<PAGE>   1
                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549


                                   Form 10-Q/A

[X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934, for the quarter ended SEPTEMBER 30, 1999. or

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934



                         Commission File Number 1-11913


                                   Aetna Inc.
             (Exact name of registrant as specified in its charter)


                Connecticut                                   02-0488491
      (State or other jurisdiction of                      (I.R.S. Employer
       incorporation or organization)                     Identification No.)

           151 Farmington Avenue                                 06156
           Hartford, Connecticut                              (ZIP Code)
  (Address of principal executive offices)


                                 (860) 273-0123
              (Registrant's telephone number, including area code)

                                 Not Applicable
              (Former name, former address and former fiscal year,
                         if changed since last report)


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

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

<TABLE>
<S>                                     <C>
Common Capital Stock (par value $.01)               141,289,941
-------------------------------------   ----------------------------------------
                      (Class)            Shares Outstanding at January 31, 2000
</TABLE>
<PAGE>   2
                                TABLE OF CONTENTS






<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.
         Consolidated Statements of Income                                   4
         Consolidated Balance Sheets                                         5
         Consolidated Statements of Shareholders' Equity                     6
         Consolidated Statements of Cash Flows                               7
         Condensed Notes to Consolidated Financial Statements                8
         Independent Auditors' Review Report                                29

Item 2.  Management's Discussion and Analysis of
            Financial Condition and Results of Operations.                  30

Item 3.  Quantitative and Qualitative Disclosures
            About Market Risk.                                              58


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings.                                                 58

Item 5.  Other Information.                                                 60

Item 6.  Exhibits and Reports on Form 8-K.                                  61

Signatures                                                                  62
</TABLE>











                                     Page 2
<PAGE>   3
SIGNIFICANT FINANCIAL AND ACCOUNTING DEVELOPMENTS

Following a review by the staff of the Securities and Exchange Commission, Aetna
Inc. and its subsidiaries (collectively, the "Company") concluded that it would
restate its 1998 Form 10-K and 1999 Form 10-Qs. The purpose of this Form 10-Q/A
is to restate the Company's third quarter 1999 and 1998 financial statements,
and the corresponding year to date periods, and to add certain other disclosures
(the "Restatement") to reflect, among other things and to the extent applicable,
the following changes:

-    Changes to the classification and timing of amounts earned by the Company
     following the 1997 sale of Human Affairs International, Incorporated
     ("HAI"). Contingent payments earned by the Company originally recorded as
     reductions of medical costs and as other income on a quarterly basis in
     1999 have instead been recorded as a realized capital gain during the third
     quarter of 1999. Contingent payments earned by the Company originally
     recorded as reductions of medical costs and as other income on a quarterly
     basis in 1998 have instead been recorded as a realized capital gain during
     the fourth quarter of 1998;
-    A liability relating to the extension period (2000-2003) of an unfavorable
     pharmacy contract originally recorded by the Company in connection with the
     July, 1998 acquisition of NYLCare has been reversed to reflect the
     elimination of this liability and reduction of goodwill;
-    The breakout of salaries and benefits expense originally included in other
     operating expenses for each period presented;
-    The reclassification of the Company's initial capital contributions to
     separate accounts and other excess funds not held to fund current separate
     account liabilities to other invested assets, originally recorded to
     separate account assets;
-    Expanded disclosures regarding the Company's discontinued products and
     goodwill amortization;
-    The recording of an asset representing the fair value of a reinsurance
     contract at the acquisition date of the Prudential health care business
     ("PHC");
-    The recording of a liability at the acquisition date of PHC representing
     the estimated unfavorable component of the contracts underlying the
     acquired medical risk business of PHC; and
-    The recording of an asset at the acquisition date of PHC representing the
     above-market compensation component related to supplemental fees to be
     received under the Company's agreement to service Prudential's
     administrative services only contracts.

The principal effects of these changes on the accompanying financial statements
are presented in Note 2 to the Consolidated Financial Statements.

For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the
Securities and Exchange Act of 1934, as amended, the Company has amended and
restated in its entirety each item of the 1999 third quarter Form 10-Q which has
been affected by the Restatement. In order to preserve the nature and character
of the disclosures originally set forth in the 1999 third quarter Form 10-Q
filed on November 2, 1999, this Form 10-Q/A does not reflect events occurring
after the filing of the original Form 10-Q, or modify or update those
disclosures in any way, except as required to reflect the effects of the
Restatement. The Company will file its 1999 Form 10-K on or before March 30,
2000.






                                     Page 3
<PAGE>   4
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                                      As Restated
                                                                --------------------------------------------------------
                                                                    Three Months Ended             Nine Months Ended
                                                                       September 30,                 September 30,
                                                                --------------------------   ---------------------------
(Millions, except per common share data)                            1999           1998           1999           1998
----------------------------------------                        -----------    -----------   ------------   ------------
<S>                                                             <C>            <C>           <C>            <C>
Revenue:
   Premiums                                                     $   5,574.8    $   4,030.3   $   14,598.0   $   10,548.0
   Net investment income                                              748.6          795.4        2,232.6        2,444.1
   Fees and other income                                              651.9          587.0        1,755.7        1,667.4
   Net realized capital gains                                          93.6           22.0          120.5          226.3
                                                                -----------    -----------   ------------   ------------
Total revenue                                                       7,068.9        5,434.7       18,706.8       14,885.8
                                                                -----------    -----------   ------------   ------------

Benefits and expenses:
   Current and future benefits                                      5,147.1        3,954.2       13,647.5       10,508.0
   Operating expenses:
     Salaries and related benefits                                    595.8          450.2        1,562.3        1,248.5
     Other                                                            702.5          532.9        1,865.3        1,528.2
   Interest expense                                                    72.4           67.1          201.1          180.5
   Amortization of goodwill and other acquired
    intangible assets                                                 111.7          102.2          325.1          295.3
   Amortization of deferred policy acquisition costs                   52.2           60.8          153.9          176.0
   Reductions of reserve for loss on discontinued products               --          (68.0)         (77.2)         (68.0)
                                                                -----------    -----------   ------------   ------------
Total benefits and expenses                                         6,681.7        5,099.4       17,678.0       13,868.5
                                                                -----------    -----------   ------------   ------------
Income before income taxes                                            387.2          335.3        1,028.8        1,017.3
Income taxes:
   Current                                                             79.7           62.9          232.3          358.7
   Deferred                                                           112.2           69.8          214.1           42.3
                                                                -----------    -----------   ------------   ------------
 Total income taxes                                                   191.9          132.7          446.4          401.0
                                                                -----------    -----------   ------------   ------------
 Net income                                                     $     195.3    $     202.6   $      582.4   $      616.3
                                                                ===========    ===========   ============   ============
Net income applicable to common ownership                       $     192.4    $     188.8   $      551.9   $      574.7
                                                                ===========    ===========   ============   ============

Results per common share:
   Basic                                                        $      1.30    $      1.32   $       3.84   $       3.97
   Diluted                                                             1.29           1.30           3.81           3.92
Dividends declared                                                      .20            .20            .60            .60
                                                                -----------    -----------   ------------   ------------
</TABLE>

See Condensed Notes to Consolidated Financial Statements.








                                     Page 4
<PAGE>   5
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                            As Restated
                                                                                                 ---------------------------------
                                                                                                 September 30,        December 31,
(Millions, except share data)                                                                        1999                 1998
-----------------------------                                                                     ----------            ---------
<S>                                                                                              <C>                  <C>
Assets:
Investments:
   Debt securities available for sale, at fair value (amortized cost $30,970.7 and $30,730.1)     $ 30,708.6            $32,180.8
   Equity securities, at fair value (cost $776.5 and $762.6)                                           841.5                800.5
   Short-term investments                                                                              892.4                942.2
   Mortgage loans                                                                                    3,535.2              3,553.0
   Real estate                                                                                         314.8                270.3
   Policy loans                                                                                        530.2                458.7
   Other                                                                                             1,444.6              1,300.3
                                                                                                  ----------           ----------
Total investments                                                                                   38,267.3             39,505.8
                                                                                                  ----------           ----------
   Cash and cash equivalents                                                                         2,125.1              1,951.5
   Short-term investments under securities loan agreement                                            1,514.3                753.6
   Accrued investment income                                                                           511.5                537.1
   Premiums due and other receivables                                                                2,589.7              1,478.1
   Reinsurance recoverables                                                                          3,979.3              3,897.2
   Deferred income taxes                                                                               335.0                 46.6
   Deferred policy acquisition costs                                                                 2,077.5              1,768.6
   Goodwill and other acquired intangible assets                                                     9,366.4              9,143.5
   Other assets                                                                                      1,183.6              1,111.9
   Separate Accounts assets                                                                         47,606.9             44,936.0
                                                                                                  ----------           ----------
Total assets                                                                                      $109,556.6           $105,129.9
                                                                                                  ==========           ==========
Liabilities:
   Future policy benefits                                                                          $18,906.3            $18,541.1
   Unpaid claims                                                                                     4,861.0              3,953.9
   Unearned premiums                                                                                   286.8                428.9
   Policyholders' funds left with the Company                                                       16,220.6             17,632.5
                                                                                                  ----------           ----------
Total insurance liabilities                                                                         40,274.7             40,556.4
                                                                                                  ----------           ----------
   Dividends payable to shareholders                                                                    30.0                 35.2
   Short-term debt                                                                                   1,610.9              1,370.1
   Long-term debt                                                                                    2,683.4              2,214.5
   Payables under securities loan agreement                                                          1,514.3                753.6
   Current income taxes                                                                                267.1                444.8
   Other liabilities                                                                                 3,825.0              3,007.0
   Minority and participating policyholders' interests                                                 152.9                148.4
   Separate Accounts liabilities                                                                    47,606.9             44,936.0
                                                                                                  ----------           ----------
Total liabilities                                                                                   97,965.2             93,466.0
                                                                                                  ----------           ----------
Aetna-obligated mandatorily redeemable preferred securities of subsidiary
  limited liability company holding primarily debentures guaranteed by Aetna                           275.0                275.0
                                                                                                  ----------           ----------
Commitments and Contingent Liabilities (Notes 4 and 12)
Shareholders' Equity:
   Class C voting mandatorily convertible preferred stock ($.01 par value; 15,000,000
    shares authorized and 11,614,816 issued and outstanding in 1998)                                       -                862.1
   Common stock ($.01 par value; 500,000,000 shares authorized; 149,673,857 in
    1999 and 141,272,628 in 1998 issued and outstanding)                                             4,094.6              3,292.4
   Accumulated other comprehensive income (loss)                                                      (298.4)               177.8
   Retained earnings                                                                                 7,520.2              7,056.6
                                                                                                  ----------           ----------
Total shareholders' equity                                                                          11,316.4             11,388.9
                                                                                                  ----------           ----------
Total liabilities, redeemable preferred securities and shareholders' equity                       $109,556.6           $105,129.9
                                                                                                  ==========           ==========
</TABLE>

See Condensed Notes to Consolidated Financial Statements.



                                     Page 5
<PAGE>   6
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                              Accumulated Other
                                                                                           Comprehensive Income (Loss)
                                                            Class C Voting                 ----------------------------
(Millions, except share data)                                  Mandatorily                    Unrealized        Foreign
As Restated                                                    Convertible      Common    Gains (Losses)       Currency    Retained
Nine Months Ended September 30, 1999             Total     Preferred Stock       Stock     on Securities      and Other    Earnings
------------------------------------         ---------     ---------------    --------    --------------      ---------   ---------
<S>                                          <C>           <C>                <C>         <C>                 <C>         <C>
Balances at December 31, 1998                $11,388.9         $  862.1       $3,292.4        $  368.1        $(190.3)    $7,056.6
Comprehensive income:
 Net income                                      582.4                                                                       582.4
 Other comprehensive loss, net of tax:
    Unrealized losses on securities
     ($(560.3) pretax) (1)                      (364.2)                                         (364.2)
    Foreign currency and other
     ($(172.4) pretax)                          (112.0)                                                        (112.0)
                                             ---------
 Other comprehensive loss                       (476.2)
                                             ---------
Total comprehensive income                       106.2
                                             =========
Common stock issued for benefit
    plans (586,543 shares)                        39.3                            39.3
Repurchase of common shares
    (1,704,800 shares)                          (131.7)                         (131.7)
Conversion of preferred securities
(11,614,816 preferred shares converted
to 9,519,486 common shares)                         -            (862.1)         862.1
Issuance of stock appreciation rights             32.5                            32.5
Common stock dividends                           (88.3)                                                                      (88.3)
Preferred stock dividends                        (30.5)                                                                      (30.5)
                                             ---------       ----------       --------       ---------       --------     --------
Balances at September 30, 1999               $11,316.4       $        -       $4,094.6       $     3.9       $ (302.3)    $7,520.2
                                             =========       ==========       ========       =========       ========     ========
</TABLE>


<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
------------------------------------
<S>                                         <C>               <C>            <C>             <C>             <C>         <C>
Balances at December 31, 1997                $11,195.4         $  865.4       $3,644.4        $  456.4        $(149.3)    $6,378.5
Comprehensive income:
 Net income                                      616.3                                                                       616.3
 Other comprehensive loss, net of tax:
    Unrealized losses on securities
     ($(184.4) pretax) (1)                      (119.8)                                         (119.8)
    Foreign currency ($(75.3) pretax)            (49.0)                                                         (49.0)
                                             ---------
 Other comprehensive loss                       (168.8)
                                             ---------
Total comprehensive income                       447.5
                                             =========
Common stock issued for benefit
    plans (490,099 shares)                        32.9                            32.9
Repurchase of common shares
    (3,371,700 shares)                          (258.1)                         (258.1)
Conversion of preferred securities
    (40,327 preferred shares converted to
    33,047 common shares)                           -              (3.3)           3.3
Common stock dividends                           (86.2)                                                                      (86.2)
Preferred stock dividends                        (41.6)                                                                      (41.6)
                                             ---------       ----------       --------       ---------       --------     --------
Balances at September 30, 1998               $11,289.9         $  862.1       $3,422.5        $  336.6        $(198.3)    $6,867.0
                                             =========       ==========       ========       =========       ========     ========
</TABLE>
(1)  Net of reclassification adjustments.

See Condensed Notes to Consolidated Financial Statements.





                                     Page 6
<PAGE>   7
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                                 As Restated
                                                                                             Nine Months Ended September 30,
                                                                                             -------------------------------
(Millions)                                                                                             1999           1998
----------                                                                                           --------       --------
<S>                                                                                          <C>                    <C>
Cash flows from operating activities:
  Net income                                                                                         $  582.4       $  616.3
  Adjustments to reconcile net income to net cash provided by operating activities:
     Depreciation and amortization (including investment discounts and premiums)                        506.9          358.3
     Net realized capital gains                                                                        (120.5)        (226.3)
     Changes in assets and liabilities:
       (Increase) Decrease in accrued investment income                                                  45.4          (18.4)
       Increase in premiums due and other receivables                                                  (290.0)        (360.8)
       Increase in deferred policy acquisition costs                                                   (293.7)        (205.9)
       Decrease in income taxes                                                                        (148.3)        (103.7)
       Net decrease in other assets and other liabilities                                                74.4           54.6
       Increase in insurance liabilities                                                                652.4          478.5
       Other, net                                                                                        29.9          (30.1)
                                                                                                     --------       --------
Net cash provided by operating activities                                                             1,038.9          562.5
                                                                                                     --------       --------
Cash flows from investing activities:
  Proceeds from sales of:
     Debt securities available for sale                                                              15,597.5       17,566.8
     Equity securities                                                                                  375.2          672.5
     Mortgage loans                                                                                     321.4          840.4
     Real estate                                                                                         21.9          156.8
     Other investments                                                                                  444.5          210.2
     Short-term investments                                                                          13,033.9       16,054.8
  Cost of investments in:
     Debt securities available for sale                                                             (15,513.6)     (15,834.9)
     Equity securities                                                                                 (293.4)        (346.7)
     Mortgage loans                                                                                    (315.9)        (282.8)
     Real estate                                                                                        (43.2)         (23.3)
     Other investments                                                                                 (605.6)        (589.2)
     Short-term investments                                                                         (12,475.6)     (15,611.3)
  Acquisitions:
     Prudential healthcare business                                                                    (512.5)             -
     NYLCare healthcare business                                                                        (48.8)      (1,080.6)
     Other                                                                                             (150.5)         (57.3)
  Increase in property and equipment                                                                   (258.5)        (100.8)
  Net decrease in Separate Accounts                                                                      26.8           26.8
  Other, net                                                                                            (30.3)        (342.9)
                                                                                                     --------       --------
Net cash provided by (used for) investing activities                                                   (426.7)       1,258.5
                                                                                                     --------       --------
Cash flows from financing activities:
  Deposits and interest credited for investment contracts                                             2,008.1        1,510.6
  Withdrawals of investment contracts                                                                (2,605.4)      (2,406.2)
  Repayment of long-term debt                                                                           (31.3)        (164.1)
  Net increase in short-term debt                                                                       241.3        1,166.0
  Common stock issued under benefit plans                                                                39.3           32.9
  Common stock acquired                                                                                (121.7)        (258.1)
  Dividends paid to shareholders                                                                       (124.0)        (128.4)
  Other, net                                                                                           (105.1)           -
                                                                                                     --------       --------
Net cash used for financing activities                                                                 (698.8)        (247.3)
                                                                                                     --------       --------
Effect of exchange rate changes on cash and cash equivalents                                             (1.4)          (6.4)
                                                                                                     --------       --------
Net increase (decrease) in cash and cash equivalents                                                    (88.0)       1,567.3
Cash acquired from NYLCare healthcare business                                                              -          108.8
Cash acquired from Prudential healthcare business                                                       261.6            -
Cash and cash equivalents, beginning of period                                                        1,951.5        1,805.8
                                                                                                     --------       --------
Cash and cash equivalents, end of period                                                             $2,125.1       $3,481.9
                                                                                                     ========       ========
Supplemental cash flow information:
  Interest paid                                                                                      $  212.5       $  196.2
  Income taxes paid                                                                                     414.7          506.1
                                                                                                     --------       --------
</TABLE>

See Condensed Notes to Consolidated Financial Statements.


                                     Page 7
<PAGE>   8
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Restatement

The consolidated financial statements include Aetna Inc. and its majority-owned
subsidiaries (collectively, the "Company"), including Aetna Services, Inc.
("Aetna Services") and Aetna U.S. Healthcare Inc. ("Aetna U.S. Healthcare").
Less than majority-owned entities, in which the Company has at least a 20%
interest, are reported on the equity basis. These consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and are unaudited. Certain reclassifications have been made to the
1998 financial information to conform to the 1999 presentation. These interim
statements necessarily rely heavily on estimates, including assumptions as to
annualized tax rates. In the opinion of management, all adjustments necessary
for a fair statement of results for the interim periods have been made. All such
adjustments are of a normal, recurring nature. The accompanying condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes as presented in Aetna Inc.'s
1998 Annual Report on Form 10-K/A. Certain financial information that is
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles, but that is not required for interim
reporting purposes, has been condensed or omitted.

Subsequent to the issuance of the Company's third quarter 1999 financial
statements and the filing of its third quarter 1999 Form 10-Q with the
Securities and Exchange Commission (the "SEC"), and following discussions with
representatives of the SEC's Division of Corporate Finance and Office of the
Chief Accountant concerning its review of the Company's financial statements,
the Company concluded it would restate its third quarter 1999 financial
statements and related disclosures. (Refer to Note 2.)

New Accounting Standard

On January 1, 1999, the Company adopted Statement of Position ("SOP") 97-3,
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments,
issued by the American Institute of Certified Public Accountants ("AICPA"). This
statement provides guidance for determining when an insurance or other
enterprise should recognize a liability for guaranty-fund and other
insurance-related assessments and guidance for measuring the liability. The
adoption of this standard did not have a material effect on the Company's
financial position or results of operations as the Company had previously
accounted for guaranty-fund and other insurance-related assessments in a manner
consistent with this standard.

Future Accounting Standards

In October 1998, the AICPA issued SOP 98-7, Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk, which
provides guidance on how to account for all insurance and reinsurance contracts
that do not transfer insurance risk, except for long-duration life and health
insurance contracts. This statement is effective for the Company's financial
statements beginning January 1, 2000, with early adoption permitted. The Company
does not expect the adoption of this standard to have a material effect on its
financial position or results of operations.

In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standard ("FAS") No. 133, Accounting for Derivative Instruments and
Hedging Activities. This standard requires companies to record all derivatives
on the balance sheet as either assets or liabilities and measure those
instruments at fair value. The manner in which companies are to record gains or
losses resulting from changes in the values of those derivatives depends on the
use of the derivative and whether it qualifies for hedge accounting. As amended
by FAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, this standard is
effective for the Company's financial statements beginning January 1, 2001, with
early adoption permitted. The Company is currently evaluating the impact of the
adoption of this standard and the potential effect on its financial position and
results of operations.

                                     Page 8
<PAGE>   9
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(2) RESTATEMENT

Subsequent to the issuance of the Company's third quarter 1999 financial
statements and the filing of its third quarter 1999 Form 10-Q with the
Securities and Exchange Commission (the "SEC"), and following discussions with
representatives of the SEC's Division of Corporate Finance and Office of the
Chief Accountant concerning its review of the Company's financial statements,
the Company concluded that it would restate its third quarter 1999 and 1998
financial statements and related disclosures to reflect, among other things, the
following changes:

-    Changes to the classification and timing of amounts earned by the Company
     following the 1997 sale of Human Affairs International, Incorporated
     ("HAI"). Contingent payments earned by the Company originally recorded as
     reductions of medical costs and as other income on a quarterly basis in
     1999 have instead been recorded as a realized capital gain during the third
     quarter of 1999. Contingent payments earned by the Company originally
     recorded as reductions of medical costs and as other income on a quarterly
     basis in 1998 have instead been recorded as a realized capital gain during
     the fourth quarter of 1998;
-    A liability relating to the extension period (2000-2003) of an unfavorable
     pharmacy contract originally recorded by the Company in connection with the
     July, 1998 acquisition of NYLCare has been reversed to reflect the
     elimination of this liability and reduction of goodwill;
-    The breakout of salaries and benefits expense originally included in other
     operating expenses for each period presented;
-    The reclassification of the Company's initial capital contributions to
     separate accounts and other excess funds not held to fund current separate
     account liabilities to other invested assets, originally recorded to
     separate account assets;
-    Expanded disclosures regarding the Company's discontinued products and
     goodwill amortization;
-    The recording of an asset representing the fair value of a reinsurance
     contract at the acquisition date of the Prudential health care business
     ("PHC");
-    The recording of a liability at the acquisition date of PHC representing
     the estimated unfavorable component of the contracts underlying the
     acquired medical risk business of PHC; and
-    The recording of an asset at the acquisition date of PHC representing the
     above-market compensation component related to supplemental fees to be
     received under the Company's agreement to service Prudential's
     administrative services only contracts.

As a result of the foregoing and other factors, the Company's third quarter 1999
and 1998 financial statements have been restated from amounts previously
reported.


                                     Page 9
<PAGE>   10
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(2) RESTATEMENT (CONTINUED)

Consolidated Statements of Income:

<TABLE>
<CAPTION>
                                                                              For the three months ended September 30,
                                                                    ------------------------------------------------------------
                                                                              1999                                1998
                                                                    -------------------------        ---------------------------
                                                                          As    As Previously               As     As Previously
(Millions, except per common share data)                            Restated         Reported         Restated          Reported
----------------------------------------                            --------    -------------        ---------     -------------
<S>                                                                 <C>         <C>                  <C>           <C>
Revenue:
  Premiums                                                          $5,574.8        $ 5,574.8        $ 4,030.3         $ 4,030.3
  Net investment income                                                748.6            748.6            795.4             795.4
  Fees and other income                                                651.9            660.6            587.0             595.7
  Net realized capital gains                                            93.6             33.6             22.0              22.0
                                                                    --------        ---------        ---------         ---------
Total revenue                                                        7,068.9          7,017.6          5,434.7           5,443.4
                                                                    --------        ---------        ---------         ---------
Benefits and Expenses:
  Current and future benefits                                        5,147.1          5,142.0          3,954.2           3,947.9
  Operating expenses:
     Salaries and related benefits                                     595.8            497.0            450.2             461.3
     Other                                                             702.5            801.3            532.9             521.8
  Interest expense                                                      72.4             72.4             67.1              67.1
  Amortization of goodwill and other acquired intangible
     assets                                                            111.7            111.7            102.2             102.2
  Amortization of deferred policy acquisition costs                     52.2             52.2             60.8              60.8
  Reduction of reserve for loss on discontinued products                   -                -            (68.0)            (68.0)
                                                                    --------        ---------        ---------         ---------
Total benefits and expenses                                          6,681.7          6,676.6          5,099.4           5,093.1
                                                                    --------        ---------        ---------         ---------
Income from continuing operations before income taxes                  387.2            341.0            335.3             350.3
Income taxes (benefits):
  Current                                                               79.7             63.9             62.9              68.4
  Deferred                                                             112.2            111.8             69.8              69.5
                                                                    --------        ---------        ---------         ---------
Total income taxes                                                     191.9            175.7            132.7             137.9
                                                                    --------        ---------        ---------         ---------
Net income                                                          $  195.3        $   165.3        $   202.6         $   212.4
                                                                    --------        ---------        ---------         ---------
Net income applicable to common ownership                           $  192.4        $   162.4        $   188.8         $   198.6
                                                                    ========        =========        =========         =========
Results Per Common Share:
Net income:
  Basic                                                             $   1.30         $   1.09         $   1.32          $   1.38
  Diluted                                                               1.29             1.09             1.30              1.36
Dividends declared                                                       .20              .20              .20               .20
                                                                    --------        ---------        ---------         ---------
</TABLE>

See Notes to Consolidated Financial Statements.




                                     Page 10
<PAGE>   11
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(2) RESTATEMENT (CONTINUED)

Consolidated Statements of Income:

<TABLE>
<CAPTION>
                                                                           For the nine months ended September 30,
                                                                  -------------------------------------------------------------
                                                                            1999                               1998
                                                                  --------------------------        ---------------------------
                                                                         As    As Previously               As     As Previously
(Millions, except per common share data)                           Restated         Reported         Restated          Reported
----------------------------------------                           --------         --------         --------          --------
<S>                                                               <C>          <C>                  <C>           <C>
Revenue:
  Premiums                                                        $14,598.0        $14,598.0       $ 10,548.0        $ 10,548.0
  Net investment income                                             2,232.6          2,232.6          2,444.1           2,444.1
  Fees and other income                                             1,755.7          1,781.9          1,667.4           1,693.6
  Net realized capital gains                                          120.5             60.5            226.3             226.3
                                                                  ---------        ---------       ----------        ----------
Total revenue                                                      18,706.8         18,673.0         14,885.8          14,912.0
                                                                  ---------        ---------       ----------        ----------
Benefits and Expenses:
  Current and future benefits                                      13,647.5         13,629.9         10,508.0          10,489.2
  Operating expenses:
     Salaries and related benefits                                  1,562.3          1,481.2          1,248.5           1,260.5
     Other                                                          1,865.3          1,946.4          1,528.2           1,516.2
  Interest expense                                                    201.1            201.1            180.5             180.5
  Amortization of goodwill and other acquired intangible
      assets                                                          325.1            325.1            295.3             295.3
  Amortization of deferred policy acquisition costs                   153.9            153.9            176.0             176.0
  Reduction of reserve for loss on discontinued products.             (77.2)           (77.2)           (68.0)            (68.0)
                                                                  ---------        ---------       ----------        ----------
Total benefits and expenses                                        17,678.0         17,660.4         13,868.5          13,849.7
                                                                  ---------        ---------       ----------        ----------
Income from continuing operations before income taxes               1,028.8          1,012.6          1,017.3           1,062.3
Income taxes (benefits):
  Current                                                             232.3            227.0            358.7             374.4
  Deferred                                                            214.1            213.7             42.3              42.3
                                                                  ---------        ---------       ----------        ----------
Total income taxes                                                    446.4            440.7            401.0             416.7
                                                                  ---------        ---------       ----------        ----------
Net income                                                        $   582.4        $   571.9       $    616.3        $    645.6
                                                                  =========        =========       ==========        ==========
Net income applicable to common ownership                         $   551.9        $   541.4       $    574.7        $    604.0
                                                                  =========        =========       ==========        ==========
Results Per Common Share:
Net income:
  Basic                                                           $    3.84        $    3.77       $     3.97        $     4.17
  Diluted                                                              3.81             3.74             3.92              4.10
Dividends declared                                                $     .60        $     .60       $      .60        $      .60
                                                                  ---------        ---------       ----------        ----------
</TABLE>

See Notes to Consolidated Financial Statements.



                                     Page 11
<PAGE>   12
Item 1.  Financial Statements.

                          AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (CONTINUED)

(2) RESTATEMENT (CONTINUED)

Consolidated Balance Sheets:
<TABLE>
                                                                    As of September 30, 1999          As of December 31, 1998
                                                                   -------------------------         ------------------------
                                                                         As    As Previously               As   As Previously
(Millions, except per common share data)                           Restated         Reported         Restated        Reported
----------------------------------------                           --------    -------------         --------   -------------
<S>                                                            <C>             <C>               <C>            <C>
Assets:
Investments:
Debt securities available for sale, at fair value
 (amortized cost $30,970.7 and $30,730.1)                      $   30,708.6     $   30,708.6     $   32,180.8    $   32,180.8
Equity securities, at fair value (cost $776.5 and $762.6)             841.5            841.5            800.5           800.5
Short-term investments                                                892.4            892.4            942.2           942.2
Mortgage loans                                                      3,535.2          3,535.2          3,553.0         3,553.0
Real estate                                                           314.8            314.8            270.3           270.3
Policy loans                                                          530.2            530.2            458.7           458.7
Other                                                               1,444.6          1,427.8          1,300.3         1,264.5
                                                               ------------     ------------     ------------    ------------
Total investments                                                  38,267.3         38,250.5         39,505.8        39,470.0
                                                               ------------     ------------     ------------    ------------
Cash and cash equivalents                                           2,125.1          2,125.1          1,951.5         1,951.5
Short-term investments under securities loan agreement              1,514.3          1,514.3            753.6           753.6
Accrued investment income                                             511.5            511.5            537.1           537.1
Premiums due and other receivables                                  2,589.7          2,574.7          1,478.1         1,478.1
Reinsurance recoverables                                            3,979.3          3,979.3          3,897.2         3,897.2
Deferred income taxes                                                 335.0            342.1             46.6            53.0
Deferred policy acquisition costs                                   2,077.5          2,077.5          1,768.6         1,768.6
Goodwill and other acquired intangible assets                       9,366.4          9,378.7          9,143.5         9,155.3
Other assets                                                        1,183.6          1,094.9          1,111.9         1,111.9
Separate Accounts assets                                           47,606.9         47,614.7         44,936.0        44,971.8
                                                               ------------     ------------     ------------    ------------
Total assets                                                   $  109,556.6     $  109,463.3     $  105,129.9    $  105,148.1
                                                               ============     ============     ============    ============
Liabilities:
Future policy benefits                                         $   18,906.3     $   18,819.6     $   18,541.1    $   18,541.1
Unpaid claims                                                       4,861.0          4,861.0          3,953.9         3,953.9
Unearned premiums                                                     286.8            286.8            428.9           428.9
Policyholders' funds left with the Company                         16,220.6         16,220.6         17,632.5        17,632.5
                                                               ------------     ------------     ------------    ------------
Total insurance liabilities                                        40,274.7         40,188.0         40,556.4        40,556.4
                                                               ------------     ------------     ------------    ------------
Dividends payable to shareholders                                      30.0             30.0             35.2            35.2
Short-term debt                                                     1,610.9          1,610.9          1,370.1         1,370.1
Long-term debt                                                      2,683.4          2,683.4          2,214.5         2,214.5
Payables under securities loan agreement                            1,514.3          1,514.3            753.6           753.6
Current income taxes                                                  267.1            261.8            444.8           444.8
Other liabilities                                                   3,825.0          3,834.2          3,007.0         3,025.2
Minority and participating policyholders' interests                   152.9            152.9            148.4           148.4
Separate Accounts liabilities                                      47,606.9         47,606.9         44,936.0        44,936.0
                                                               ------------     ------------     ------------    ------------
Total liabilities                                                  97,965.2         97,882.4         93,466.0        93,484.2
                                                               ------------     ------------     ------------    ------------
Aetna-obligated mandatorily redeemable preferred
 securities of subsidiary limited liability company
 holding primarily debentures guaranteed by Aetna                     275.0            275.0            275.0           275.0
                                                               ------------     ------------     ------------    ------------
Commitments and Contingent Liabilities (Notes 4 and 12)
Shareholders' Equity:
Class C voting mandatorily convertible preferred stock
 ($.01 par value; 15,000,000 shares authorized; and
 11,614,816 issued and outstanding in 1998)                              --               --            862.1           862.1
Common stock ($.01 par value; 500,000,000 shares
 authorized; 149,673,857 in 1999 and  141,272,628 in
 1998 issued and outstanding)                                       4,094.6          4,094.6          3,292.4         3,292.4
Accumulated other comprehensive income                               (298.4)          (298.4)           177.8           177.8
Retained earnings                                                   7,520.2          7,509.7          7,056.6         7,056.6
                                                               ------------     ------------     ------------    ------------
Total shareholders' equity                                         11,316.4         11,305.9         11,388.9        11,388.9
                                                               ------------     ------------     ------------    ------------
Total liabilities, redeemable preferred securities and
 shareholders' equity                                          $  109,556.6     $  109,463.3     $  105,129.9    $  105,148.1
                                                               ============     ============     ============    ============
</TABLE>

See Notes to Consolidated Financial Statements.


                                     Page 12
<PAGE>   13
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(3) EARNINGS PER COMMON SHARE (AS RESTATED)

A reconciliation of the numerator and denominator of the basic and diluted
earnings per common share ("EPS") for the three and nine months ended September
30, was as follows:

<TABLE>
<CAPTION>
Three Months Ended September 30,                                               Income              Shares          Per Common
(Millions, except per common share data)                                  (Numerator)       (Denominator)        Share Amount
----------------------------------------                                  -----------       -------------        ------------
<S>                                                                       <C>               <C>                  <C>
1999
Net income                                                                    $195.3
Less:  preferred stock dividends                                                 2.9
                                                                              ------
Basic EPS
   Income applicable to common ownership                                      $192.4              148.4                 $1.30
                                                                              ======                                    =====
Effect of dilutive securities:
   Stock options and other (1)                                                                      1.0
                                                                                                  -----
Diluted EPS
 Income applicable to common ownership and assumed conversions                $192.4              149.4                 $1.29
                                                                              ======              =====                 =====

1998
Net income                                                                    $202.6
Less:  preferred stock dividends                                                13.8
                                                                              ------
Basic EPS
   Income applicable to common ownership                                       188.8              143.5                 $1.32
                                                                                                                        =====
Effect of dilutive securities:
   Stock options and other (1)                                                                       .9
   Convertible preferred stock                                                  13.8               11.6
                                                                              ------              -----
Diluted EPS
 Income applicable to common ownership and assumed conversions                $202.6              156.0                 $1.30
                                                                              ======              =====                 =====
</TABLE>

<TABLE>
<CAPTION>
Nine Months Ended September 30,                                                Income              Shares          Per Common
(Millions, except per common share data)                                  (Numerator)       (Denominator)        Share Amount
----------------------------------------                                  -----------       -------------        ------------
<S>                                                                        <C>              <C>                  <C>
1999
Net income                                                                    $582.4
Less:  preferred stock dividends                                                30.5
                                                                              ------
Basic EPS
   Income applicable to common ownership                                      $551.9              143.6                 $3.84
                                                                              ======                                    =====
Effect of dilutive securities:
   Stock options and other (2)                                                                      1.1
                                                                                                  -----
Diluted EPS
 Income applicable to common ownership and assumed conversions                $551.9              144.7                 $3.81
                                                                              ======              =====                 =====
1998
Net income                                                                    $616.3
Less:  preferred stock dividends                                                41.6
                                                                              ------
Basic EPS
   Income applicable to common ownership                                       574.7              144.7                 $3.97
                                                                                                                        =====
Effect of dilutive securities:
   Stock options and other (2)                                                                      1.1
   Convertible preferred stock                                                  41.6               11.6
                                                                              ------              -----
Diluted EPS
 Income applicable to common ownership and assumed conversions                $616.3              157.4                 $3.92
                                                                              ======              =====                 =====
</TABLE>

(1)    Options to purchase shares of common stock and stock appreciation rights
       (refer to Note 3) of approximately 7.0 million (with exercise prices
       ranging from $74.63 - $112.63) for the three months ended September 30,
       1999 and 6.0 million (with exercise prices ranging from $69.00 - $112.63)
       for the three months ended September 30, 1998 were not included in the
       calculation of diluted earnings per common share because the options'
       exercise price was greater than the average market price of common
       shares.
(2)    Options to purchase shares of common stock and stock appreciation rights
       (refer to Note 3) of approximately 5.9 million (with exercise prices
       ranging from $81.56 - $112.63) for the nine months ended September 30,
       1999 and 2.9 million (with exercise prices ranging from $76.24 - $112.63)
       for the nine months ended September 30, 1998 were not included in the
       calculation of diluted earnings per common share because the options'
       exercise price was greater than the average market price of common
       shares.

                                     Page 13
<PAGE>   14
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(4) ACQUISITIONS AND DISPOSITIONS

Aetna U.S. Healthcare

On August 6, 1999, the Company acquired from The Prudential Insurance Company of
America ("Prudential") the Prudential health care business ("PHC") for
approximately $1 billion, subject to adjustment as provided in the transaction
agreements. Included in the acquisition are PHC's risk HMO, POS, PPO and
Indemnity health lines, as well as its dental risk business. As part of the
purchase price, the Company issued one million stock appreciation rights
("SAR's") for the Company's common stock, valued at approximately $32.5 million.
The value of the SAR's is included in the purchase price. The SAR's are also
reflected as a component of shareholders' equity in the consolidated financial
statements. The acquisition was accounted for as a purchase.

In addition to recording the assets and liabilities acquired at fair value, the
purchase price allocation at acquisition date included the following:

-     An asset of $130 million, representing the fair value adjustment of a
      reinsurance agreement (discussed below), primarily reflecting the net
      benefits to be  received from Prudential over the life of the agreement.
      Significant assumptions utilized in the determination of this asset
      primarily included, for expected amounts recoverable under the agreement,
      various probability outcomes above and below the medical loss thresholds
      (83.5% in 1999 and 84.0% in 2000). The probability outcomes considered the
      estimated medical loss ratios of the business at the acquisition date as
      well as expected medical loss ratios for 2000, with variability in
      relation to the thresholds, up to plus or minus three standard
      deviations. A risk premium (an amount typically charged by a third party
      for accepting risk under a reinsurance contract) based on an approximate
      12% after-tax return, which considers the cost of capital to the
      reinsurer, was also assumed. This asset will be amortized to expense in
      proportion to the benefits expected to be recognized under the
      reinsurance agreement over its term;

-     A liability of $129 million, representing a fair value adjustment for the
      unfavorable component of the contracts underlying the acquired medical
      risk business. Significant assumptions utilized in the determination of
      this fair value adjustment included an assumed market rate medical loss
      ratio for the acquired contracts (i.e., 83.5% for Commercial HMO and
      92.0% for Medicare HMO) as compared to the medical loss ratios of the
      acquired business at acquisition date. The fair value adjustment
      considered the period from acquisition date to the underlying contracts'
      renewal dates. This liability will be amortized over the period from the
      acquisition date to the renewal date of the underlying contracts;

-     An asset of $21 million, representing the above-market compensation
      component related to supplemental fees to be received under the Company's
      agreement to service Prudential's administrative services only contracts
      (discussed below). This asset will be amortized over the period of the
      above-market compensation component, beginning in January, 2000.

The period August 6, 1999 through September 30, 1999, reflected asset
amortization of $42 million related to the reinsurance agreement and liability
amortization of $43 million related to the unfavorable component of the
contracts underlying the acquired medical risk business.

The excess of the purchase price over the fair value of the net assets acquired
resulted in approximately $167 million being allocated to goodwill and
approximately $128 million to other acquired intangible assets, which is being
amortized over a 40-year period for goodwill and over the estimated useful lives
of other acquired intangible assets. The Company's consolidated results of
operations include PHC from August 6, 1999.


                                     Page 14
<PAGE>   15
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)


(4) ACQUISITIONS AND DISPOSITIONS (CONTINUED)

The Company's consolidated financial statements reflect the preliminary
allocation of purchase price based on estimated fair values at the date of
acquisition, pending final determination of certain acquired balances, primarily
intangible assets. Further, the transaction agreements provide for adjustment of
the purchase price based on asset and liability values determined as of a date
nine months following the close. Therefore, the excess of the purchase price
over the fair value of the net assets acquired allocated to goodwill and other
acquired intangible assets, as well as related amortization, may change once
these final determinations are complete. Also, the purchase price does not
reflect the Company's plan to exit certain activities of the acquired PHC
business and provide employee termination benefits for positions that will be
eliminated. The Company's management is in the process of finalizing this plan,
expected to be completed in the fourth quarter of 1999. Accordingly, the
goodwill associated with the acquisition of PHC will increase once this plan is
finalized.

The Company and Prudential entered into a reinsurance agreement for which the
Company paid a premium. Under the agreement, Prudential has agreed to indemnify
the Company from certain insurance risks that arise following the closing by
reimbursing the Company for 75% of medical costs (as calculated under the
agreement) of PHC in excess of certain threshold medical loss ratio levels
through 2000 for substantially all the acquired medical and dental risk
business. The medical loss ratio threshold is 83.5% for August 6, 1999 through
December 31, 1999 and 84% for January 1, 2000 through December 31, 2000. During
the period August 6, 1999 through September 30, 1999, reinsurance recoveries
under this agreement (reflected as a reduction of current and future benefits)
were $27 million pretax. The premium is subject to adjustment if medical costs
of PHC are below these threshold medical loss ratio levels. Prudential has also
agreed to indemnify the Company for unanticipated increases in medical claims
payable existing at the acquisition date for a period of up to nine months
following the close.

The Company also agreed to service Prudential's administrative services only
("ASO") contracts following the acquisition. Prudential is terminating its ASO
business and has retained the Company to service these contracts during the
run-off period, but no later than June 30, 2001. Prudential ASO customers will
remain Prudential customers as long as the contracts remain in force.

The Company is maintaining personnel, systems and other resources necessary to
service the ASO business during the run-off period, as it was not feasible to
segregate these operating assets from those purchased in the PHC transaction. In
exchange for servicing the ASO business, Prudential is remitting fees received
from its ASO customers to the Company, as well as paying certain supplemental
fees. The supplemental fees are fixed in amount and decline over a period ending
18 months following the closing. During the period August 6, 1999 through
September 30, 1999, the Company recorded total fees for servicing the Prudential
ASO business of $90 million pretax, including supplemental fees of $40 million
pretax (reflected as fees and other income).


                                     Page 15
<PAGE>   16
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(4) ACQUISITIONS AND DISPOSITIONS (CONTINUED)

In connection with the PHC acquisition, the Company reached an agreement with
the U.S. Department of Justice and the State of Texas that will result in the
divestiture of certain Texas HMO/POS and other related businesses ("NYLCare
Texas") acquired by the Company as part of the 1998 acquisition of New York Life
Insurance Company's ("NYL") health care business ("NYLCare"). Pursuant to this
agreement, on September 14, 1999, Aetna U.S. Healthcare and Health Care Service
Corporation ("HCSC") entered into an agreement for Blue Cross and Blue Shield of
Texas ("Blue Cross"), a division of HCSC, to acquire the NYLCare Texas
operations for approximately $500 million in cash, subject to certain
adjustments including an adjustment based on the level of membership at the
closing date. The Blue Cross agreement affects approximately 520,000 Commercial
HMO members and 16,000 PPO members in the Houston, Austin, San Antonio, Corpus
Christi, Beaumont, Dallas-Fort Worth, San Angelo, Texarkana and Amarillo areas.
Aetna U.S. Healthcare will retain approximately 108,000 NYLCare Medicare members
through a reinsurance and administrative services agreement. The Blue Cross
agreement is subject to regulatory approval, and the transaction is expected to
close by the first quarter of 2000. Proceeds from the sale are expected to be
used for general corporate purposes, including repayment of debt, internal
growth, share repurchases and acquisitions. The sale is expected to result in a
capital gain which will be determined upon closing. The earnings of the divested
businesses were not material to the Aetna U.S. Healthcare segment or to the
Company's consolidated results of operations. Effective for the third quarter
1999, the earnings of NYLCare Texas are presented on an equity basis (reflected
as net investment income) in the Consolidated Financial Statements consistent
with the agreement with the U.S. Department of Justice and the State of Texas.

On July 15, 1998, the Company acquired NYLCare for a purchase price of $1.08
billion in cash, including an adjustment as provided in the transaction
agreements. The acquisition was accounted for as a purchase. Originally, in
addition to the cash purchase price, payments totaling up to $300 million (up to
$150 million in each of two years) were potentially payable to the extent that
predetermined earnings and membership targets in future periods were achieved
(the "Earnout"). On January 29, 1999, the Company and NYL agreed to resolve all
purchase price adjustments and obligations under the Earnout and paid NYL an
additional $50 million to resolve such matters, resulting in an increase to
goodwill of approximately $200 million. As a result, the total purchase price
was approximately $1.1 billion.

In addition to recording the assets and liabilities acquired at fair value, the
purchase price allocation included approximately $35 million pretax related to
an unfavorable contract with an affiliate of NYL for providing pharmaceutical
benefits services (the "pharmacy contract"). As a condition of closing the
transaction, the pharmacy contract was extended from January 1, 2000 through
December 31, 2003 (the "extension period"). The terms of the extension period
were determined to reflect an appropriate market price, however the terms of the
pharmacy contract prior to January 1, 2000 were determined to be unfavorable.
The purchase price allocation related to the pharmacy contract is being
amortized over the period from closing to December 31, 1999. For the nine months
ended September 30, 1999, approximately $14 million pretax was amortized as a
reduction of pharmacy costs. Also, a $64 million liability related to the
expected costs associated with involuntarily terminating certain NYLCare
employees and the costs related to the exiting of leased NYLCare facilities was
established as part of the purchase price allocation. These costs will be
charged to this liability as actions are taken and were not significant to the
Company's combined revenues or operating results.

The excess of the purchase price over the fair value of the net assets acquired
resulted in approximately $1.1 billion, net of related deferred taxes, being
primarily allocated to goodwill and other acquired intangible assets, which is
being amortized over a 40-year period for goodwill and over a range of three to
20 years for other acquired intangible assets. The Company's consolidated
results of operations include the NYLCare health business from July 15, 1998.


                                    Page 16
<PAGE>   17
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(4) ACQUISITIONS AND DISPOSITIONS (CONTINUED)

Aetna Financial Services

On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln National Corporation ("Lincoln") for $1 billion in cash,
subject to adjustment as provided by the related agreements. The transaction was
generally in the form of an indemnity reinsurance arrangement, under which
Lincoln contractually assumed from the Company certain policyholder liabilities
and obligations, although the Company remains directly obligated to
policyholders. Assets related to and supporting the life policies were
transferred to Lincoln and the Company recorded a reinsurance receivable from
Lincoln. The transaction resulted in an after-tax gain on the sale of
approximately $152 million, of which $88 million was deferred and is being
recognized over approximately 15 years. Premiums ceded and reinsurance
recoveries made during 1999 totaled $400 million and $334 million, respectively.

Aetna International

On October 1, 1999, Aetna International, Inc. sold its Canadian operations to
John Hancock Canadian Holdings Limited, the parent of The Maritime Life
Assurance Company, for approximately $310 million in cash. The Company's
previously announced plan to sell its Canadian operations was dependent upon
receiving regulatory approval for the sale, which was received on September 30,
1999. Accordingly, a capital loss of $22 million for the sale was recognized
during the third quarter of 1999. The revenue and earnings of the Canadian
operations were not material to the Company.

On February 16, 1999, the Company entered into a joint venture with Poland's
sixth-largest bank for a 40% ownership interest in a company that sells pension
products throughout Poland following the reform and privatization of Poland's
pension sector, effective March 1, 1999.

On January 13, 1999, the Company acquired Asistencia Medica Social Argentina,
Argentina's largest HMO, for approximately $100 million.

(5) CAPITAL STOCK

On July 19, 1999, the Company redeemed all outstanding shares of its 6.25% Class
C Voting Mandatorily Convertible Preferred Stock. Holders of the Preferred Stock
received .8197 shares of Aetna common stock for each share of Preferred Stock
that was redeemed. Approximately 9.5 million shares of Aetna common stock were
issued to effect the redemption.

In January 1999, the Company's Board of Directors authorized the repurchase of
5.0 million shares of common stock. Through October 7, 1999, 1,780,000 shares of
common stock had been repurchased under this authorization at a cost of
approximately $135 million. On October 8, 1999, the Board of Directors
authorized the repurchase of up to 20 million shares of common stock, not to
exceed an aggregate purchase price of $1 billion. This authorization replaces
the January 1999 plan which had 3,220,000 shares remaining. Pursuant to the
October 1999 authorization, the Company has repurchased 2,295,900 shares of
common stock at a cost of approximately $120 million through October 15, 1999.

On September 24, 1999, the Board of Directors adopted a new shareholder rights
plan (the "1999 Plan") that will replace the Company's existing plan. The
Company's existing plan expires on November 8, 1999. Under the 1999 Plan, one
new right ("New Right") will be distributed on each outstanding share of Aetna
common stock to shareholders of record at the close of business on November 8,
1999, and one New Right will be issued with each share of Aetna common stock
issued after November 8, 1999.


                                     Page 17
<PAGE>   18
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(5) CAPITAL STOCK (CONTINUED)

After November 8, 1999, the New Rights will trade with the Aetna common stock
until they become exercisable. The New Rights will become exercisable (i) 10
days after a public announcement that a person or group ("Person") has acquired
15% or more of the outstanding shares of Aetna common stock (a "Triggering
Acquisition"); or (ii) 10 business days after a Person commences a tender offer
or exchange offer, the consummation of which could result in such Person owning
15% or more of the outstanding shares of Aetna common stock; or (iii) in either
event, such later date as the Board of Directors may determine.

Upon becoming exercisable each New Right will entitle the holder thereof (the
"Holder") to purchase one one-hundredth of a share of Aetna Inc.'s Class B
Voting Preferred Stock, Series A ("Fractional Preferred Share") at a price of
$300 (the "Exercise Price"). Each Fractional Preferred Share has dividend,
voting and liquidation rights designed to make it approximately equal in value
to one share of Aetna common stock. Under certain circumstances, including a
Triggering Acquisition, each New Right (other than New Rights that were or are
owned by the acquirer, which are void) thereafter will entitle the Holder to
purchase Aetna common stock (or economically equivalent securities, under
certain circumstances) worth twice the Exercise Price. Under certain
circumstances, including certain acquisitions of Aetna Inc. in a merger or sale
of its assets, each New Right thereafter will entitle the Holder to purchase
equity securities of the acquirer at a 50% discount.

Under certain circumstances, Aetna Inc. may redeem all of the New Rights at a
price of $.01 per New Right. The New Rights will expire on November 8, 2009,
unless earlier redeemed, however, the 1999 Plan provides for a committee of
Aetna Inc.'s independent Directors to review the 1999 Plan at least once every
three years and recommend to the full Board of Directors whether the 1999 Plan
should be amended or the New Rights redeemed. The New Rights will have no
dilutive effect on earnings per share until exercised.

Effective October 29, 1999, the Board of Directors approved a grant of
approximately 5.5 million options to executive, middle management and
non-management employees to purchase common stock of the Company at $50.25 per
share.

(6) INVESTMENTS

Net investment income includes amounts allocable to experience-rated
contractholders of $251 million and $305 million for the three months ended
September 30, 1999 and 1998, respectively, and $764 million and $926 million for
the nine months ended September 30, 1999 and 1998, respectively. Interest
credited to contractholders is included in current and future benefits.

Net realized capital gains (losses) allocable to experience-rated
contractholders of $(27) million and $20 million for the three months ended
September 30, 1999 and 1998, respectively, and $(18) million and $92 million for
the nine months ended September 30, 1999 and 1998, respectively, were deducted
from net realized capital gains as reflected on the Consolidated Statements of
Income, and an offsetting amount is reflected on the Consolidated Balance Sheets
in policyholders' funds left with the Company.


                                     Page 18
<PAGE>   19
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(6) INVESTMENTS (CONTINUED)

The total recorded investment in mortgage loans that are considered to be
impaired (including problem loans, restructured loans and potential problem
loans) and related specific reserves are presented in the table below.

<TABLE>
<CAPTION>
                                                               September 30, 1999                  December 31, 1998
                                                          --------------------------         ----------------------------
                                                               Total                              Total
                                                            Recorded        Specific           Recorded          Specific
(Millions)                                                Investment        Reserves         Investment          Reserves
----------                                                ----------        --------         ----------          --------
<S>                                                       <C>               <C>              <C>                 <C>
Supporting discontinued products                              $157.1           $22.3             $161.9             $22.9
Supporting experience-rated products                            85.9            17.4               95.7              21.7
Supporting remaining products                                   45.3             4.0               43.6               3.2
                                                              ------           -----             ------             -----
Total impaired loans                                          $288.3(1)        $43.7             $301.2(1)          $47.8
                                                              ======           =====             ======             =====
</TABLE>

(1)  Includes impaired loans of $96.9 million and $96.0 million at September 30,
     1999 and December 31, 1998, respectively, for which no specific reserves
     are considered necessary.

The activity in the specific and general reserves for the nine months ended
September 30, 1999 and 1998 is summarized below:

<TABLE>
<CAPTION>
                                                                Supporting
                                               Supporting       Experience-         Supporting
                                             Discontinued             Rated          Remaining
(Millions)                                       Products          Products           Products            Total
----------                                   ------------       -----------         ----------            -----
<S>                                          <C>                <C>                 <C>                <C>
Balance at December 31, 1998                     $  29.5            $  29.6            $   7.8         $   66.9
Credited to net realized capital losses               --                 --                (.2)             (.2)
Charged to other accounts                             --                 --                1.8              1.8
Principal write-offs                                 (.6)              (4.4)               (.5)            (5.5)
                                                 -------            -------            -------         --------
Balance at September 30, 1999                    $  28.9            $  25.2            $   8.9         $   63.0(2)
                                                 =======            =======            =======         ========
Balance at December 31, 1997                     $  68.7            $  31.6            $  14.2         $  114.5
Credited to net realized capital losses               --                 --               (2.0)            (2.0)
Charged (credited) to other accounts               (30.0)(1)           (2.0)(1)            5.0            (27.0)
Principal write-offs                                 (.4)              (2.0)               (.7)            (3.1)
                                                 -------            -------            -------         --------
Balance at September 30, 1998                    $  38.3            $  27.6            $  16.5         $   82.4(2)
                                                 =======            =======            =======         ========
</TABLE>

(1) Reflects adjustments to reserves related to assets supporting discontinued
    products and experience-rated products, which do not affect the Company's
    results of operations.
(2) Total reserves at September 30, 1999 and 1998 include $43.7 million and
    $39.4 million of specific reserves, respectively, and $19.3 million and
    $43.0 million of general reserves, respectively.

Income earned (pretax) and cash received on the average recorded investment in
impaired loans was as follows:

<TABLE>
<CAPTION>
                                            Three Months Ended September 30,         Nine Months Ended September 30,
                                                         1999                                     1999
                                           ----------------------------------      -----------------------------------
                                            Average                                 Average
                                           Impaired      Income          Cash      Impaired       Income          Cash
(Millions)                                    Loans      Earned      Received         Loans       Earned      Received
----------                                 --------      ------      --------      --------       ------      --------
<S>                                        <C>           <C>         <C>           <C>            <C>         <C>
Supporting discontinued products             $157.9        $3.1          $3.0        $158.8        $ 9.1        $  9.0
Supporting experience-rated products           95.3         2.8           2.6          94.2          7.1           6.8
Supporting remaining products                  29.9         2.7           2.4          35.4          5.8           5.2
                                             ------        ----          ----        ------         -----        -----
Total                                        $283.1        $8.6          $8.0        $288.4         $22.0        $21.0
                                             ======        ====          ====        ======         =====        =====
</TABLE>


<TABLE>
<CAPTION>
                                             Three Months Ended September 30,        Nine Months Ended September 30,
                                                          1998                                     1998
                                            ---------------------------------      -----------------------------------
                                             Average                                Average
                                            Impaired     Income          Cash      Impaired       Income          Cash
(Millions)                                     Loans     Earned      Received         Loans       Earned      Received
                                            --------     ------      --------      --------       ------      --------
<S>                                         <C>          <C>         <C>           <C>            <C>         <C>
Supporting discontinued products              $164.3       $4.1          $4.1        $175.5        $10.6         $10.9
Supporting experience-rated products           103.6        3.8           3.9         106.2          7.9           8.0
Supporting remaining products                   44.6         .9            .8          52.1          2.6           2.4
                                              ------       ----          ----        ------         -----        -----
Total                                         $312.5       $8.8          $8.8        $333.8         $21.1        $21.3
                                              ======       ====          ====        ======         =====        =====
</TABLE>


                                     Page 19
<PAGE>   20
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(7) SUPPLEMENTAL CASH FLOW INFORMATION

Significant noncash investing and financing activities included acquisition of
real estate through foreclosures of mortgage loans amounting to $9 million and
$4 million for the nine months ended September 30, 1999 and 1998, respectively.

(8) ADDITIONAL INFORMATION - ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities (excluding those related to
experience-rated contractholders and discontinued products) were as follows:

<TABLE>
<CAPTION>
                                                                                                    Nine Months Ended
                                                                                                      September 30,
                                                                                                --------------------------
(Millions)                                                                                       1999               1998
----------                                                                                      -------            -------
<S>                                                                                             <C>                <C>
Unrealized holding gains (losses) arising during the period (1)                                 $(322.1)           $ 112.2
Less:  reclassification adjustment for gains and other items included in net income (2)            42.1              232.0
                                                                                                -------            -------
Net unrealized losses on securities                                                             $(364.2)           $(119.8)
                                                                                                =======            =======
</TABLE>

(1)  Pretax unrealized holding gains (losses) arising during the period were
     $(495.5) million and $172.5 million for 1999 and 1998, respectively.
(2)  Pretax reclassification adjustments for gains and other items included in
     net income were $64.8 million and $356.9 million for 1999 and 1998,
     respectively.

(9) DISCONTINUED PRODUCTS

The Company discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. Under the Company's accounting for these discontinued
products, a reserve for anticipated future losses from these products was
established and the reserve is reviewed by management quarterly. As long as the
reserve continues to represent management's then best estimate of expected
future losses, results of operations of the discontinued products, including net
realized capital gains and losses, are credited/charged to the reserve and do
not affect the Company's results of operations. The Company's results of
operations would be adversely affected to the extent that future losses on the
products are greater than anticipated and positively affected to the extent that
future losses are less than anticipated. The current reserve reflects
management's best estimate of anticipated future losses.

The factors contributing to changes in the reserve for anticipated future losses
are: operating income or loss, realized capital gains or losses and mortality
gains or losses. Operating income or loss is equal to revenue less expenses.
Realized capital gains or losses reflect the excess (deficit) of sales price
over (below) the carrying value of assets sold. Mortality gains or losses
reflect the mortality and retirement experience related to SPAs. A mortality
gain (loss) occurs when an annuitant or a beneficiary dies sooner (later) than
expected. A retirement gain will occur on some contracts if an annuitant retires
later than expected (a loss if an annuitant retires earlier than expected).


                                     Page 20
<PAGE>   21
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)


(9) DISCONTINUED PRODUCTS (CONTINUED)

At the time of discontinuance, a receivable from Large Case Pensions' continuing
products equivalent to the net present value of the anticipated cash flow
shortfalls was established for the discontinued products. Interest on the
receivable is accrued at the discount rate that was used to calculate the
reserve. The offsetting payable, on which interest is similarly accrued, is
reflected in continuing products. Interest on the payable generally offsets the
investment income on the assets available to fund the shortfall. At September
30, 1999, the receivable from continuing products, net of related deferred taxes
payable of $64 million on the accrued interest income, was $459 million. At
December 31, 1998, the receivable from continuing products, net of related
deferred taxes payable of $55 million on accrued interest income, was $493
million. These amounts were eliminated in consolidation.

Results of discontinued products were as follows (pretax, in millions):

<TABLE>
<CAPTION>
                                                                                   Charged (Credited)
                                                                                       to Reserve for
Three months ended September 30, 1999                                  Results          Future Losses          Net (1)
-------------------------------------                                  -------     ------------------          -------
<S>                                                                    <C>         <C>                         <C>
Net investment income                                                   $116.3           $    -                $116.3
Net realized capital loss                                                (12.3)            12.3                     -
Interest earned on receivable from continuing products                     7.9                -                   7.9
Other income                                                               9.1                -                   9.1
                                                                        ------           ------                -----
   Total revenue                                                         121.0             12.3                 133.3
                                                                        ------           ------                -----
Current and future benefits                                              122.4              8.0                 130.4
Operating expenses                                                         2.9                -                   2.9
                                                                        ------           ------                -----
   Total benefits and expenses                                           125.3              8.0                 133.3
                                                                        ------           ------                -----
Results of discontinued products                                        $ (4.3)          $  4.3                $    -
                                                                        ======           ======                =====
</TABLE>


<TABLE>
<CAPTION>
Three months ended September 30, 1998
-------------------------------------
<S>                                                                     <C>              <C>                   <C>
Net investment income                                                   $ 132.3          $     -               $132.3
Net realized capital gains                                                  7.8             (7.8)                   -
Interest earned on receivable from continuing products                      8.8                -                  8.8
Other income                                                                1.2                -                  1.2
                                                                        -------          -------               ------
   Total revenue                                                          150.1             (7.8)               142.3
                                                                        -------          -------               ------
Current and future benefits                                               138.9               .4                139.3
Operating expenses                                                          3.0                -                  3.0
                                                                        -------          -------               ------
   Total benefits and expenses                                            141.9               .4                142.3
                                                                        -------          -------               ------
Results of discontinued products                                        $   8.2          $  (8.2)              $    -
                                                                        =======          =======               ======
</TABLE>


                                     Page 21
<PAGE>   22
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(9) DISCONTINUED PRODUCTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                    Charged (Credited)
                                                                                     to Reserve for
Nine months ended September 30, 1999                                    Results       Future Losses           Net (1)
------------------------------------                                    -------     ------------------        -------
<S>                                                                     <C>         <C>                        <C>
Net investment income                                                   $ 360.1          $    -                $360.1
Net realized capital gains                                                  6.0            (6.0)                    -
Interest earned on receivable from continuing products                     24.8               -                  24.8
Other income                                                               24.4               -                  24.4
                                                                        -------         -------                ------
   Total revenue                                                          415.3            (6.0)                409.3
                                                                        -------         -------                ------
Current and future benefits                                               379.5            20.4                 399.9
Operating expenses                                                          9.4               -                   9.4
                                                                        -------         -------                ------
   Total benefits and expenses                                            388.9            20.4                 409.3
                                                                        -------         -------                ------
Results of discontinued products                                        $  26.4         $ (26.4)               $    -
                                                                        =======         =======                ======
</TABLE>


<TABLE>
<CAPTION>
Nine months ended September 30, 1998
------------------------------------
<S>                                                                      <C>               <C>                   <C>
Net investment income                                                    $404.9         $     -                $404.9
Net realized capital gains                                                 82.8           (82.8)                    -
Interest earned on receivable from continuing products                     26.1               -                  26.1
Other income                                                               17.6               -                  17.6
                                                                         ------         -------                ------
   Total revenue                                                          531.4           (82.8)                448.6
                                                                         ------         -------                ------
Current and future benefits                                               429.4             8.9                 438.3
Operating expenses                                                         10.3               -                  10.3
                                                                         ------         -------                ------
   Total benefits and expenses                                            439.7             8.9                 448.6
                                                                         ------         -------                ------
Results of discontinued products                                         $ 91.7         $ (91.7)               $    -
                                                                         ======         =======                ======
</TABLE>


(1)  Amounts are reflected in the September 30, 1999 and 1998 Consolidated
     Statements of Income, except for interest earned on the receivable from
     continuing products, which is eliminated in consolidation.

Assets and liabilities supporting discontinued products at September 30, 1999
and December 31, 1998 were as follows (1):

<TABLE>
<CAPTION>
                                                              September 30,         December 31,
(Millions)                                                             1999                 1998
----------                                                    -------------         ------------
<S>                                                           <C>                   <C>
Debt securities available for sale                                 $4,770.4             $5,890.5
Mortgage loans                                                        788.8                754.2
Real estate                                                           101.8                104.2
Short-term and other investments                                      401.9                350.7
                                                                   --------             --------
Total investments                                                   6,062.9              7,099.6
Short-term investments under securities loan agreement                134.6                143.9
Current and deferred income taxes                                     182.2                187.5
Receivable from continuing products (2)                               522.6                548.0
Other                                                                   1.7                    -
                                                                   --------             --------
Total assets                                                       $6,904.0              7,979.0
                                                                   ========             ========

Future policy benefits                                             $4,574.2             $4,653.5
Policyholders' funds left with the Company                          1,031.9              1,546.0
Reserve for anticipated future losses on discontinued               1,163.3              1,214.1
products
Payables under securities loan agreements                             134.6                143.9
Other                                                                     -                421.5
                                                                   --------             --------
Total liabilities                                                  $6,904.0             $7,979.0
                                                                   ========             ========
</TABLE>

(1)  Assets supporting the discontinued products are distinguished from other
     continuing operations assets.
(2)  The receivable from continuing products is eliminated in consolidation.


                                     Page 22
<PAGE>   23
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(9) DISCONTINUED PRODUCTS (CONTINUED)

At September 30, 1999, net unrealized capital losses on available-for-sale debt
securities are included above in other assets. At December 31, 1998, net
unrealized capital gains on available-for-sale debt securities are included
above in other liabilities. These net unrealized capital gains and losses are
not reflected in consolidated shareholders' equity. The reserve for anticipated
future losses is included in future policy benefits on the Consolidated Balance
Sheets.

The reserve for anticipated future losses on discontinued products represents
the present value (at the risk-free rate at the time of discontinuance,
consistent with the duration of the liabilities) of the difference between the
expected cash flows from the assets supporting discontinued products and the
cash flows expected to be required to meet the obligations of the outstanding
contracts. Calculation of the reserve for anticipated future losses requires
projection of both the amount and the timing of cash flows over approximately
the next 30 years, including consideration of, among other things, future
investment results, participant withdrawal and mortality rates and the cost of
asset management and customer service. There have been no significant changes to
the assumptions underlying the calculation of the reserve related to the
projection of the amount and timing of cash flows.

The projection of future investment results considers assumptions for interest
rates, bond discount rates and performance of mortgage loans and real estate.
Mortgage loan assumptions represent management's best estimate of current and
future levels of rent growth, vacancy and expenses based upon market conditions
at each reporting date. The performance of real estate assets has been
consistently estimated using the most recent forecasts available. During 1997, a
bond default assumption was included to reflect historical default experience,
since the bond portfolio increased as a percentage of the overall investment
portfolio and reflected more bond credit risk, concurrent with the decline in
the commercial mortgage loan and real estate portfolios.

The previous years' actual participant withdrawal experience is used for the
current year assumption. Prior to 1995, the Company used the 1983 Group
Annuitant Mortality table published by the Society of Actuaries (the "Society").
In 1995, the Society published the 1994 Uninsured Pensioner's mortality table
which has been used since then.

The Company's assumptions about the cost of asset management and customer
service reflect actual investment and general expenses allocated over invested
assets. Since inception, the expense assumption has increased as the level of
fixed expenses has not declined as rapidly as the liability run-off.

The activity in the reserve for anticipated future losses on discontinued
products for the nine months ended September 30, 1999 was as follows (pretax):

<TABLE>
<CAPTION>
(Millions)
----------
<S>                                                            <C>
Reserve at December 31, 1998                                   $1,214.1
Operating income                                                   10.3
Net realized capital gains                                          6.0
Mortality and other                                                10.1
Reserve reduction                                                 (77.2)
                                                               --------
Reserve at September 30, 1999                                  $1,163.3
                                                               ========
</TABLE>

Management reviews the adequacy of the discontinued products reserve quarterly
and, as a result, $50 million ($77 million pretax) of the reserve was released
in the second quarter of 1999 primarily due to favorable investment performance.
A similar review in the third quarter of 1998 resulted in the Company's release
of $44 million ($68 million pretax) of the discontinued products reserve. The
current reserve reflects management's best estimate of anticipated future
losses.


                                     Page 23
<PAGE>   24
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(10) DEBT AND GUARANTEE OF DEBT SECURITIES

Aetna Inc. has fully and unconditionally guaranteed the payment of all
principal, premium, if any, and interest on all outstanding debt securities of
Aetna Services, including the $348 million 9.5% Subordinated Debentures due 2024
(the "Subordinated Debentures") issued to Aetna Capital L.L.C. ("ACLLC"), a
wholly owned subsidiary of Aetna Services (collectively the "Aetna Services
Debt"). ACLLC has issued $275 million of redeemable preferred stock, and the
Subordinated Debentures represent substantially all of the assets of ACLLC.

Aetna Services has a revolving credit facility in an aggregate amount of $1.5
billion with a worldwide group of banks. This credit facility terminates in June
2001. Various interest rate options are available under this facility and any
borrowings mature on the expiration date of the applicable credit commitment.
Aetna Services pays facility fees ranging from .065% to .2% per annum, depending
upon its long-term senior unsecured debt rating. The facility fee at September
30, 1999 is at an annual rate of .08%. This facility also supports Aetna
Services' commercial paper borrowing program. As a guarantor of any amounts
outstanding under the credit facility, Aetna Inc. is required to maintain
shareholders' equity, excluding net unrealized capital gains and losses
(accumulated other comprehensive income), of at least $7.5 billion.

On April 1, 1999 Aetna Services entered into an additional revolving credit
facility in an aggregate amount of $500 million with a worldwide group of banks.
This credit facility terminates on March 26, 2000. Various interest rate options
are available under this facility and any borrowings mature on the expiration
date of the applicable credit commitment. Aetna Services pays facility fees
ranging from .065% to .25% per annum, depending upon its long-term senior
unsecured debt rating. The facility fee at September 30, 1999 is at an annual
rate of .08%. This facility also supports Aetna Services' commercial paper
borrowing program. As a guarantor of any amounts outstanding under this credit
facility, Aetna Inc. is required to maintain shareholders' equity, excluding net
unrealized capital gains and losses (accumulated other comprehensive income), of
at least $7.5 billion.

Consolidated financial statements of Aetna Services have not been presented
herein or in any separate reports filed with the Securities and Exchange
Commission because management has determined that such financial statements
would not be material to holders of the Aetna Services Debt. Summarized
consolidated financial information for Aetna Services is as follows (in
millions):

Balance Sheets Information:
<TABLE>
<CAPTION>
                                                                           As Restated
                                                                -----------------------------------
                                                                September 30,         December 31,
                                                                         1999                  1998
                                                                -------------         -------------
<S>                                                             <C>                   <C>
Total investments (excluding Separate Accounts)                     $35,843.6             $38,349.7
Total assets                                                         95,755.6              93,190.9
Total insurance liabilities                                          37,765.0              38,566.9
Total liabilities                                                    94,108.4              90,770.3
Total redeemable preferred stock                                        275.0                 275.0
Total shareholder's equity                                            1,381.2               2,145.6
                                                                -----------------------------------
</TABLE>


Statements of Income Information:
<TABLE>
<CAPTION>
                                                          Three Months Ended       Nine Months Ended
                                                          September 30, 1999      September 30, 1999
                                                          ------------------      ------------------
<S>                                                       <C>                     <C>
Total revenue                                                       $3,240.6                $8,690.9
Total benefits and expenses                                          2,972.3                 7,949.6
Income before income taxes                                             268.3                   741.3
Net income                                                             133.6                   449.8
                                                          ------------------------------------------
</TABLE>


                                     Page 24
<PAGE>   25
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(10) DEBT AND GUARANTEE OF DEBT SECURITIES (CONTINUED)

The amount of dividends which may be paid to Aetna Services or Aetna U.S.
Healthcare by their domestic insurance and HMO subsidiaries at September 30,
1999 without prior approval by state regulatory authorities is limited to
approximately $312 million in the aggregate. There are no such restrictions on
distributions from Aetna Services or Aetna U.S. Healthcare to Aetna Inc. or on
distributions from Aetna Inc. to its shareholders.

(11) SEGMENT INFORMATION

Summarized financial information for the Company's principal operations for the
three and nine months ended September 30, was as follows:

<TABLE>
<CAPTION>
                                             As Restated          Aetna                                                 As Restated
Three months ended September 30,               Aetna U.S.     Financial           Aetna   Large Case        Corporate         Total
(Millions)                                     Healthcare      Services   International     Pensions    and Other (1)       Company
--------------------------------             ------------     ---------   -------------   ----------    -------------   -----------
<S>                                          <C>              <C>         <C>             <C>           <C>             <C>
1999
Revenues from external customers                 $5,405.5        $178.4          $595.2       $ 47.6          $    -       $6,226.7
Net investment income                               165.4         224.8            93.5        241.1             1.9          726.7
Equity in subsidiaries                               (1.6)            -            23.5            -               -           21.9
                                                 --------        ------          ------       ------          ------       --------
Total revenue excluding realized capital
 gains (losses)                                  $5,569.3        $403.2          $712.2       $288.7          $  1.9       $6,975.3
                                                 ========        ======          ======       ======          ======       ========

Operating earnings (2)                           $  139.7        $ 58.0          $ 45.9       $ 21.0          $(66.4)      $  198.2
Other item (3)                                       (8.4)        (2.5)            (2.4)         (.1)            (.7)         (14.1)
Realized capital gains (losses), net of tax          26.1         (7.2)           (21.4)        (3.8)           17.5           11.2
                                                 --------        ------          ------       ------          ------       --------
Net income (loss)                                $  157.4        $ 48.3          $ 22.1       $ 17.1          $(49.6)      $  195.3
                                                 ========        ======          ======       ======          ======       ========

1998
Revenues from external customers                 $3,957.3        $207.8          $411.4       $ 40.5          $   .3       $4,617.3
Net investment income                               133.3         278.2            80.9        278.0             3.3          773.7
Equity in subsidiaries                                  -             -            21.7            -               -           21.7
                                                 --------        ------          ------       ------          ------       --------
Total revenue excluding realized capital
  gains (losses)                                 $4,090.6        $486.0          $514.0       $318.5          $  3.6       $5,412.7
                                                 ========        ======          ======       ======          ======       ========

Operating earnings (losses) (2)                  $  108.6        $ 71.8          $ 42.5       $ 20.6          $(64.6)      $  178.9
Other items (3)                                     (18.1)         (6.5)           (3.4)        43.8            (8.1)           7.7
Realized capital gains (losses), net of tax          13.2           1.3             1.7          (.2)              -           16.0
                                                 --------        ------          ------       ------          ------       --------
Net income (loss)                                $  103.7        $ 66.6          $ 40.8       $ 64.2          $(72.7)      $  202.6
                                                 ========        ======          ======       ======          ======       ========
</TABLE>

(1)  Corporate and Other includes interest, staff area expenses, advertising,
     contributions, net investment income and other general expenses, as well as
     consolidating adjustments. Realized capital gains (losses) reflect $13.7
     million of previously deferred hedge gains related to an anticipated debt
     issuance. Refer to Financings and Financing Capacity in Management's
     Discussion and Analysis of Financial Condition and Results of Operations
     for further discussion.
(2)  Operating earnings are comprised of net income (loss) excluding net
     realized capital gains (losses) and other items. While operating earnings
     is the measure of profit or loss used by the Company's management when
     assessing performance or making operating decisions, it does not replace
     operating income or net income as a measure of profitability.
(3)  Other items include Year 2000 costs for all segments in 1999 and 1998 and
     an after-tax benefit of $44.2 million from reductions of the reserve for
     anticipated future losses on discontinued products in the Large Case
     Pensions segment in 1998.


                                     Page 25
<PAGE>   26
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(11) SEGMENT INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                          As Restated          Aetna                                                 As Restated
Nine months ended September 30,             Aetna U.S.     Financial           Aetna   Large Case      Corporate           Total
(Millions)                                  Healthcare      Services   International     Pensions   and Other (1)        Company
----------                                ------------     ---------   -------------   ----------   -------------    -----------
<S>                                       <C>              <C>         <C>             <C>          <C>              <C>
1999
Revenues from external customers             $14,036.4     $   478.4        $1,714.6     $  123.9        $    .4      $ 16,353.7
Net investment income                            444.6         672.3           285.1        756.0            6.2         2,164.2
Equity in subsidiaries                            (1.6)            -            70.0            -              -            68.4
                                             ---------     ---------        --------     --------        -------      ----------
Total revenue excluding realized
capital gains (losses)                       $14,479.4     $ 1,150.7        $2,069.7     $  879.9        $   6.6      $ 18,586.3
                                             =========     =========        ========     ========        =======      ==========

Operating earnings (2)                       $   388.2     $   167.3        $  141.5     $   65.2        $(186.1)     $    576.1
Other items (3)                                  (46.6)        (13.6)           (9.6)        49.8           (2.5)          (22.5)
Realized capital gains (losses), net
of tax                                            22.4          (4.7)          (19.3)        15.4           15.0            28.8
                                             ---------     ---------        --------     --------        -------      ----------
Net income (loss)                            $   364.0     $   149.0        $  112.6     $  130.4        $(173.6)     $    582.4
                                             =========     =========        ========     ========        =======      ==========

1998
Revenues from external customers             $10,328.9     $   602.4        $1,156.9     $  126.2        $   1.0      $ 12,215.4
Net investment income                            386.6         827.8           263.6        883.4            6.1         2,367.5
Equity in subsidiaries                               -             -            76.6            -              -            76.6
                                             ---------     ---------        --------     --------        -------      ----------
Total revenue excluding realized
capital gains (losses)                       $10,715.5     $ 1,430.2        $1,497.1     $1,009.6        $   7.1      $ 14,659.5
                                             =========     =========        ========     ========        =======      ==========

Operating earnings (losses) (2)              $   294.2     $   207.6        $  120.7     $   65.4        $(188.1)     $    499.8
Other items (3)                                  (42.5)        (15.7)           (6.2)        43.4          (12.1)          (33.1)
Realized capital gains (losses), net
of tax                                            41.8           6.4             (.7)        33.6           68.5           149.6
                                             ---------     ---------        --------     --------        -------      ----------
Net income (loss)                            $   293.5     $   198.3        $  113.8     $  142.4        $(131.7)     $    616.3
                                             =========     =========        ========     ========        =======      ==========
</TABLE>

(1)  Corporate and Other includes interest, staff area expenses, advertising,
     contributions, net investment income and other general expenses, as well as
     consolidating adjustments. Realized capital gains (losses) reflect $13.7
     million of previously deferred hedge gains related to an anticipated debt
     issuance. Refer to Financings and Financing Capacity in Management's
     Discussion and Analysis of Financial Condition and Results of Operations
     for further discussion.
(2)  Operating earnings are comprised of net income (loss) excluding net
     realized capital gains (losses) and other items. While operating earnings
     is the measure of profit or loss used by the Company's management when
     assessing performance or making operating decisions, it does not replace
     operating income or net income as a measure of profitability.
(3)  Other items include Year 2000 costs for all segments in 1999 and 1998 and
     an after-tax benefit of $50.2 million and $44.2 million from reductions of
     the reserve for anticipated future losses on discontinued products in the
     Large Case Pensions segment in 1999 and 1998, respectively.

(12) COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

In connection with the sale of its property-casualty operations in 1996, the
Company vacated, and the purchaser subleased, at market rates for a period of
eight years, the space that the Company occupied in the CityPlace office
facility in Hartford. In 1996, the Company recorded a charge of $292 million
pretax ($190 million after tax) which represented the present value of the
difference between rent required to be paid by the Company under the lease and
future rentals expected to be received by the Company. Lease payments are
charged to this facilities reserve as they are made and will continue to be
charged to this reserve over the remaining lease term. At September 30, 1999 and
December 31, 1998, the balance in this facilities reserve was $274 million and
$288 million, respectively.


                                     Page 26
<PAGE>   27
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(12) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

Litigation

Class Action Complaints were filed in the United States District Court for the
Eastern District of Pennsylvania on November 5, 1997 by Eileen Herskowitz and
Michael Wolin, and on December 4, 1997 by Pamela Goodman and Michael J. Oring.
Other Class Action Complaints were filed in the United States District Court for
the District of Connecticut on November 25, 1997 by Evelyn Silvert, on November
26, 1997 by the Rainbow Fund, Inc., and on December 24, 1997 by Terry B. Cohen.
The Connecticut actions were transferred to the United States District Court for
the Eastern District of Pennsylvania (the "Court") for consolidated pretrial
proceedings with the cases pending there. The plaintiffs filed a Consolidated
and Amended Complaint (the "Complaint") seeking, among other remedies,
unspecified damages resulting from defendants' alleged violations of federal
securities laws. The Complaint alleged that the Company and three of its current
or former officers or directors, Ronald E. Compton, Richard L. Huber, and
Leonard Abramson, are liable for certain misrepresentations and omissions
regarding, among other matters, the integration of the merger with U.S.
Healthcare and the Company's medical claim reserves. The Company and the
individual defendants filed a motion to dismiss the Complaint on July 31, 1998.
On February 2, 1999, the Court dismissed the Complaint, but granted the
plaintiffs leave to file a second amended complaint. On February 22, 1999, the
plaintiffs filed a second amended complaint against the Company, Ronald E.
Compton and Richard L. Huber. The Company and the remaining individual
defendants filed a motion to dismiss the second amended complaint, and the Court
denied that motion in March, 1999. On August 9, 1999 the Court entered an order
certifying as plaintiffs those persons who purchased Company common stock on the
market from March 6, 1997 through 7:00 a.m. on September 29, 1997. Substantial
discovery has taken place, including depositions commencing in the late summer
of 1999 of current and former senior officers of the Company. Discovery on the
merits is scheduled to be completed in the fourth quarter of 1999. Trial is
scheduled to begin in early 2000. The Company is defending the actions
vigorously.

The Company has recently become involved in several purported class action
lawsuits that it believes are part of a wave of similar actions targeting the
health care industry and, in particular, the conduct of business by managed care
companies.

A purported class action complaint was filed in the United States District Court
for the Eastern District of Pennsylvania on October 4, 1999 by Anthony Conte
(the "Conte Complaint"). The Conte Complaint seeks various forms of relief,
including unspecified damages, from Aetna U.S. Healthcare Inc. for alleged
violations of the Employee Retirement Income Security Act of 1974 ("ERISA"). The
Conte Complaint alleges that Aetna U.S. Healthcare does not make adequate
disclosure of provider compensation arrangements in the literature that it makes
available to actual or prospective members. The Company intends to defend the
action vigorously and on November 1, 1999 filed a motion to dismiss the
litigation for failure to state a claim upon which relief can be granted. This
litigation is in the preliminary stages.

A purported class action complaint was filed in the United States District Court
for the Southern District of Mississippi on October 7, 1999 by Jo Ann O'Neil
(the "O'Neil Complaint"). The O'Neil Complaint seeks various forms of relief,
including unspecified damages and treble damages, from the Company, Aetna U.S.
Healthcare Inc., Richard L. Huber and unnamed members of the Board of Directors
of Aetna Inc. for alleged violations of ERISA and the Racketeering Influenced
and Corrupt Organizations Act ("RICO"). The O'Neil Complaint alleges that
defendants are liable for alleged misrepresentations and omissions relating to
advertising, marketing and member materials directed to Aetna HMO members.
Defendants intend to defend the action vigorously. This litigation is in the
preliminary stages.


                                     Page 27
<PAGE>   28
Item 1.  Financial Statements.

                           AETNA INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (CONTINUED)

(12) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

A purported class action complaint was filed in the Superior Court of
California, County of Contra Costa on October 28, 1999 by Jeanne E. Curtright
(the "Curtright Complaint"). The Curtright Complaint seeks various forms of
relief, including injunctive relief and disgorgement of amounts allegedly
wrongfully acquired, from the Company, Aetna U.S. Healthcare Inc., Aetna U.S.
Healthcare of California Inc. and unnamed persons for alleged violations of
California Business and Professions Code Sections 17200 and 17500 in connection
with the sale and marketing of health plans in California. The Curtright
Complaint alleges that defendants are liable for alleged misrepresentations and
omissions relating to advertising, marketing and member materials directed to
Aetna HMO members. Defendants intend to defend the action vigorously. This
litigation is in the preliminary stages.

A purported class action complaint was filed in the United States District Court
for the Eastern District of Pennsylvania on April 19, 1999 by Joseph Maio, Jo
Ann Maio and Gary Bender seeking various forms of relief, including unspecified
damages and treble damages, from the Company and a number of its subsidiaries
for alleged violations of RICO, the Pennsylvania Unfair Trade Practices and
Consumer Protection Law, and state common law. On September 29, 1999 the Court
dismissed the RICO claims with prejudice and dismissed the state law claims for
lack of subject matter jurisdiction. The Court held, among other things, that
the plaintiffs lacked standing to pursue the federal RICO claims because they
had not alleged an injury in fact. Plaintiffs have appealed the dismissal to the
United States Court of Appeals for the Third Circuit.

The Company is also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations, including bad faith,
medical malpractice, marketing and other litigation in its health business. Some
of these other lawsuits are purported to be class actions. Aetna U.S. Healthcare
of California Inc., an indirect subsidiary of the Company, is currently a party
to a bad faith and medical malpractice action brought by Teresa Goodrich,
individually and as successor in interest of David Goodrich. The action was
originally filed in March, 1996 in Superior Court for the state of California,
county of San Bernardino. The action alleges damages for unpaid medial bills,
punitive damages and compensatory damages for wrongful death based upon, among
other things, alleged denial of claims for services provided to David Goodrich
by out of network providers without prior authorization. On January 20, 1999 a
jury rendered a verdict in favor of the plaintiff for $750,000 for unpaid
medical bills, $3.7 million for wrongful death and $116 million for punitive
damages. On April 12, 1999 the trial court amended the judgment to include Aetna
Services, Inc., a direct subsidiary of the Company, as a defendant. On April 27,
1999 Aetna Services, Inc. and Aetna U.S. Healthcare of California Inc. filed
appeals with the California Court of Appeal and will continue to defend this
matter vigorously. While the ultimate outcome of the lawsuits referred to in
this paragraph cannot be determined at this time, after consideration of the
defenses available to the Company and any related reserves established, and
after consultation with counsel, the lawsuits referred to in this paragraph are
not expected to result in liability for amounts material to the financial
condition of the Company, although they may adversely affect results of
operations in future periods.


                                     Page 28
<PAGE>   29
                       INDEPENDENT AUDITORS' REVIEW REPORT

The Board of Directors
Aetna Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Aetna
Inc. and Subsidiaries as of September 30, 1999, and the related condensed
consolidated statements of income for the three-month and nine-month periods
ended September 30, 1999 and 1998, and the related condensed consolidated
statements of shareholders' equity and cash flows for the nine-month periods
ended September 30, 1999 and 1998. These condensed consolidated financial
statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.

We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Aetna Inc. and Subsidiaries as of
December 31, 1998, and the related consolidated statements of income,
shareholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 3, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1998, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.

As discussed in Note 2, the accompanying condensed consolidated financial
statements have been restated.



                                  /s/ KPMG LLP


Hartford, Connecticut
October 27, 1999, except as to
Note 2, which is as of February 7, 2000


                                     Page 29
<PAGE>   30
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion and analysis presents a review of Aetna Inc. and its
subsidiaries (collectively, the "Company") for the three and nine months ended
September 30, 1999 and 1998. This review should be read in conjunction with the
consolidated financial statements and other data presented herein as well as the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in Aetna Inc.'s 1998 Annual Report on Form 10-K/A.

RESTATEMENT

Following a review by the staff of the Securities and Exchange Commission, the
Company concluded that it would restate its 1999 Form 10-Qs (the "Restatement").
For additional information concerning the Restatement refer to "Significant
Financial and Accounting Developments" contained elsewhere in this Form 10-Q/A.

OVERVIEW

General

The Company's current operations include three core businesses - Aetna U.S.
Healthcare, Aetna Financial Services (formerly Aetna Retirement Services) and
Aetna International. Aetna U.S. Healthcare provides a full spectrum of managed
care, indemnity, and group life and disability insurance products. Aetna
Financial Services offers a range of financial services products including
annuity contracts, investment advisory services, financial planning and pension
plan administration services. Aetna International, through subsidiaries and
joint venture operations, sells primarily life insurance, health insurance and
financial services products in markets outside the United States. The Company
also has a Large Case Pensions business that manages a variety of retirement
products for defined benefit and defined contribution plans.

Consolidated Results

The Company reported net income of $195 million for the three months ended
September 30, 1999 compared to $203 million for the same period in 1998. Net
income per diluted common share for the three months ended September 30, 1999
was $1.29, compared with $1.30 a year ago.

Net income reflects Year 2000 costs of $14 million for the three months ended
September 30, 1999 and $37 million for the same period in 1998. Net income for
the three months ended September 30, 1998 includes a reduction of the reserve
for loss on discontinued products for Large Case Pensions of $44 million. Net
realized capital gains were $11 million for the three months ended September 30,
1999 and $16 million for the same period in 1998. Excluding these items, results
were $198 million for the three months ended September 30, 1999 compared to $179
million for the same period in 1998.

The Company reported net income of $582 million for the nine months ended
September 30, 1999 compared to $616 million for the same period in 1998. Net
income per diluted common share for the nine months ended September 30, 1999 was
$3.81, compared with $3.92 a year ago.

Net income reflects Year 2000 costs of $73 million for the nine months ended
September 30, 1999 and $77 million for the same period in 1998. Net income
includes a reduction of the reserve for loss on discontinued products for Large
Case Pensions of $50 million for the nine months ended September 30, 1999 and
$44 million for the same period in 1998. Net realized capital gains were $29
million for the nine months ended September 30, 1999 and $150 million for the
same period in 1998. Excluding these items, results were $576 million for the
nine months ended September 30, 1999 compared to $500 million for the same
period in 1998.


                                     Page 30
<PAGE>   31
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

OVERVIEW (CONTINUED)

Acquisitions and Dispositions

Aetna U.S. Healthcare

Prudential Health Care Business

On August 6, 1999, the Company acquired The Prudential Insurance Company of
America's ("Prudential") health care business ("PHC") for approximately $1
billion. Included in the acquisition are PHC's risk HMO, POS, PPO and Indemnity
health lines, as well as its dental risk business. The Company financed the
transaction by issuing $500 million of three-year senior notes to Prudential and
by using funds made available from the issuance of commercial paper. The Company
expects to ultimately replace this commercial paper with medium- or long-term
fixed income securities. The Company also agreed to service Prudential's
administrative services only contracts.

Since the closing, the Company's results have been affected by, among other
things, the operating results of PHC, the costs of financing the transaction and
the amortization of intangible assets (primarily goodwill) created as a result
of the transaction. The operations, and related amortization of intangible
assets, of PHC are reflected in the Aetna U.S. Healthcare segment while the
financing costs of the acquisition are reflected in the Corporate segment. Refer
to "Aetna U.S. Healthcare", "Corporate", "Liquidity and Capital Resources" and
Note 4 of the Condensed Notes to Consolidated Financial Statements for further
discussion.

Sale of NYLCare Texas

In connection with the PHC acquisition, the Company reached an agreement with
the U.S. Department of Justice and the State of Texas that will result in the
divestiture of certain Texas HMO/POS and other related businesses ("NYLCare
Texas") acquired by the Company as part of the 1998 NYLCare acquisition.
Pursuant to this agreement, on September 14, 1999, Aetna U.S. Healthcare and
Health Care Service Corporation ("HCSC") entered into an agreement for Blue
Cross and Blue Shield of Texas ("Blue Cross"), a division of HCSC, to acquire
the NYLCare Texas operations for approximately $500 million in cash, subject to
certain adjustments, including an adjustment based on the level of membership at
the closing date. The Blue Cross agreement affects approximately 520,000
Commercial HMO members and 16,000 PPO members in the Houston, Austin, San
Antonio, Corpus Christi, Beaumont, Dallas-Fort Worth, San Angelo, Texarkana and
Amarillo areas. Aetna U.S. Healthcare will retain approximately 108,000 NYLCare
Medicare members through a reinsurance and administrative services agreement.
The Blue Cross agreement is subject to regulatory approval and the transaction
is expected to close by the first quarter of 2000. Proceeds from the sale are
expected to be used for general corporate purposes, including repayment of debt,
internal growth, share repurchases and acquisitions. The sale is expected to
result in a capital gain which will be determined upon closing. The earnings of
the divested businesses were not material to the Aetna U.S. Healthcare segment
or to the Company's consolidated results of operations. Effective for the third
quarter 1999, the earnings of NYLCare Texas are presented on an equity basis
(reflected as net investment income) in the Consolidated Financial Statements
consistent with the agreement with the U.S. Department of Justice and the State
of Texas.

NYLCare Health Business

In July 1998, the Company acquired NYLCare. The total purchase price was
approximately $1.1 billion. Since the closing, the Company's results have been
affected by, among other things, the operating results of NYLCare, the costs of
financing the transaction and the amortization of intangible assets (primarily
goodwill) created as a result of the transaction. The operations, and related
amortization of intangible assets, of NYLCare are reflected in the Aetna U.S.
Healthcare segment while the financing costs of the acquisition are reflected in
the Corporate segment. Refer to "Aetna U.S. Healthcare", "Corporate", "Liquidity
and Capital Resources" and Note 4 of the Condensed Notes to Consolidated
Financial Statements for further discussion.


                                     Page 31
<PAGE>   32
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

OVERVIEW (CONTINUED)

Acquisitions and Dispositions (Continued)

Aetna Financial Services

In October 1998, the Company sold its domestic individual life insurance
business to Lincoln National Corporation for approximately $1 billion. The
principal agreement to sell this business was generally in the form of an
indemnity reinsurance arrangement. For more details about the transaction and
the indemnity reinsurance arrangement, refer to "Aetna Financial Services" and
Note 4 of the Condensed Notes to Consolidated Financial Statements.

Aetna International

On October 1, 1999, Aetna International, Inc. completed the sale of its Canadian
operations to John Hancock Canadian Holdings Limited, the parent of The Maritime
Life Assurance Company, for approximately $310 million in cash. The Company's
previously announced plan to sell its Canadian operations, as well as the
closing, was dependent upon receiving regulatory approval for the sale, which
was received on September 30, 1999. Accordingly, a capital loss of $22 million
for the sale was recognized during the third quarter of 1999. The revenue and
earnings of the Canadian operations were not material to the Company. Proceeds
from the sale are expected to be used for general corporate purposes, including
repayment of debt, internal growth, share repurchases and acquisitions. Refer to
"Aetna International" and Note 4 of the Condensed Notes to Consolidated
Financial Statements for further discussion.

Other

On July 19, 1999, the Company redeemed all outstanding shares of its 6.25% Class
C Voting Mandatorily Convertible Preferred Stock. Upon redemption, holders of
the Preferred Stock received .8197 shares of Aetna common stock for each share
of Preferred Stock that was redeemed. Approximately 9.5 million shares of Aetna
common stock were issued to effect the redemption. Refer to "Liquidity and
Capital Resources" and Note 5 of the Condensed Notes to Consolidated Financial
Statements for further discussion.


                                     Page 32
<PAGE>   33
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

AETNA U.S. HEALTHCARE

Operating Summary

<TABLE>
<CAPTION>
                                                   As Restated                                     As Restated
                                          Three Months Ended September 30,                 Nine Months Ended September 30,
                                        ------------------------------------           --------------------------------------
(Millions)                              1999(1)      1998 (2)       % Change           1999(1)       1998(2)         % Change
----------                              -------      --------       --------           -------       -------         --------
<S>                                    <C>           <C>            <C>               <C>           <C>              <C>
Premiums                               $4,935.8      $3,584.1          37.7%          $12,797.5     $ 9,270.1          38.1 %
Net investment income                     163.8         133.3          22.9               443.0         386.6          14.6
Fees and other income                     469.7         373.2          25.9             1,238.9       1,058.8          17.0
Net realized capital gains                 39.9          19.2             -                34.4          63.4         (45.7)
                                       --------      --------          ----           ---------     ---------         -----
         Total revenue                  5,609.2       4,109.8          36.5            14,513.8      10,778.9          34.7
                                       --------      --------          ----           ---------     ---------         -----
Current and future benefits             4,210.1       3,090.8          36.2            10,956.8       7,976.1          37.4
Operating expenses                      1,016.8         725.6          40.1             2,586.8       1,969.8          31.3
Amortization of goodwill and
   other acquired intangible assets       108.6          99.1           9.6               312.4         280.5          11.4
                                       --------      --------          ----           ---------     ---------         -----
         Total benefits and expenses    5,335.5       3,915.5          36.3            13,856.0      10,226.4          35.5
                                       --------      --------          ----           ---------     ---------         -----
Income before income taxes                273.7         194.3          40.9               657.8         552.5          19.1
Income taxes                              116.3          90.6          28.4               293.8         259.0          13.4
                                       --------      --------          ----           ---------     ---------         -----
Net income                             $  157.4      $  103.7          51.8%          $   364.0     $   293.5          24.0 %
                                       ========      ========          ====           =========     =========         =====
Net realized capital gains,
   net of tax (included above)         $   26.1      $   13.2          97.7%          $    22.4     $    41.8         (46.4)%
                                       ========      ========          ====           =========     =========         =====
</TABLE>


(1)  Results include PHC since August 6, 1999.
(2)  Results include NYLCare, including the portion that the Company has agreed
     to divest, since July 15, 1998.

Aetna U.S. Healthcare's net income for the three months ended September 30, 1999
increased $54 million compared to the same period in 1998. Net income includes
Year 2000 costs of $8 million for the three months ended September 30, 1999 and
$18 million for the same period in 1998. Excluding Year 2000 costs and net
realized capital gains, results for the three months ended September 30, 1999
increased $31 million, or 29%, compared to the same period in 1998.

Net income for the nine months ended September 30, 1999 increased by $71 million
compared to the same period in 1998. Net income includes Year 2000 costs of $47
million for the nine months ended September 30, 1999 and $43 million for the
same period in 1998. Excluding Year 2000 costs and net realized capital gains,
results for the nine months ended September 30, 1999 increased $94 million, or
32%, compared to the same period in 1998.

Net realized capital gains for the three months ended September 30, 1999 include
$39 million after-tax of contingent consideration following the Company's 1997
sale of its behavioral health subsidiary, HAI. The Company records these amounts
as they become realizable. This gain was partially offset by net realized
capital losses from the Company's rebalancing of its investment portfolio in a
rising interest rate environment.

Acquisition of the Prudential Health Care Business

On August 6, 1999, the Company acquired PHC. The Company also agreed to service
Prudential's administrative services only ("ASO") contracts following the
acquisition. Included in the acquisition are PHC's risk HMO, POS, PPO and
Indemnity health lines, as well as its dental risk business. Subsequent to the
closing, Aetna U.S. Healthcare's results have been affected by, among other
things, the operating results of PHC and the amortization of intangible assets
(primarily goodwill) created by the transaction. PHC has incurred significant
operating losses in recent periods. The Company is seeking to improve PHC's
profitability by, among other things, reducing administrative costs and
improving underwriting and pricing discipline. If the Company is not able to
improve PHC's profitability, it could have an adverse effect on Aetna U.S.
Healthcare's profitability. Refer to "Overview" and Note 4 of the Condensed
Notes to Consolidated Financial Statements for a further discussion of the PHC
acquisition and the Company's agreement to divest NYLCare Texas.


                                     Page 33
<PAGE>   34
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

AETNA U.S. HEALTHCARE (CONTINUED)

Business Results

In order to provide a comparison that management believes better reflects the
underlying performance of Aetna U.S. Healthcare, the operating earnings
discussion that follows excludes the amortization of goodwill and other acquired
intangible assets (including the goodwill associated with the U.S. Healthcare,
NYLCare and PHC acquisitions), Year 2000 costs and net realized capital gains or
losses in both periods.

<TABLE>
<CAPTION>
                                                   As Restated                         As Restated
                                          Three Months Ended September 30,     Nine Months Ended September 30,
                                          --------------------------------     -------------------------------
(Millions)                                 1999(1)                 1998(2)      1999 (1)               1998(2)
                                          ----------              --------     ----------             --------
<S>                                       <C>                     <C>          <C>                    <C>
Operating earnings:
   Health Risk and PHC                    $  149.9                $   97.8     $  404.0               $  267.0
   Group Insurance and Other Health           77.2                    91.4        236.7                  257.3
                                          ----------              --------     ----------             --------
Total Aetna U.S. Healthcare               $  227.1                $  189.2     $  640.7               $  524.3
                                          ==========              ========     ==========             ========
Commercial HMO Premium PMPM               $ 138.01                $ 134.01     $ 138.72               $ 134.63
                                          ----------              --------     ----------             --------
Commercial HMO Medical Cost PMPM          $ 115.77(3)             $ 110.77     $ 115.10(3)            $ 110.96
                                          ----------              --------     ----------             --------
Commercial HMO Medical Loss Ratio             83.9%(3)                82.6%        83.0%(3)               82.4%
                                          ----------              --------     ----------             --------

Medicare HMO Premium PMPM                 $ 490.64                $ 477.34     $ 488.85               $ 473.26
                                          ----------              --------     ----------             --------
Medicare HMO Medical Cost PMPM            $ 450.50(3)             $ 437.77     $ 444.08(3)            $ 441.19
                                          ----------              --------     ----------             --------
Medicare HMO Medical Loss Ratio               91.8%(3)                91.7%        90.8%(3)               93.2%
                                          ----------              --------     ----------             --------
</TABLE>

(1)      Includes PHC since August 6, 1999.

(2)      Includes NYLCare, including the portion that the Company has agreed to
         divest, since July 15, 1998.

(3)      Does not reflect $24.5 million pretax of net recoveries under a
         reinsurance agreement with Prudential.

Health Risk and PHC

Health Risk (which includes all health products for which Aetna U.S. Healthcare
assumes all or a majority of health care cost and utilization risk) and PHC
earnings increased $52 million for the three months ended September 30, 1999 and
$137 million for the nine months ended September 30, 1999 compared to the
corresponding periods of 1998. The increase in 1999 earnings primarily reflects
HMO membership growth, improved Medicare HMO results due to the exiting of
several Medicare markets as of January 1, 1999, and higher investment income
partly offset by higher expenses. Also contributing to higher results was the
addition of PHC, including the benefit of supplemental fees for servicing
Prudential's ASO customers and net recoveries under a reinsurance agreement with
Prudential.

For the Health Risk business, the liability for medical claims payable reflects
estimates of the ultimate cost of claims that have been incurred but not yet
reported or paid. Medical claims payable are based on a number of factors,
including those derived from historical claim experience. Medical claims payable
are estimated periodically, and any resulting adjustments are reflected in
current period operating results within current and future benefits.






                                    Page 34
<PAGE>   35
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

AETNA U.S. HEALTHCARE (CONTINUED)

Commercial HMO

Commercial HMO premium per member per month ("PMPM") increased 3% for the three
and nine months ended September 30, 1999 compared to the corresponding periods
of 1998. Excluding PHC, the increase would have been 6% for the three months
ended September 30, 1999 and 4% for the nine months ended September 30, 1999
compared to the corresponding periods of 1998. These increases were primarily
due to premium rate increases, partially offset by customers selecting lower
premium plans and a shift in the geographic mix of membership.

Commercial HMO medical cost PMPM increased 5% for the three months ended
September 30, 1999 and 4% for the nine months ended September 30, 1999 compared
to the corresponding periods of 1998. Excluding PHC, the increase would have
been 6% for the three months ended September 30, 1999 and 4% for the nine months
ended September 30, 1999 compared to the corresponding periods of 1998. These
increases reflect higher medical costs due to medical cost inflation and
increased utilization, partially offset by medical cost initiatives.

The Commercial HMO medical loss ratio was 83.9% for the three months ended
September 30, 1999 compared to 82.6% for the three months ended September 30,
1998. This ratio was 83.0% for the nine months ended September 30, 1999 compared
to 82.4% for the corresponding period of 1998. These increases are primarily due
to the addition of the PHC business at a medical loss ratio of 87.2%. Excluding
the impact of PHC members and the NYLCare Texas members being divested, the
medical loss ratio is relatively flat for both periods as price increases kept
pace with medical cost inflation.

Medicare HMO

Medicare HMO premium PMPM increased 3% for the three and nine months ended
September 30, 1999 compared to the corresponding periods of 1998. Excluding PHC,
the increase would have remained 3% for the three and nine months ended
September 30, 1999 compared to the corresponding periods of 1998. These
increases were primarily due to Health Care Financing Administration rate
increases and increases in supplemental premiums, partially offset by a shift in
the geographic mix of membership.

Medicare HMO medical cost PMPM increased 3% for the three months ended September
30, 1999 and 1% for the nine months ended September 30, 1999 compared to the
corresponding periods of 1998. Excluding PHC, the increase would have been 2%
for the three months ended September 30, 1999 and essentially level for the nine
months ended September 30, 1999 compared to the corresponding periods of 1998.
The three month increase reflects higher medical costs offset by the favorable
impact of exiting several markets as of January 1, 1999.

The Medicare HMO medical loss ratio was 91.8% for the three months ended
September 30, 1999 compared to 91.7% for the three months ended September 30,
1998. Excluding the impact of PHC members, the medical loss ratio decreased for
the three months ended September 30, 1999 compared to the corresponding period
of 1998. The medical loss ratio was 90.8% for the nine months ended September
30, 1999 compared to 93.2% for the corresponding period of 1998. The medical
loss ratio for the nine months ended September 30, 1999 was not significantly
impacted by the addition of PHC members. The improvement in each period reflects
the favorable impact of exiting several markets as of January 1, 1999.






                                    Page 35
<PAGE>   36
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

AETNA U.S. HEALTHCARE (CONTINUED)

PHC Agreement

The Company and Prudential entered into a reinsurance agreement for which the
Company paid a premium. Under the agreement, Prudential has agreed to indemnify
the Company from certain health insurance risks that arise following the
closing by reimbursing the Company for 75% of medical costs (as calculated
under the agreement) of PHC in excess of certain threshold medical loss ratio
levels through 2000 for substantially all the acquired medical and dental risk
business. The medical loss ratio threshold is 83.5% for August 6, 1999 through
December 31, 1999 and 84% for January 1, 2000 through December 31, 2000. During
the period August 6, 1999 through September 30, 1999, reinsurance recoveries
under this agreement  were $27 million pretax. In addition, results were
impacted by $1.2 million pretax ($.8 million after tax) related to the net
amortization of the fair value adjustment of the reinsurance  agreement and the
fair value adjustment of the unfavorable component of the contracts  underlying
the acquired medical risk business recorded as part of the acquisition. Such
reinsurance recoveries and net amortization were reflected in current and
future benefits. Refer to Note 4 of Condensed Notes to Consolidated Financial
Statements.

The Company also agreed to service Prudential's ASO contracts. Prudential is
terminating its ASO business and has retained the Company to service these
contracts during the run-off period, but no later than June 30, 2001. Prudential
ASO customers will remain Prudential customers as long as the contracts remain
in force. The Company is maintaining personnel, systems and other resources
necessary to service the ASO business during the run-off period, as it was not
feasible to segregate these operating assets from those purchased in the PHC
transaction. In exchange for servicing the ASO business, Prudential is remitting
fees received from its ASO customers to the Company, as well as paying certain
supplemental fees. The supplemental fees are fixed in amount and decline over a
period ending 18 months following the closing. During the period August 6, 1999
through September 30, 1999, the Company recorded total fees for servicing the
Prudential ASO business of $90 million pretax, including supplemental fees of
$40 million pretax (reflected as fees and other income). The results of
servicing this business during the run-off period will depend on, among other
things, rate increases that are obtained from renewing customers (most of such
rate increases were implemented by Prudential prior to the Company's servicing
of these contracts), the timing and extent of ASO contract terminations and the
cost structure for servicing these contracts. Refer to Note 4 of Condensed Notes
to Consolidated Financial Statements.

Group Insurance and Other Health

Group Insurance and Other Health includes group life and disability insurance
and long-term care insurance, offered on both an insured and employer-funded
basis, and all health products offered on an employer-funded basis. Group
Insurance and Other Health results decreased $14 million for the three months
ended September 30, 1999 compared to the corresponding period of 1998. This
decrease reflects higher operating expenses and unfavorable disability
experience, partially offset by favorable developments in claim benefit reserve
estimates for NYLCare life and disability products and higher investment and fee
income.

Results decreased $21 million for the nine months ended September 30, 1999
compared to the corresponding period of 1998.

This decrease reflects higher operating expenses and less favorable developments
in claim benefit reserve estimates, partially offset by higher fees and
investment income. Fourth quarter 1999 results for Group Insurance and Other
Health are expected to be comparable to third quarter 1999.





                                    Page 36
<PAGE>   37
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

AETNA U.S. HEALTHCARE (CONTINUED)

Membership

Aetna U.S. Healthcare's membership was as follows:

<TABLE>
<CAPTION>
                                            September 30, 1999 (1)               September 30, 1998
                                            ----------------------               ------------------
(Thousands)                           Risk       Nonrisk       Total         Risk       Nonrisk       Total
-----------                           ----       -------       -----         ----       -------       -----
<S>                                 <C>          <C>         <C>           <C>         <C>          <C>
HMO
Commercial(2)(3)                     8,669          722        9,391        5,044          641        5,685
Medicare                               706           --          706          531           --          531
Medicaid                               171           50          221          129           --          129
                                    ------        -----       ------        -----        -----       ------
      Total HMO                      9,546          772       10,318        5,704          641        6,345
POS(3)                                 407        3,553        3,960          262        2,507        2,769
PPO(3)                                 829        3,107        3,936        1,225        2,972        4,197
Indemnity                              260        2,547        2,807          242        2,247        2,489
                                    ------        -----       ------        -----        -----       ------
Total Health Membership             11,042        9,979       21,021        7,433        8,367       15,800
                                    ======        =====       ======        =====        =====       ======

Dental                                                        15,817                                  8,455

Group Insurance:
Group Life                                                     9,409                                  9,994
Disability                                                     2,258                                  2,821
Long-Term Care                                                   108                                     92
                                                              ------                                 ------
</TABLE>

(1)      Health membership in thousands includes 5,335 PHC members (3,135
         Commercial HMO risk, 119 Medicare HMO risk, 24 Medicaid HMO risk, 200
         POS risk, 55 PPO risk, 110 Indemnity risk and 1,692 Administrative
         Services Only members that Aetna U. S. Healthcare has agreed to service
         (1,084 POS nonrisk, 93 PPO nonrisk and 515 Indemnity nonrisk)) and
         8,017 Dental members. There were no group insurance PHC members.

(2)      Includes 2,309 thousand POS members who access primary care physicians
         and referred care through an HMO network at September 30, 1999 and
         1,306 thousand at September 30, 1998.

(3)      Membership includes the NYLCare Texas operations to be sold. NYLCare
         Texas includes 520 thousand Commercial HMO members and 16 thousand PPO
         members.

Total Health membership as of September 30, 1999 increased 5 million members, or
33%, when compared to September 30, 1998, due to the addition of PHC members,
including ASO members that Aetna U.S. Healthcare has agreed to service.
Excluding the impact of the PHC members, HMO membership increases were more than
offset by declines in point-of-service ("POS"), preferred provider organization
("PPO") and Indemnity enrollment. The Company expects that it will experience
declines in PHC membership during the current and upcoming enrollment cycles
given the level of premium rate increases implemented by Prudential prior to the
PHC closing as compared to premium rate increases for PHC a year earlier and
given the fact that the Company is not actively marketing PHC products.

Total Revenue and Expense

Revenue, excluding net realized capital gains or losses, increased by $1.5
billion, or 36%, for the three months ended September 30, 1999 and $3.8 billion
or 35% for the nine months ended September 30, 1999 compared to the
corresponding periods of 1998. These increases were primarily due to the
acquisition of PHC, the acquisition of NYLCare on July 15, 1998, Commercial HMO
membership growth and premium rate increases.

Operating expenses increased by $291 million, or 40%, for the three months ended
September 30, 1999 and $617 million, or 31%, for the nine months ended September
30, 1999 compared to the corresponding periods of 1998. These increases were
primarily due to the acquisition of PHC and NYLCare as well as increased costs
to support Commercial HMO membership growth. Operating expenses as a percentage
of revenue was 18% for all periods reported.




                                    Page 37
<PAGE>   38
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

AETNA FINANCIAL SERVICES

Operating Summary

<TABLE>
<CAPTION>
                                               Three Months Ended September 30,            Nine Months Ended September 30,
                                            --------------------------------------      --------------------------------------
(Millions)                                       1999        1998 (1)     % Change           1999           1998(1)    % Change
----------                                       ----        --------     --------           ----           -------    --------
<S>                                          <C>         <C>              <C>           <C>            <C>             <C>
Premiums (2)                                 $   44.2    $   38.6             14.5%     $    86.6      $   113.8          (23.9)%
Net investment income                           224.8       278.2            (19.2)         672.3          827.8          (18.8)
Fees and other income                           134.2       169.2            (20.7)         391.8          488.6          (19.8)
Net realized capital gains (losses)             (11.2)        1.9                -           (7.3)           9.8              -
                                             --------    --------            -----      ---------      ---------           ----
       Total revenue                            392.0       487.9            (19.7)       1,143.4        1,440.0          (20.6)
                                             --------    --------            -----      ---------      ---------           ----
Current and future benefits (2)                 201.1       254.2            (20.9)         564.2          739.8          (23.7)
Operating expenses                               93.0       101.9             (8.7)         280.1          307.6           (8.9)
Amortization of deferred policy
   acquisition costs                             25.9        36.2            (28.5)          77.6          106.7          (27.3)
                                             --------    --------            -----      ---------      ---------           ----
       Total benefits and expenses              320.0       392.3            (18.4)         921.9        1,154.1          (20.1)
                                             --------    --------            -----      ---------      ---------           ----
Income before income taxes                       72.0        95.6            (24.7)         221.5          285.9          (22.5)
Income taxes                                     23.7        29.0            (18.3)          72.5           87.6          (17.2)
                                             --------    --------            -----      ---------      ---------           ----
Net income                                   $   48.3    $   66.6            (27.5)%    $   149.0      $   198.3          (24.9)%
                                             ========    ========            =====      =========      =========           ====
Net realized capital gains (losses),
  net of tax (included above)                $   (7.2)   $    1.3                -%     $    (4.7)     $     6.4              -%
                                             ========    ========            =====      =========      =========           ====
Deposits (not included in premiums above):
    Annuities -- fixed options               $  524.2    $  238.8            119.5%     $ 1,518.5      $   847.5           79.2%
    Annuities -- variable options             1,330.3       850.3             56.5        3,875.4        2,704.9           43.3
    Individual life insurance                       -       113.5           (100.0)             -          374.2         (100.0)
                                             --------    --------            -----      ---------      ---------           ----
       Total                                 $1,854.5    $1,202.6             54.2%     $ 5,393.9      $ 3,926.6           37.4%
                                             ========    ========            =====      =========      =========           ====
Assets under management and
administration: (3)
   Annuities -- fixed options                                                           $12,557.2      $12,043.8            4.3%
   Annuities -- variable options (4)                                                     29,583.0       21,367.0           38.5
   Other investment advisory                                                             17,256.8       12,130.9           42.3
                                                                                        ---------      ---------           ----
         Assets under administration (5)                                                  3,581.8        2,618.5           36.8
                                                                                        ---------      ---------           ----
Total financial services' assets under
 management and administration                                                           62,978.8       48,160.2           30.8
                                                                                        ---------      ---------           ----
  Individual life insurance assets under
    management                                                                                  -        2,826.1         (100.0)
                                                                                        ---------      ---------           ----
Total assets under management and
   Administration                                                                       $62,978.8      $50,986.3           23.5%
                                                                                        =========      =========           ====
</TABLE>

(1)      1998 operating results reflect the operations of the individual life
         business which was sold on October 1, 1998.

(2)      Includes annuity premiums on contracts converting from the accumulation
         phase to payout options with life contingencies of $15.9 million for
         the three months ended September 30, 1999, $17.7 million for the three
         months ended September 30, 1998, $53.9 million for the nine months
         ended September 30, 1999 and $51.3 million for the nine months ended
         September 30, 1998.

(3)      Excludes net unrealized capital losses of approximately $132.2 million
         at September 30, 1999 and net unrealized capital gains of approximately
         $552.3 million at September 30, 1998.

(4)      Includes $10,138.7 million at September 30, 1999 and $6,099.4 million
         at September 30, 1998 of assets invested through Aetna Financial
         Services' products in unaffiliated mutual funds.

(5)      Represents assets for which Aetna Financial Services provides
         administrative services only.

In order to more accurately reflect its business, effective October 1, 1999
Aetna Retirement Services changed its trade name to Aetna Financial Services.
Aetna Financial Services' ("AFS") net income for the three months ended
September 30, 1999 decreased $18 million compared to the same period in 1998 due
to the sale of the individual life business on October 1, 1998. Net income
includes Year 2000 costs of $3 million for the three months ended September 30,
1999 and $7 million for the same period in 1998. Net income for the three months
ended September 30, 1998 also included $24 million related to the individual
life insurance business. Excluding Year 2000 costs, net realized capital gains
or losses and the 1998 individual life earnings, results for the three months
ended September 30, 1999 increased $11 million, or 22%, compared to the third
quarter of 1998.





                                    Page 38
<PAGE>   39
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

AETNA FINANCIAL SERVICES (CONTINUED)

Net income for the nine months ended September 30, 1999 decreased $49 million
compared to the same period in 1998 due to the sale of the individual life
business on October 1, 1998. Net income includes Year 2000 costs of $14 million
for the nine months ended September 30, 1999 and $16 million for the same period
in 1998. Net income for the nine months ended September 30, 1998 also included
$72 million related to the individual life insurance business. Excluding Year
2000 costs, net realized capital gains or losses and the 1998 individual life
earnings, results for the nine months ended September 30, 1999 increased $31
million, or 23%, compared to the first nine months of 1998.

AFS' earnings, excluding Year 2000 costs and net realized capital gains or
losses, were as follows:

<TABLE>
<CAPTION>
                                                Three Months Ended September 30,       Nine Months Ended September 30,
                                                -------------------------------        ------------------------------
(Millions)                                           1999                1998                 1999             1998
----------                                           ----                ----                 ----             ----
<S>                                             <C>                    <C>             <C>                  <C>
Financial services                                  $58.0              $ 47.5               $167.3           $136.1
Individual life insurance (1)                           -                24.3                    -             71.5
                                                    -----              ------               ------           ------
    Total                                           $58.0              $ 71.8               $167.3           $207.6
                                                    =====              ======               ======           ======
</TABLE>

(1) The individual life business was sold on October 1, 1998.

The increase in earnings for financial services products primarily reflects
increased fee income from increased assets under management and administration.
Assets under management and administration at September 30, 1999 increased
primarily due to appreciation in the stock market, as well as additional net
deposits (deposits less surrenders) compared to a year ago. Compared to June 30,
1999, assets under management and administration increased due to additional net
deposits substantially offset by market declines. Partially offsetting the
increases in fee income were increased operating expenses resulting from
business growth. However, for annuity products, operating expenses as a
percentage of assets under management declined in both periods.

Of the $12.6 billion and $12.0 billion of fixed-annuity assets under management
at September 30, 1999 and 1998, respectively, 25% were fully guaranteed and 75%
were experience-rated in each period. The average annualized earned rates on
investments supporting fully guaranteed investment contracts were 7.3% and 7.6%
and the average annualized earned rates on investments supporting
experience-rated investment contracts were 7.6% and 7.9% for the nine months
ended September 30, 1999 and 1998, respectively. The average annualized credited
rates on fully guaranteed investment contracts were 6.3% and 6.5% and the
average annualized credited rates on experience-rated investment contracts were
5.6% and 5.8% for the nine months ended September 30, 1999 and 1998,
respectively. The resulting annualized interest margins on fully guaranteed
investment contracts were 1.0% and 1.1% and on experience-rated investment
contracts were 2.0% and 2.1% for the nine months ended September 30, 1999 and
1998, respectively.

Sale of Individual Life Insurance Business

On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1 billion in cash. The sale resulted in an after-tax
gain of approximately $152 million. Since the principal agreement to sell this
business was generally in the form of an indemnity reinsurance arrangement, the
Company deferred approximately $88 million of the gain and is recognizing it
over approximately 15 years. Approximately $2 million of the gain was recognized
during the three months ended September 30, 1999 and approximately $6 million
was recognized during the first nine months of 1999. Revenues from the business
sold were $135 million for the three months ended September 30, 1998 and were
$399 million for the first nine months of 1998. For more details about the
transaction and the indemnity reinsurance arrangement, refer to Note 4 of the
Condensed Notes to Consolidated Financial Statements.





                                    Page 39
<PAGE>   40
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

AETNA INTERNATIONAL

Operating Summary

<TABLE>
<CAPTION>
                                              Three Months Ended September 30,           Nine Months Ended September 30,
                                           -------------------------------------   -----------------------------------------
(Millions)                                     1999          1998      % Change        1999            1998        % Change
----------                                     ----          ----      --------        ----            ----        --------
<S>                                        <C>           <C>            <C>        <C>             <C>              <C>
Premiums                                   $  562.0      $  376.0         49.5%    $1,623.7        $1,063.1            52.7%
Net investment income                         117.0         102.6         14.0        355.1           340.2             4.4
Fees and other income                          33.2          35.4         (6.2)        90.9            93.8            (3.1)
Net realized capital gains (losses)            43.5           1.2           --         46.4            (3.9)             --
                                           --------      --------         ----     --------        --------            ----
       Total revenue                          755.7         515.2         46.7      2,116.1         1,493.2            41.7
                                           --------      --------         ----     --------        --------            ----
Current and future benefits                   487.9         337.2         44.7      1,373.0           919.7            49.3
Operating expenses                            145.6          98.4         48.0        436.6           334.8            30.4
Interest expenses                               2.3           2.4         (4.2)         6.8             8.2           (17.1)
Amortization of goodwill and other
   acquired intangible assets                   2.4           2.4           --         10.5            12.7           (17.3)
Amortization of deferred policy
   acquisition costs                           26.1          24.5          6.5         75.9            68.9            10.2
                                           --------      --------         ----     --------        --------            ----
       Total benefits and expenses            664.3         464.9         42.9      1,902.8         1,344.3            41.5
                                           --------      --------         ----     --------        --------            ----
Income before income taxes                     91.4          50.3         81.7        213.3           148.9            43.3
Income taxes                                   69.3           9.5           --        100.7            35.1           186.9
                                           --------      --------         ----     --------        --------            ----
Net income                                 $   22.1      $   40.8        (45.8)%   $  112.6        $  113.8            (1.1)%
                                           ========      ========         ====     ========        ========            ====
Net realized capital gains (losses),
 net of tax (included above)               $  (21.4)     $    1.7           -%     $  (19.3)       $    (.7)             -%
                                           ========      ========         ====     ========        ========            ====
</TABLE>


Aetna International's net income for the three months ended September 30, 1999
decreased by $19 million compared to the same period in 1998. Net income
includes Year 2000 costs of $2 million for the three months ended September 30,
1999 and $3 million for the same period in 1998. Excluding Year 2000 costs and
net realized capital gains or losses, results for the three months ended
September 30, 1999 increased $3 million, or 8%, compared to the same period in
1998.

Net income for the nine months ended September 30, 1999 decreased by $1 million
compared to the same period in 1998. Net income includes Year 2000 costs of $10
million for the nine months ended September 30, 1999 and $6 million for the same
period in 1998. Excluding Year 2000 costs and net realized capital gains or
losses, results for the nine months ended September 30, 1999 increased $21
million, or 17%, compared to the same period in 1998.

The increase in the effective tax rate for the three and nine months ended
September 30, 1999 primarily reflects taxes on undistributed earnings resulting
from the Company's sale of its Canadian operations. Excluding the tax effect of
these undistributed earnings and the Company's equity in earnings of affiliates,
Aetna International's effective tax rate declined primarily due to a tax holiday
and recognition of prior year net operating loss tax benefits in Malaysia.

Earnings by major geographic location, excluding Year 2000 costs and net
realized capital gains or losses, were as follows:

<TABLE>
<CAPTION>
                           Three Months Ended September 30,         Nine Months Ended September 30,
                           --------------------------------         -------------------------------
(Millions)                      1999          1998                         1999           1998
----------                      ----          ----                         ----           ----
<S>                        <C>              <C>                     <C>                <C>
Asia Pacific (1)              $ 18.1        $ 16.6                       $ 48.4         $ 44.5
Americas (2)                    30.3          26.2                        106.9           83.4
Other (3)                       (2.5)          (.3)                       (13.8)          (7.2)
                              ------        ------                       ------         ------
    Total                     $ 45.9        $ 42.5                       $141.5         $120.7
                              ======        ======                       ======         ======
</TABLE>

(1)      Includes China, Hong Kong, Indonesia, Malaysia, New Zealand,
         Philippines, Taiwan and Thailand.
(2)      Includes Argentina, Brazil, Canada, Chile, Colombia, Mexico, Peru,
         Poland and Venezuela.
(3)      Includes general and other miscellaneous expenses.




                                    Page 40
<PAGE>   41
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

AETNA INTERNATIONAL (CONTINUED)

The increase in earnings for the three months ended September 30, 1999 primarily
reflects earnings growth in the Mexican businesses, favorable tax benefits in
Malaysia and Mexico and growth in Taiwan substantially offset by losses in
Brazil. Fluctuations in foreign currencies did not significantly impact earnings
for the third quarter of 1999.

The increase in earnings for the nine months ended September 30, 1999 primarily
reflects business growth in Mexico as well as strong performance in Canada,
Chile, Malaysia, and Taiwan partially offset by lower earnings in Brazil. The
weakening of foreign currencies significantly offset growth in local currency
earnings in Brazil and partially offset local currency earnings in Mexico and
Chile during the nine months ended September 30, 1999.

On October 1, 1999, Aetna International completed the sale of its Canadian
operations to John Hancock Canadian Holdings Limited, the parent of The Maritime
Life Assurance Company, for approximately $310 million in cash. The Company's
previously announced plan to sell its Canadian operations, as well as the
closing, was dependent upon receiving regulatory approval for the sale, which
was received on September 30, 1999. Accordingly, a capital loss of $22 million
for the sale, including taxes on previously undistributed earnings, was
recognized during the third quarter of 1999. The revenue and earnings of the
Canadian operations were not material to the Company. The earnings of the
Canadian operations have been an important contributor to Aetna International's
results of operations and growth over the past several years. However, Aetna
International has also made investments in several emerging markets and expects
that its earnings will continue to grow annually. Refer to "Overview" for
additional information related to the sale of Aetna International's Canadian
operations.

The impact of the earthquake in Taiwan, which occurred in late September, is not
currently expected to be material to the Company. The Company also continues to
monitor Latin American economies, which are in recession, and the potential
near-term impact on our businesses. Further currency devaluations in Latin
America, or in other regions where the Company has established operations, could
adversely affect future operating earnings when translated into U.S. dollars.
Refer to "Aetna International" and "Forward-Looking Information/Risk Factors" in
Aetna Inc.'s 1998 Annual Report on Form 10-K/A for additional information.







                                    Page 41
<PAGE>   42
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

LARGE CASE PENSIONS

Operating Summary

<TABLE>
<CAPTION>
                                              Three Months Ended September 30,              Nine Months Ended September 30,
                                           --------------------------------------    ---------------------------------------------
(Millions)                                     1999          1998        % Change      1999              1998             % Change
----------                                     ----          ----        --------      ----              ----             --------
<S>                                       <C>           <C>              <C>         <C>             <C>                 <C>
Premiums                                   $    32.8     $    31.6           3.8 %   $    90.2        $   101.0            (10.7)%
Net investment income                          241.1         278.0         (13.3)        756.0            883.4            (14.4)
Fees and other income                           14.8           8.9          66.3          33.7             25.2             33.7
Net realized capital gains (losses)             (5.7)          (.3)           --          23.8             51.7            (54.0)
                                           ---------     ---------         -----     ---------        ---------            -----
       Total revenue                           283.0         318.2         (11.1)        903.7          1,061.3            (14.8)
                                           ---------     ---------         -----     ---------        ---------            -----
Current and future benefits                    248.0         272.0          (8.8)        753.5            872.4            (13.6)
Operating expenses                               7.5           9.3         (19.4)         23.8             28.2            (15.6)
Reduction of reserve for loss on
   Discontinued products                          --         (68.0)        100.0         (77.2)           (68.0)           (13.5)
                                           ---------     ---------         -----     ---------        ---------            -----
       Total benefits and expenses             255.5         213.3          19.8         700.1            832.6            (15.9)
                                           ---------     ---------         -----     ---------        ---------            -----
Income before income taxes                      27.5         104.9         (73.8)        203.6            228.7            (11.0)
Income taxes                                    10.4          40.7         (74.4)         73.2             86.3            (15.2)
                                           ---------     ---------         -----     ---------        ---------            -----
Net income                                 $    17.1     $    64.2         (73.4)%   $   130.4        $   142.4             (8.4)%
                                           =========     =========         =====     =========        =========            =====
Net realized capital gains (losses),
   net of Tax (included above)             $    (3.8)    $     (.2)           -%     $    15.4        $    33.6            (54.2)%
                                           =========     =========         =====     =========        =========            =====
Deposits not included in
   Premiums above                          $   162.7     $   263.7         (38.3)%   $   624.0        $   613.7              1.7%
                                           =========     =========         =====     =========        =========            =====
Assets under management(1)(2)                                                        $26,670.8        $28,446.9             (6.2)%
                                                                                     =========        =========            =====
</TABLE>

(1)      Excludes net unrealized capital losses of approximately $144.4 million
         at September 30, 1999 and net unrealized capital gains of approximately
         $733.2 million at September 30, 1998.
(2)      Includes assets under management of $6,126.9 million at September 30,
         1999 and $6,892.1 million at September 30, 1998 related to discontinued
         products.

Large Case Pensions' net income for the three months ended September 30, 1999
decreased by $47 million compared to the same period in 1998. Net income
includes Year 2000 costs of $.1 million for the three months ended September 30,
1999 and $.4 million for the same period in 1998. During the three months ended
September 30, 1998, the Company released $44 million of the reserve related to
discontinued products primarily as a result of favorable investment performance.
Excluding Year 2000 costs, the discontinued products reserve release in 1998 and
net realized capital gains or losses in both periods, results for the three
months ended September 30, 1999 remained relatively level compared to the same
period in 1998.

Net income for the nine months ended September 30, 1999 decreased by $12 million
compared to the same period in 1998. Net income includes Year 2000 costs of $.4
million for the nine months ended September 30, 1999 and $.8 million for the
same period in 1998. Net income also includes a reduction of the reserve for
loss on discontinued products of $50 million for the first nine months of 1999,
and $44 million for the same period in 1998. Excluding Year 2000 costs,
discontinued products reserve releases and net realized capital gains or losses
in both periods, results for the nine months ended September 30, 1999 remained
relatively level compared to the same period in 1998.

The results for the three and nine months ended September 30, 1999 continue to
reflect the redeployment of capital supporting this business, partially offset
by lower expenses. Assets under management at September 30, 1999 were 6% lower
than a year earlier. This decrease primarily resulted from the continuing runoff
of underlying liabilities. Large Case Pensions' earnings are expected to decline
in 2000 as capital supporting maturing obligations is redeployed to other
business purposes.





                                    Page 42
<PAGE>   43
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

LARGE CASE PENSIONS (CONTINUED)

General account assets supporting experience-rated products (where the
contractholder, not the Company, assumes investment and other risks) may be
subject to participant or contractholder withdrawal. Experience-rated
contractholder and participant withdrawals and transfers were as follows
(excluding contractholder transfers to other Company products):

<TABLE>
<CAPTION>
                                                 Three Months Ended September 30,      Nine Months Ended September 30,
                                                 -------------------------------       -------------------------------
(Millions)                                                  1999            1998                  1999            1998
----------                                                  ----            ----                  ----            ----
<S>                                              <C>                     <C>           <C>                     <C>
Scheduled contract maturities
   And benefit payments (1)                               $233.0          $233.2                $711.5          $706.2
Contractholder withdrawals other than
   Scheduled contract maturities and benefit
   Payments                                               $161.3          $ 86.8                $362.3          $259.3
Participant directed withdrawals                          $ 16.1          $ 22.3                $ 60.0          $ 74.9
                                                          ------          ------                ------          ------
</TABLE>
(1)   Includes payments made upon contract maturity and other amounts
      distributed in accordance with contract schedules.


Discontinued Products

The Company discontinued the sale of its fully guaranteed large case pension
products (single-premium annuities ("SPAs") and guaranteed investment contracts
("GICs")) in 1993. The Company established a reserve for anticipated future
losses on these products based on the present value of the difference between
(a) the expected cash flows from the assets supporting these products and (b)
the cash flows expected to be required to meet the product obligations.

Results of operations of discontinued products, including net realized capital
gains or losses, are credited or charged to the reserve for anticipated losses.
The Company's results of operations would be adversely affected to the extent
that future losses on the products are greater than anticipated and positively
affected to the extent future losses are less than anticipated.

The factors contributing to changes in the reserve for anticipated future losses
are: operating income or loss, realized capital gains or losses and mortality
gains or losses. Operating income or loss is equal to revenue less expenses.
Realized capital gains or losses reflect the excess (deficit) of sales price
over (below) the carrying value of assets sold. Mortality gains or losses
reflect the mortality and retirement experience related to SPAs. A mortality
gain (loss) occurs when an annuitant or a beneficiary dies sooner (later) than
expected. A retirement gain will occur on some contracts if an annuitant retires
later than expected (a loss if an annuitant retires earlier than expected).

The results of discontinued products were as follows:

<TABLE>
<CAPTION>
                                                              Three Months Ended                 Nine Months Ended
                                                                 September 30,                     September 30,
                                                              -------------------                --------------------
(Millions)                                                      1999         1998                   1999         1998
----------                                                      ----         ----                   ----         ----
<S>                                                           <C>          <C>                   <C>          <C>
Interest deficit (1)                                          $ (4.0)      $ (4.3)               $ (12.6)     $ (15.9)
Net realized capital gains (losses)                             (8.0)         5.0                    3.9         53.8
Interest earned on receivable from continuing
   Products                                                      5.1          5.8                   16.1         17.0
Other, net                                                       4.2          (.6)                  10.1          1.0
                                                              ------       ------                -------      -------
Results of discontinued products, after tax                   $ (2.7)      $  5.9                $  17.5      $  55.9
                                                              ======       ======                =======      =======
Results of discontinued products, pretax                      $ (4.3)      $  8.2                $  26.4      $  91.7
                                                              ======       ======                =======      =======
Net realized capital gains (losses) from sales of bonds,
   After tax (included above)                                 $(10.5)      $  (.6)               $  (2.7)     $  28.5
                                                              ======       ======                =======      =======
</TABLE>
(1)   The interest deficit is the difference between earnings on invested assets
      and interest credited to contractholders.





                                    Page 43
<PAGE>   44
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

LARGE CASE PENSIONS (CONTINUED)

The interest deficit for 1999 remained relatively level compared to 1998. Net
realized capital losses for the three months ended September 30, 1999 are
primarily due to losses on bonds resulting from higher interest rates. The 1998
net realized capital gains reflect gains of $3 million for the three months
ended September 30, 1998 and $25 million for the nine months ended September 30,
1998 related to continued favorable developments in real estate markets.

At the time of discontinuance, a receivable from Large Case Pensions' continuing
products equivalent to the net present value of the anticipated cash flow
shortfalls was established for the discontinued products. Interest on the
receivable is accrued at the discount rate that was used to calculate the
reserve. Total assets supporting discontinued products and the reserve include a
receivable from continuing products of $459 million at September 30, 1999, net
of related deferred taxes payable.

The reserve for anticipated future losses on discontinued products represents
the present value (at the risk-free rate at the time of discontinuance,
consistent with the duration of the liabilities) of the difference between the
expected cash flows from the assets supporting discontinued products and the
cash flows expected to be required to meet the obligations of the outstanding
contracts. Calculation of the reserve for anticipated future losses requires
projection of both the amount and the timing of cash flows over approximately
the next 30 years, including consideration of, among other things, future
investment results, participant withdrawal and mortality rates, as well as the
cost of asset management and customer service. There have been no significant
changes to the assumptions underlying the calculation of the reserve related to
the projection of the amount and timing of cash flows.

The projection of future investment results considers assumptions for interest
rates, bond discount rates and performance of mortgage loans and real estate.
Mortgage loan assumptions represent management's best estimate of current and
future levels of rent growth, vacancy and expenses based upon market conditions
at each reporting date. The performance of real estate assets has been
consistently estimated using the most recent forecasts available. During 1997, a
bond default assumption was included to reflect historical default experience,
since the bond portfolio increased as a percentage of the overall investment
portfolio and reflected more bond credit risk, concurrent with the decline in
the commercial mortgage loan and real estate portfolios.

The previous years' actual participant withdrawal experience is used for the
current year assumption. Prior to 1995, the Company used the 1983 Group
Annuitant Mortality table published by the Society of Actuaries (the "Society").
In 1995, the Society published the 1994 Uninsured Pensioner's mortality table
which has been used since then.

The Company's assumptions about the cost of asset management and customer
service reflect actual investment and general expenses allocated over invested
assets. Since inception, the expense assumption has increased as the level of
fixed expenses has not declined as rapidly as the liability run-off.

The activity in the reserve for anticipated future losses on discontinued
products for the nine months ended September 30, 1999 was as follows (pretax):

<TABLE>
<CAPTION>
(Millions)
----------                                              ----------
<S>                                                     <C>
Reserve at December 31, 1998                            $ 1,214.1
Operating income                                             10.3
Net realized capital gains                                    6.0
Mortality and other                                          10.1
Reserve reduction                                           (77.2)
                                                        ---------
Reserve at September 30, 1999                           $ 1,163.3
                                                        =========
</TABLE>





                                    Page 44
<PAGE>   45
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

LARGE CASE PENSIONS (CONTINUED)

Management reviews the adequacy of the discontinued products reserve quarterly
and, as a result, $50 million ($77 million pretax) of the reserve was released
in the second quarter of 1999 primarily due to favorable investment performance.
A similar review in the third quarter of 1998 resulted in the Company's release
of $44 million ($68 million pretax) of the discontinued products reserve. The
current reserve reflects management's best estimate of anticipated future
losses.

The discontinued products investment portfolio is as follows:

<TABLE>
<CAPTION>
(Millions)                                          September 30, 1999                    December 31, 1998
----------                                          ------------------                    -----------------
Class                                              Amount       Percent                  Amount        Percent
-----                                              ------       -------                  ------        -------
<S>                                             <C>             <C>                  <C>               <C>
Debt Securities                                 $ 4,770.4          78.7%              $ 5,890.5           83.0%
Mortgage Loans                                      788.8          13.0                   754.2           10.6
Real Estate                                         101.8           1.7                   104.2            1.5
Equities                                            172.5           2.8                    98.5            1.4
Short-term and other investments                    229.4           3.8                   252.2            3.5
                                                ---------         -----               ---------          -----
Total                                           $ 6,062.9         100.0%              $ 7,099.6          100.0%
                                                =========         =====               =========          =====
</TABLE>

The investment portfolio declined in 1999 as assets were used to pay off
contractual liabilities.

Distributions on discontinued products were as follows:


<TABLE>
<CAPTION>
                                                           Three Months                             Nine Months
                                                        Ended September 30,                     Ended September 30,
                                                      ------------------------                -------------------------
(Millions)                                               1999             1998                   1999              1998
----------                                               ----             ----                   ----              ----
<S>                                                   <C>              <C>                    <C>             <C>
Scheduled contract maturities, settlements
 and benefit payments                                 $ 304.1          $ 264.6                $ 970.8         $ 1,124.7
Participant directed withdrawals                          3.4              4.8                   12.0              17.7
                                                      -------          -------                -------         ---------
</TABLE>

Cash required to fund these distributions was provided by earnings and scheduled
payments on, and sales of, invested assets.

Refer to Note 9 of Condensed Notes to Consolidated Financial Statements and
"General Account Investments" for additional information.

CORPORATE

Operating Summary

<TABLE>
<CAPTION>
                                                   Three Months Ended September 30,                Nine Months Ended September 30,
                                                  --------------------------------             ----------------------------------
(Millions, after tax)                              1999         1998      % Change               1999          1998      % Change
---------------------                              ----         ----      --------               ----          ----      --------
<S>                                               <C>         <C>              <C>             <C>           <C>            <C>
Interest expense                                  $45.7       $42.0            8.8%            $126.4        $111.9         13.0%
                                                  =====       =====          ======            ======        ======        =====
Other operating expenses, net                     $21.4       $30.7          (30.3)%           $ 62.2        $ 88.3        (29.6)%
Net realized capital gains (1)                    (17.5)          -              -              (15.0)        (68.5)        78.1
                                                  -----       -----          ------            ------        ------        -----
Total other expense                               $ 3.9       $30.7          (87.3)%           $ 47.2        $ 19.8        138.4%
                                                  =====       =====          ======            ======        ======        =====
</TABLE>

(1)   After-tax net realized capital gains for the nine months ended September
      30, 1998 include gains of $74.4 million related to the sale of the
      Company's remaining investment in Travelers Property Casualty Corporation.

The Corporate segment includes interest expense and other expenses that are not
directly related to the Company's business segments. "Other Operating Expenses"
include corporate expenses such as staff area expenses, advertising and
contributions, which are partially offset by net investment income.






                                    Page 45
<PAGE>   46
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

CORPORATE (CONTINUED)

The increase in interest expense for the three months ended September 30, 1999
is due to the issuance of debt to fund the acquisition of PHC. Interest expense
increased for the nine months ended September 30, 1999 due to the issuance of
additional debt for the NYLCare and PHC acquisitions.

Included in other operating expenses are Year 2000 costs of $.7 million for the
three months ended September 30, 1999, $8 million for the same period in 1998,
$3 million for the nine months ended September 30, 1999 and $12 million for the
same period in 1998. Excluding Year 2000 costs, other operating expenses
decreased due to continued cost reduction initiatives, as well as system
implementation costs during 1998 that were not present in 1999.

GENERAL ACCOUNT INVESTMENTS

Investments disclosed in this section relate to the Company's total general
account portfolio (including assets supporting discontinued products and
experience-rated products).

Total Investments

<TABLE>
<CAPTION>
                                                                    As Restated
                                               -------------------------------------------------------
(Millions)                                     September 30, 1999                    December 31, 1998
----------                                     ------------------                    -----------------
<S>                                           <C>                                   <C>
Debt securities                                        $ 30,708.6                            $32,180.8
Equity securities                                           841.5                                800.5
Short-term investments                                      892.4                                942.2
Mortgage loans                                            3,535.2                              3,553.0
Real estate                                                 314.8                                270.3
Policy loans                                                530.2                                458.7
Other                                                     1,444.6                              1,300.3
                                                       ----------                            ---------
    Total investments                                  $ 38,267.3                            $39,505.8
                                                       ==========                            =========
</TABLE>


Debt Securities

Debt securities represented 80% of the Company's total general account invested
assets at September 30, 1999 and 81% at December 31, 1998. Debt securities were
as follows:

<TABLE>
<CAPTION>
(Millions)                                        September 30, 1999             December 31, 1998
----------                                        ------------------             -----------------
<S>                                               <C>                            <C>
Supporting discontinued products                      $ 4,770.4                       $ 5,890.5
Supporting experience-rated products                   11,945.5                        13,197.3
Supporting remaining products                          13,992.7                        13,093.0
                                                      ---------                       ---------
  Total debt securities (1)                           $30,708.6                       $32,180.8
                                                      =========                       =========
</TABLE>

(1)   Total debt securities include "Below Investment Grade" securities of $2.0
      billion at September 30, 1999 and December 31, 1998 of which 41.2% at
      September 30, 1999 and 50.8% at December 31, 1998 supported discontinued
      and experience-rated products. Refer to Aetna Inc.'s 1998 Annual Report on
      Form 10-K/A for a discussion of "Below Investment Grade" securities.

Debt securities reflected net unrealized capital losses of $262 million at
September 30, 1999 compared to net unrealized capital gains of $1.5 billion at
December 31, 1998. Included in net unrealized capital losses at September 30,
1999 were unrealized capital losses of $64 million related to assets supporting
discontinued products and unrealized capital losses of $167 million related to
assets supporting experience-rated contracts.





                                    Page 46
<PAGE>   47
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

GENERAL ACCOUNT INVESTMENTS (CONTINUED)

Residential Collateralized Mortgage Obligations

Included in the Company's debt securities are residential collateralized
mortgage obligations ("CMOs") of $1.8 billion at September 30, 1999 and $2.0
billion at December 31, 1998. There are various categories of CMOs that are
subject to different degrees of risk from changes in interest rates and, for
CMOs that are not agency backed, defaults. The principal risks inherent in
holding CMOs are prepayment and extension risks related to dramatic decreases
and increases in interest rates resulting in the repayment of principal from the
underlying mortgages either earlier or later than originally anticipated. At
September 30, 1999 and December 31, 1998, approximately 2% of the Company's CMO
holdings were invested in CMOs that are subject to more prepayment and extension
risk than traditional CMOs (such as interest-or principal-only strips).

Mortgage Loans

At September 30, 1999 and December 31, 1998, the Company's mortgage loan
investments, net of impairment reserves, were as follows:

<TABLE>
<CAPTION>
(Millions)                                           September 30, 1999     December 31, 1998
----------                                           ------------------     -----------------
<S>                                                  <C>                    <C>
Supporting discontinued products                          $  788.8                 $  754.2
Supporting experience-rated products                       1,067.8                  1,183.3
Supporting remaining products                              1,678.6                  1,615.5
                                                          --------                 --------
  Total mortgage loan investments                         $3,535.2                 $3,553.0
                                                          ========                 ========
</TABLE>

During the first nine months of 1999, the Company managed its mortgage loan
portfolio to maintain the balance, relative to invested assets, by selectively
pursuing refinance and new loan opportunities. At September 30, 1999 and
December 31, 1998, the mortgage loan portfolio balance represented 9% of the
Company's total general account invested assets.

Problem, restructured, and potential problem loans included in mortgage loans
were $288 million at September 30, 1999 and $301 million at December 31, 1998 of
which 84% at September 30, 1999 and 86% at December 31, 1998 supported
discontinued and experience-rated products. Refer to Aetna Inc.'s 1998 Annual
Report on Form 10-K/A for a discussion of problem, restructured and potential
problem loans. Specific impairment reserves on these loans were $44 million at
September 30, 1999 and $48 million at December 31, 1998. Refer to Note 6 of the
Condensed Notes to Consolidated Financial Statements.

Risk Management and Market Sensitive Instruments

Interest rate risk is managed within a tight duration band, and credit risk is
managed by maintaining high average quality ratings and diversified sector
exposure within the debt securities portfolio. The Company's use of derivatives
is generally limited to hedging purposes and has principally consisted of using
interest rate swap agreements, futures contracts, warrants, foreign exchange
forward contracts, currency swap agreements and written options to hedge certain
market risks such as interest rate, equity price and foreign exchange risk.

The Company regularly evaluates market risk sensitive instruments by examining,
among other things, levels of or changes in domestic and/or foreign interest
rates (short-term or long-term), duration, exchange rates, prepayment rates,
equity markets or credit ratings/spreads.

Management also reviews, on a quarterly basis, hypothetical net losses in the
Company's consolidated near-term financial position, results of operations and
cash flows under certain assumed market rate changes.





                                    Page 47
<PAGE>   48
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

GENERAL ACCOUNT INVESTMENTS (CONTINUED)

Based on the Company's overall exposure to interest rate, equity price and
foreign exchange risks, the Company believes that these hypothetical changes in
market rates and prices would not materially affect the consolidated near-term
financial position, results of operations or cash flows of the Company as of
September 30, 1999. Refer to Aetna Inc.'s 1998 Annual Report on Form 10-K/A for
a more complete discussion of "Risk Management and Market Sensitive
Instruments".

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Generally, the Company meets its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and using overall
cash flows from premiums, deposits and income received on investments. Overall
cash flows are used primarily for claim and benefit payments, contract
withdrawals and operating expenses. In addition, the Company uses cash to invest
in core businesses, make acquisitions, repurchase common stock and pay
shareholder dividends.

During the first nine months of 1999, the Company used net cash generated from
investing, financing and operating activities to make approximately $1.2 billion
of investments in core businesses and acquisitions, pay approximately $122
million for common stock repurchases and pay approximately $124 million of
dividends to shareholders.

During the corresponding period of 1998, the Company used net cash generated
from investing, financing and operating activities to make approximately $1.1
billion of investments in core businesses and acquisitions, pay approximately
$258 million for common stock repurchases and pay approximately $129 million of
dividends to shareholders. Refer to the "Consolidated Statements of Cash Flows"
for additional information.

Dividends

On September 24, 1999, the Company's Board of Directors declared a quarterly
dividend of $.20 per share of common stock to shareholders of record at the
close of business on October 29, 1999, payable November 15, 1999.

On July 19, 1999, the Company redeemed all outstanding shares of its 6.25% Class
C Voting Mandatorily Convertible Preferred Stock. Holders of the Preferred Stock
received .8197 shares of Aetna common stock for each share of Preferred Stock
that was redeemed. Approximately 9.5 million shares of Aetna common stock were
issued as part of the redemption. The Company expects the redemption of the
Preferred Stock to result in approximately $48 million of annual cash dividend
savings. Refer to Note 5 of the Condensed Notes to Consolidated Financial
Statements for further information.

Financings and Financing Capacity

Substantially all of the Company's borrowings and financings are conducted
through Aetna Services and are fully and unconditionally guaranteed by Aetna
Inc. Refer to Note 10 of the Condensed Notes to Consolidated Financial
Statements for additional information.

The Company has significant short-term liquidity supporting its businesses. The
Company uses short-term borrowings from time to time to address timing
differences between receipts and disbursements. The maximum amount of domestic
short-term borrowings outstanding was $1.4 billion during the first nine months
of 1999 and $1.7 billion during the first nine months of 1998.






                                    Page 48
<PAGE>   49
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

The Company financed the acquisition of PHC by issuing $500 million of
three-year senior notes to Prudential and by using funds made available from the
issuance of commercial paper. The Company expects to ultimately replace this
commercial paper with medium- or long-term fixed income securities, subject to
market conditions.

The Company financed the acquisition of NYLCare with funds made available from
issuing commercial paper. The Company issued $300 million of debt in the fourth
quarter of 1998 and expects to ultimately issue additional medium- or long-term
fixed income securities, subject to market conditions, to replace some of this
commercial paper. At the time of the acquisition, the Company hedged a portion
of the anticipated issuance of fixed income securities against interest rate
risk using futures contracts, with unrealized gains or losses on these contracts
deferred under hedge accounting. While the Company still expects to issue fixed
income securities, continued unfavorable market conditions have delayed this
issuance from the original probable expected timeframe. Accordingly, the Company
ceased hedge accounting under its policies and recognized the deferred hedge
gain of $14 million in the third quarter of 1999 as a realized capital gain in
the Corporate segment.

Common Stock Transactions

In January 1999, the Board authorized the repurchase of 5 million shares of
common stock. Through October 7, 1999, 1,780,000 shares of common stock had been
repurchased under this authorization at a cost of approximately $135 million. On
October 8, 1999, the Board authorized the repurchase of up to 20 million of
shares of common stock, not to exceed an aggregate purchase price of $1 billion.
This authorization replaces the January 1999 plan which had 3,220,000 shares
remaining. Pursuant to the October 1999 authorization, the Company has
repurchased 2,295,900 million shares of common stock at a cost of approximately
$120 million through October 15, 1999.

GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

Goodwill and other acquired intangible assets were $9.4 billion at September 30,
1999, or approximately 83% of consolidated shareholders' equity. The
amortization of goodwill and other acquired intangible assets was $325 million
for the nine months ended September 30, 1999, or approximately 32% of pretax
income. The amortization of other acquired intangible assets reflects
management's estimate of the useful life of acquired intangible assets
(primarily customer lists, health provider networks and computer systems),
generally over various periods not exceeding 25 years. Management's estimate of
the useful life of goodwill, which represents the excess of cost over the fair
value of net assets acquired, is over periods not exceeding 40 years. The risk
associated with the carrying value of goodwill and other acquired intangible
assets is whether future operating income (before amortization of goodwill and
other acquired intangible assets) will be sufficient on an undiscounted basis to
recover the carrying value. The Company regularly evaluates the recoverability
of goodwill and other acquired intangible assets and believes such amounts are
currently recoverable. However, any significant change in the useful lives of
goodwill or other acquired intangible assets, as estimated by management, could
have a material adverse affect on results of operations and financial condition.

NEW ACCOUNTING STANDARDS

Refer to Note 1 of the Condensed Notes to Consolidated Financial Statements for
a discussion of recently issued accounting standards.





                                    Page 49
<PAGE>   50
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

YEAR 2000

The Company relies heavily on information technology ("IT") systems and other
systems and facilities, such as telephones, building access control systems and
heating and ventilation equipment ("embedded systems") to conduct its business.
The Company also has business relationships with health care providers,
financial institutions, financial intermediaries, public utilities and other
critical vendors, as well as regulators and customers who are themselves reliant
on IT and embedded systems to conduct their businesses.

The Company completed the acquisition of PHC on August 6, 1999. PHC's IT systems
and other systems and facilities were added to the Company's Year 2000 inventory
as of that date. The Year 2000 discussion below includes PHC's systems and
facilities after that date.

State of Readiness

In 1997, the Company organized a multidisciplinary Year 2000 Project Team,
including outside consultants. The Year 2000 Project Team and the Company's
businesses have developed and are currently executing a comprehensive plan
designed to make the Company's mission-critical IT systems and embedded systems
Year 2000 ready. Outside consultants have reviewed the Company's overall
process, plan and progress to date. The Company's plan for IT systems consists
of several phases: (i) inventory -- identifying all IT systems and risk rating
each according to its potential business impact; (ii) assessment -- identifying
IT systems that use date functions and assessing them for Year 2000
functionality; (iii) remediation -- reprogramming, or replacing where necessary,
inventoried items to make them Year 2000 ready; and (iv) testing and
certification -- testing the code modifications and new inventory with other
associated systems, including extensive date testing, and performing quality
assurance testing to determine if they will operate successfully in the
post-1999 environment. The Company has completed the inventory, assessment,
remediation, testing and certification of its IT systems. The Company has
inventoried and risk rated substantially all of its embedded systems. The
results of these processes indicate that embedded systems should not present a
material Year 2000 risk to the Company. The Company's remaining steps include
testing selected embedded systems and remediating and certifying systems that
exhibit Year 2000 issues. The Company is focusing its testing and remediation
efforts on select embedded systems of its mission-critical facilities, such as
data centers, service centers, communications centers and select office
locations. The Company has completed the testing, remediation and certification
of a significant portion of these systems, and the remaining work will be
completed by year-end 1999.

The Company believes that its Year 2000 project is on schedule.

External Relationships

The Company also faces the risk that one or more of its critical suppliers or
customers ("external relationships") will not be able to interact with the
Company due to the third party's inability to resolve its own Year 2000 issues,
including those associated with its own external relationships. The Company has
completed its inventory of external relationships and risk rated each external
relationship based upon the potential business impact, available alternatives
and cost of substitution. In the case of mission-critical suppliers, such as
banks, financial intermediaries, telecommunications providers and other
utilities, mutual fund companies, IT vendors, financial market data providers,
national pharmacy chains, electronic claims clearinghouses, major physician
groups and major hospitals, the Company is engaged in discussions with the third
parties and has obtained detailed information as to those parties' Year 2000
plans and state of readiness. The Company's critical external relationships have
informed the Company that they are not aware of any Year 2000 related reason
that they will not be able to perform their obligations to the Company in all
material respects.




                                    Page 50
<PAGE>   51
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

YEAR 2000 (CONTINUED)

Year 2000 Costs

Total Year 2000 project costs are currently estimated to be at least $89 million
(after tax) in 1999. A large majority of these costs are expected to be
incremental expenses that will not recur in 2000 or thereafter. Year 2000 costs
were $14 million (after tax) for the three months ended September 30, 1999 and
$37 million (after tax) for the corresponding period in 1998. Year 2000 costs
were $73 million for the nine months ended September 30, 1999 and $77 million
for the corresponding period in 1998. The Company expects that Year 2000 costs
in 2000 will be immaterial. The Company expenses these costs as incurred and
funds these costs through operating cash flows.

Year 2000 readiness is critical to the Company. The Company has redeployed some
resources from noncritical system enhancements to address Year 2000 issues. Due
to the importance of IT systems to the Company's business, management has not
deferred mission-critical systems enhancements to become Year 2000 ready. The
Company does not expect these redeployments to have a material impact on the
Company's financial condition or results of operations.

Risks and Contingency/Recovery Planning

If the Company's Year 2000 issues were unresolved, potential consequences would
include, among other possibilities, the inability to accurately and timely
process benefits claims; update customers' accounts; process financial
transactions; bill customers; assess exposure to risks; determine liquidity
requirements or report accurate data to management, shareholders, customers,
regulators and others as well as business interruptions or shutdowns; financial
losses; reputational harm; increased scrutiny by regulators; and litigation
related to Year 2000 issues. The Company's international affiliates face
additional Year 2000 risk due to the diverse environments in which they operate.
The Company is attempting to limit the potential impact of the Year 2000 by
monitoring the progress of its own Year 2000 project and those of its critical
external relationships and by developing contingency/recovery plans. The Company
cannot guarantee that it will be able to resolve all of its Year 2000 issues.
Any critical unresolved Year 2000 issues at the Company or its external
relationships, however, could have a material adverse effect on the Company's
results of operations, liquidity or financial condition.

The Company has developed contingency/recovery plans aimed at sustaining the
continuity of critical business functions before and after December 31, 1999. As
part of its contingency planning process, the Company has identified reasonably
possible Year 2000 failure scenarios and has developed contingency plans for
those failure scenarios it believes could have a significant impact on the
Company's operations. The Company is continuing to validate, refine and test
these plans. The scenarios the Company is planning for include, but are not
limited to, limitations on providers', suppliers' and customers' ability to
interact electronically with the Company, Year 2000 related failures at key
external relationships, limitations on the Company's suppliers' or customers'
ability to move funds electronically, failures in pricing securities and
increased call volumes. The Company's planned responses to these scenarios
include, but are not limited to, reallocation of existing resources, use of
alternative processes and procedures, use of outside providers to supplement
internal capabilities and use of alternative suppliers.





                                    Page 51
<PAGE>   52
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

REGULATORY ENVIRONMENT

The federal and state governments continue to enact and seriously consider many
legislative and regulatory proposals that have or would materially impact
various aspects of the health care system. Many of these changes are described
below. While certain of these measures would adversely affect us, at this time
we cannot predict the extent of this impact.

MEDICARE

In 1997, the federal government passed legislation related to Medicare that
changed the method for determining premiums that the government pays to HMOs for
Medicare members. In general, the new method has and will reduce the premiums
payable to us compared to the old method, although the level and extent of the
reductions varies by geographic market and depends on other factors. The
legislation also requires us to pay a "user fee." The changes began to be phased
in on January 1, 1998 and will continue over five years. The federal government
also announced in 1999 that it planned to begin to phase in risk adjustments to
its premium payments over a five-year period commencing January 1, 2000. It is
anticipated that the net impact of these risk adjustments will be to reduce the
premiums payable to the Company. While the phase-in provisions provide us with
an opportunity to offset some of the premium reductions and the user fee by
adjusting the supplemental premiums that members pay to us and by adjusting the
benefits included in our products, because of competition and other factors, the
adjustments we can make may not fully offset the reductions in premiums from the
government. Because of these reduced premiums and the user fee, as well as other
factors including new Medicare + Choice regulations issued by HCFA, we decided
not to renew our Medicare HMO contracts in certain areas effective January 1,
1999 and January 1, 2000.

HIPAA AND RELATED FEDERAL LEGISLATION

The federal government enacted the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") in 1997. The legislation has three main
effects:

- it limits pre-existing condition exclusions that apply to individuals changing
  jobs or moving to individual coverage;

- it guarantees that employees in the small group market have available health
  coverage; and

- it prevents exclusion of individuals from coverage under group plans based on
  health status.

Other federal legislation, effective January 1, 1998, mandates minimum hospital
stays after childbirth and that health plans apply lifetime limits to mental
health benefits with parity.








                                    Page 52
<PAGE>   53
Item 2.  Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

REGULATORY ENVIRONMENT (CONTINUED)

OTHER LEGISLATION AND REGULATION

The federal government and many states, including states in which we have
substantial managed care membership, have enacted or are seriously considering
additional legislation or regulation related to managed care. This legislation
or regulation includes, among other things, the following:

-     Assessments, surcharges or taxes on premiums or provider payments to fund
      uncompensated care, graduate medical education, high risk pools, guaranty
      funds, or government programs

-     Changes to licensure or certification requirements

-     Eliminating or reducing the scope of ERISA pre-emption of state medical
      and bad faith liability laws, exposing health plans to expanded liability
      for punitive and other extra-contractual damages

-     Extension of malpractice and other liability for medical and other
      decisions from providers to health plans

-     Hearings and limitations on termination of providers from networks

-     Increased reserve and capital requirements

-     Liability for negligent denials or delays in coverage

-     Mandatory coverage of experimental procedures and drugs

-     Mandatory direct access to specialists for patients with chronic
      conditions

-     Mandatory direct access to specialists (including OB/GYNs) and
      chiropractors

-     Mandated expanded consumer disclosures and notices

-     Mandatory expanded coverage for emergency services

-     Mandated liberalized definitions of medical necessity

-     Mandated liberalized internal and external grievance and appeal procedures
      (including expedited decision making)

-     Mandatory maternity and other lengths of hospital inpatient stay

-     Mandatory point-of-service benefits for HMO plans

-     Prohibition of so-called "gag" and similar clauses

-     Prohibitions on incentives based on utilization

-     Prohibition or limitation of arrangements designed to manage medical costs
      and improve quality of care, such as capitated arrangements with providers
      or provider financial incentives

-     Regulation of and restrictions on utilization management and review

-     Regulation of the composition of provider networks, such as any willing
      provider and pharmacy laws

-     Required payment levels for out-of-network care

-     Exempting physicians from the antitrust laws that prohibit price fixing,
      group boycotts and other horizontal restraints on competition

-     Third party review of denials of benefits (including denials based on a
      lack of medical necessity)

For example, the House of Representatives recently passed the Norwood-Dingell
bill which would (if it became law), among other things, place limits on health
care plans' methods of operations, limit employers' and health care plans'
ability to define medical necessity and permit employers and health care plans
to be sued in state courts for coverage determinations.

It is uncertain whether we can recoup, through higher premiums or other
measures, the increased costs of mandated benefits or the other increased costs
caused by such legislation or regulation.

The health business also may be adversely impacted by court and regulatory
decisions that expand the interpretations of existing statutes and regulations,
impose medical or bad faith liability, increase our responsibilities under
ERISA, or reduce the scope of ERISA pre-emption. The U.S. Supreme Court recently
agreed to decide a case that could increase our responsibilities under ERISA.

For other important information regarding regulation of our health and other
businesses, refer to "Forward-Looking Information/Risk Factors" below and in our
1998 Annual Report on Form 10-K/A.




                                    Page 53
<PAGE>   54
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

FORWARD-LOOKING INFORMATION/RISK FACTORS

The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a
"safe harbor" for forward-looking statements, so long as (1) those statements
are identified as forward-looking, and (2) the statements are accompanied by
meaningful cautionary statements that identify important factors that could
cause actual results to differ materially from those discussed in the statement.
We want to take advantage of these safe harbor provisions.

Certain information contained in this Management's Discussion and Analysis is
forward-looking within the meaning of the 1995 Act or Securities and Exchange
Commission rules. This information includes, but is not limited to, the
information that appears under the headings (1) "Aetna U.S. Healthcare - Group
Insurance and Other Health," (2) "Aetna International," (3) "Large Case
Pensions," (4) "General Account Investments - Risk Management and Market
Sensitive Instruments" and (5) "Year 2000." In writing this Management's
Discussion and Analysis, we also used the following words, or variations of
these words and similar expressions, where we intended to identify
forward-looking statements:

<TABLE>
<CAPTION>
<S>                      <C>                 <C>                 <C>
   -    Expects          -   Anticipates     -   Plans           -   Seeks
   -    Projects         -   Intends         -   Believes        -   Estimates
</TABLE>

These forward-looking statements rely on a number of assumptions concerning
future events, and are subject to a number of significant uncertainties and
other factors, many of which are outside our control, that could cause actual
results to differ materially from these statements. You should not put undue
reliance on these forward-looking statements. We disclaim any intention or
obligation to update or revise forward-looking statements, whether as a result
of new information, future events or otherwise.

Set forth below are certain important risk factors that, in addition to general
economic conditions and other factors (some of which are discussed elsewhere in
this Quarterly Report), may affect these forward-looking statements and our
businesses generally. In addition, you may read our reports filed with the
Securities and Exchange Commission, including our 1998 Form 10-K/A, for a more
detailed description of certain uncertainties and factors that could cause
actual results to differ materially from these forward-looking statements.

Certain Factors Particular to Health Operations

Prudential Health Business has incurred significant operating losses. PHC and
Prudential's ASO business have incurred significant operating losses in recent
periods. Since August 6, 1999, these operations have been part of the Aetna U.S.
Healthcare segment. We are seeking to improve PHC's profitability by, among
other things, reducing administrative costs and improving underwriting and
pricing discipline. If we are not able to improve PHC's profitability, it could
have an adverse effect on Aetna U.S. Healthcare's profitability.

Medical costs could increase beyond our expectations for a contract year.
Premiums in our Health Risk business are generally fixed by contract for
one-year periods. We cannot recover actual costs for the contract year that are
higher than those estimated and reflected in pricing through higher premiums
from customers. However, contracts renew periodically during the year and the
Company may be able to reflect increased costs as these contracts renew.

Factors that may increase medical costs for the contract year include increased
utilization, increases in provider contract rates, increases in noncontracted
provider charges, adverse changes in legislation and regulation, changes in
health practices and medical technologies, price increases in pharmaceuticals
and durable medical equipment and other factors.




                                    Page 54
<PAGE>   55
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)

Actual costs of medical claims could exceed the estimates reflected in our
reserves. For the Health Risk business, our medical claims payable reflect
estimates of the ultimate cost of claims incurred by members but not yet
reported to us, and claims reported to us but not yet paid. Estimates of medical
claims payable are based on a number of factors, including those derived from
historical claim experience. We estimate medical claims payable periodically,
and we reflect any adjustments to our estimates in our current period results.

We establish reserves for Group Insurance products as premiums become due. These
reserves reflect the present value of expected future obligations net of the
present value of expected future premiums. Policy reserves for group paid-up
life insurance generally reflect long-term fixed obligations. We compute these
reserves on the basis of assumed or guaranteed yield and benefit payments. Our
assumptions are based on our historical claim experience. For long-term
disability products, we establish reserves for: (1) lives currently in payment
status (using standard industry, as well as our own, morbidity and interest rate
assumptions), (2) lives who have not yet satisfied the waiting period, but who
we expect will do so, and (3) claims that have been incurred but not reported to
us. Long-term care reserves are a long-term obligation, and we calculate them
using industry data for morbidity and mortality assumptions.

Federal and state governments may adopt legislation and regulations that
adversely affect our health business. As discussed above (refer to "Regulatory
Environment"), the federal and many state governments have enacted or are
actively considering certain legislative and regulatory changes related to
health products. At this time we are unable to predict the impact of future
changes, although certain of these measures, if enacted, could adversely affect
health operations through:


<TABLE>
<S>                                                            <C>
-    Reducing premiums                                          -    Regulating levels and permitted lines of business
-    Reducing our ability to manage medical costs               -    Imposing financial assessments
-    Increasing medical costs and operating expenses            -    Regulating business practices
</TABLE>


Our profitability growth depends in part on an efficient integration of acquired
health operations. We acquired the NYLCare health business in July 1998 and
acquired the Prudential health care business in August 1999. Factors that can
affect the efficiency of our integration include, but are not limited to, our
success in: (1) integrating management, products, legal entities, networks and
information systems on a timely basis, (2) applying managed care expertise and
techniques throughout a broader membership base and (3) eliminating duplicative
administrative and customer service functions.

Changes in our business mix can affect our profitability. If employers and
individuals select plans with higher copayments, deductibles or coinsurance,
then certain of our medical costs would be lower, but we also would receive
lower premiums for these plans. In addition, our profitability may become more
sensitive to changes in medical costs and premiums if:

-    more employers switch to self-funded coverage (where the employer bears
     most or all of the medical cost risk);

-    our Medicare risk membership increases relative to our commercial risk
     membership (Medicare plans have both relatively higher premiums and medical
     costs); and/or

-    health products with relatively higher medical loss ratios are purchased.

Also, adverse publicity, like the kind currently occurring, regarding managed
care may negatively influence participants' or employers' decisions to select
managed care plans generally, and our health plans specifically.




                                    Page 55
<PAGE>   56
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)

Government payors can determine premiums. In government-funded health programs
such as Medicare and Medicaid, the government payor determines the premium
levels. If the government payor reduces the premium levels or increases premiums
by less than our cost increases and the Company cannot offset these with
supplemental premiums and changes in benefit plans, then we could be adversely
affected.

Changes in accreditation of our health plans could affect our competitiveness.
Accreditation by independent quality accrediting agencies, such as the National
Committee for Quality Assurance, is an important competitive factor for certain
of our HMO plans. If our plans were to lose or be denied accreditation, it could
adversely affect customer selection of our health products and, in some
jurisdictions, could affect our licensure status.

Certain Factors Particular to Financial Services Operations

Significant changes in financial markets could affect earnings. Significant
changes in financial markets could impact the level of assets under management
in our Aetna Financial Services, Large Case Pensions and Aetna International
businesses and, in turn, our level of asset-based fees in those businesses. For
example, significant increases in interest rates or decreases in equity markets
would directly affect the level of assets under management and, in addition, may
increase the level of withdrawals and decrease the level of deposits by
customers. Customers under those circumstances may seek to diversify among asset
managers or seek investment alternatives that we do not offer. Significant
declines in the value of investments also may affect our ability to pass through
investment losses to certain experience rated customers, whether due to
triggering minimum guarantees or other business reasons.

Decreases in ratings could affect assets under management. Decreases in the
claims-paying ratings of our domestic financial services subsidiaries could have
the effect of decreasing new sales and deposits and increasing withdrawals and
surrenders in our Aetna Financial Services and Large Case Pensions businesses.
Such changes in sales, deposits, withdrawals and surrenders would adversely
affect the level of asset-based fees of those businesses.

Early withdrawal of assets could affect earnings. We incur up-front costs, such
as commissions, when we sell our annuity, life insurance and other financial
services products, including international financial services products. We
generally defer these costs and recognize them over time. As a result, the
retention of assets under those products is an important component of
profitability. We generally seek to structure our products and sales to
encourage retention of assets under management or recover costs, through
surrender charges, higher credited rates to customers if we retain their assets
for longer periods, paying renewal commissions, paying service fees or other
terms. However, if customers withdraw assets earlier than we anticipated when we
priced the products, it would adversely affect profitability. We also may
experience competitive pressure to lower margins.

Certain Factors Particular to International Operations

Devaluation of foreign currencies reduces earnings calculated in U.S. dollars.
We hedge our foreign exchange risk on a selective basis. However, we generally
do not hedge the currency exposure of our investments in foreign affiliates,
since we view these investments as long term. In preparing our consolidated
financial statements, we translate our results from the foreign currency in
which we operate in a particular country into U.S. dollars. Devaluation of a
country's currency, however, could adversely affect our results of operations
when translated into U.S. dollars. Also, when economies are considered highly
inflationary (generally, cumulative inflation levels in excess of 100% over a
three-year period), we then recognize changes in the value of net monetary
assets or liabilities currently in earnings, rather than through shareholders'
equity. This would potentially make our reported earnings more volatile. In
addition, although we consider foreign exchange trends when deciding to invest
in particular countries, currency devaluation also may affect the value of our
international investments when translated into U.S. dollars. Refer to "Aetna
International" above and "Aetna International - Outlook" in our 1998 Annual
Report to Shareholders for a discussion of currency devaluation in Brazil.




                                    Page 56
<PAGE>   57
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)

International markets are subject to additional risks. Our Aetna International
operations involve certain other risks not typically associated with doing
business in the United States. These risks include investment and other controls
that may be imposed by governments, such as:
<TABLE>
<S>                                                             <C>
-  Permitted levels of equity ownership of companies by         -  Restrictions on entry into new lines of business
   foreign persons
                                                                -  Requirements that portions of business be reinsured
-  Restrictions on remittances of foreign earnings or              through state-affiliated institutions
   repatriation of capital
                                                                -  Other restrictions affecting the conduct of business
-  Currency exchange controls
</TABLE>

Additionally, it may be more difficult for us to manage interest rate risk
because of the relatively short duration of investments that are available in
currencies that match long-term liabilities for international fixed-rate
products. Foreign economies may also experience increased volatility of equity
markets and high rates of inflation. They also may be subject to other political
and economic factors, such as more rapid change of regulatory policy. We
generally do not insure against foreign political risks.

Other Factors Affecting All of Our Businesses

Retention of our key senior executives is important to our operations. Our
success is dependent, in part, on our ability to attract and retain key senior
executives. We entered into employment agreements with certain of these
executives, although an employment agreement does not guarantee that an
executive's services with us will continue.

Adverse changes in regulation could affect the operations of each of our
businesses. In addition to our health business, each of our other businesses is
subject to comprehensive regulation. These businesses could be adversely
affected by:

-    Increases in minimum capital and other financial viability requirements for
     health and other insurance operations.

-    Removal of barriers between the banking, insurance and mutual fund
     businesses, such as the so-called "Gramm/Leach Act of 1999" that is
     expected to be enacted in the near future.

-    Changes in the taxation of insurance companies. For example, the President
     of the United States' revenue proposal would require life insurance
     companies to pay tax on certain income earned prior to 1984. Under current
     law, that income is deferred for tax purposes. If this tax change, which is
     currently just a proposal, were enacted, then we would recognize a one-time
     charge to income in the amount of the tax.

-    Changes in the tax treatment of annuity, pension and other insurance
     products as well as changes in capital gains tax rates. Certain of these
     changes, should they occur, could affect the attractiveness to customers of
     our retirement services products.

Successful completion of our Year 2000 Project is important to operations. If we
do not resolve critical Year 2000 issues, or if third parties with whom we have
external relationships do not resolve critical Year 2000 issues, then those
issues could have a material adverse effect on our results of operations,
liquidity or financial condition. In addition, our expectations about the future
costs and timely and successful completion of our Year 2000 program are subject
to uncertainties that could cause actual results to differ materially from what
we discussed under "Year 2000." Factors that could influence our future costs
and the completion dates and effectiveness of our remediation, testing and
certification and contingency planning efforts include our success in
identifying IT systems and embedded systems that contain two-digit year codes,
the nature and amount of required reprogramming, testing and certification, the
rate and magnitude of related labor and consulting costs, the availability of
qualified personnel and the success of our external relationships in addressing
their own Year 2000 issues. Refer to "Year 2000."




                                    Page 57
<PAGE>   58
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)

FORWARD-LOOKING INFORMATION/RISK FACTORS (CONTINUED)

Litigation can adversely affect us. Litigation also could adversely affect us,
both through costs of defense and adverse results or settlements. Refer to
"Legal Proceedings" below, Note 12 of Notes to Condensed Consolidated Financial
Statements and our 1998 Form 10-K/A for information regarding litigation,
including current shareholder litigation and certain litigation related to our
health business.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Refer to the information contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - General Account Investments".

PART II.  OTHER INFORMATION
Item 1. Legal Proceedings.

Class Action Complaints were filed in the United States District Court for the
Eastern District of Pennsylvania on November 5, 1997 by Eileen Herskowitz and
Michael Wolin, and on December 4, 1997 by Pamela Goodman and Michael J. Oring.
Other Class Action Complaints were filed in the United States District Court for
the District of Connecticut on November 25, 1997 by Evelyn Silvert, on November
26, 1997 by the Rainbow Fund, Inc., and on December 24, 1997 by Terry B. Cohen.
The Connecticut actions were transferred to the United States District Court for
the Eastern District of Pennsylvania (the "Court") for consolidated pretrial
proceedings with the cases pending there. The plaintiffs filed a Consolidated
and Amended Complaint (the "Complaint") seeking, among other remedies,
unspecified damages resulting from defendants' alleged violations of federal
securities laws. The Complaint alleged that the Company and three of its current
or former officers or directors, Ronald E. Compton, Richard L. Huber, and
Leonard Abramson, are liable for certain misrepresentations and omissions
regarding, among other matters, the integration of the merger with U.S.
Healthcare and the Company's medical claim reserves. The Company and the
individual defendants filed a motion to dismiss the Complaint on July 31, 1998.
On February 2, 1999, the Court dismissed the Complaint, but granted the
plaintiffs leave to file a second amended complaint. On February 22, 1999, the
plaintiffs filed a second amended complaint against the Company, Ronald E.
Compton and Richard L. Huber. The Company and the remaining individual
defendants filed a motion to dismiss the second amended complaint, and the Court
denied that motion in March, 1999. On August 9, 1999 the Court entered an order
certifying as plaintiffs those persons who purchased Company common stock on the
market from March 6, 1997 through 7:00 a.m. on September 29, 1997. Substantial
discovery has taken place, including depositions commencing in the late summer
of 1999 of current and former senior officers of the Company. Discovery on the
merits is scheduled to be completed in the fourth quarter of 1999. Trial is
scheduled to begin in early 2000. The Company is defending the actions
vigorously.

The Company has recently become involved in several purported class action
lawsuits that it believes are part of a wave of similar actions targeting the
health care industry and, in particular, the conduct of business by managed care
companies.

A purported class action complaint was filed in the United States District Court
for the Eastern District of Pennsylvania on October 4, 1999 by Anthony Conte
(the "Conte Complaint"). The Conte Complaint seeks various forms of relief,
including unspecified damages, from Aetna U.S. Healthcare Inc. for alleged
violations of the Employee Retirement Income Security Act of 1974 ("ERISA"). The
Conte Complaint alleges that Aetna U.S. Healthcare does not make adequate
disclosure of provider compensation arrangements in the literature that it makes
available to actual or prospective members. The Company intends to defend the
action vigorously and on November 1, 1999 filed a motion to dismiss the
litigation for failure to state a claim upon which relief can be granted. This
litigation is in the preliminary stages.




                                    Page 58
<PAGE>   59
PART II.  OTHER INFORMATION
Item 1. Legal Proceedings. (Continued)

A purported class action complaint was filed in the United States District Court
for the Southern District of Mississippi on October 7, 1999 by Jo Ann O'Neil
(the "O'Neil Complaint"). The O'Neil Complaint seeks various forms of relief,
including unspecified damages and treble damages, from the Company, Aetna U.S.
Healthcare Inc., Richard L. Huber and unnamed members of the Board of Directors
of Aetna Inc. for alleged violations of ERISA and the Racketeering Influenced
and Corrupt Organizations Act ("RICO"). The O'Neil Complaint alleges that
defendants are liable for alleged misrepresentations and omissions relating to
advertising, marketing and member materials directed to Aetna HMO members.
Defendants intend to defend the action vigorously. This litigation is in the
preliminary stages.

A purported class action complaint was filed in the Superior Court of
California, County of Contra Costa on October 28, 1999 by Jeanne E. Curtright
(the "Curtright Complaint"). The Curtright Complaint seeks various forms of
relief, including injunctive relief and disgorgement of amounts allegedly
wrongfully acquired, from the Company, Aetna U.S. Healthcare Inc., Aetna U.S.
Healthcare of California Inc. and unnamed persons for alleged violations of
California Business and Professions Code Sections 17200 and 17500 in connection
with the sale and marketing of health plans in California. The Curtright
Complaint alleges that defendants are liable for alleged misrepresentations and
omissions relating to advertising, marketing and member materials directed to
Aetna HMO members. Defendants intend to defend the action vigorously. This
litigation is in the preliminary stages.

A purported class action complaint was filed in the United States District Court
for the Eastern District of Pennsylvania on April 19, 1999 by Joseph Maio, Jo
Ann Maio and Gary Bender seeking various forms of relief, including unspecified
damages and treble damages, from the Company and a number of its subsidiaries
for alleged violations of RICO, the Pennsylvania Unfair Trade Practices and
Consumer Protection Law, and state common law. On September 29, 1999 the Court
dismissed the RICO claims with prejudice and dismissed the state law claims for
lack of subject matter jurisdiction. The Court held, among other things, that
the plaintiffs lacked standing to pursue the federal RICO claims because they
had not alleged an injury in fact. Plaintiffs have appealed the dismissal to the
United States Court of Appeals for the Third Circuit.

The Company is also involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations, including bad faith,
medical malpractice, marketing and other litigation in its health business. Some
of these other lawsuits are purported to be class actions. Aetna U.S. Healthcare
of California Inc., an indirect subsidiary of the Company, is currently a party
to a bad faith and medical malpractice action brought by Teresa Goodrich,
individually and as successor in interest of David Goodrich. The action was
originally filed in March, 1996 in Superior Court for the state of California,
county of San Bernardino. The action alleges damages for unpaid medial bills,
punitive damages and compensatory damages for wrongful death based upon, among
other things, alleged denial of claims for services provided to David Goodrich
by out of network providers without prior authorization. On January 20, 1999 a
jury rendered a verdict in favor of the plaintiff for $750,000 for unpaid
medical bills, $3.7 million for wrongful death and $116 million for punitive
damages. On April 12, 1999 the trial court amended the judgment to include Aetna
Services, Inc., a direct subsidiary of the Company, as a defendant. On April 27,
1999 Aetna Services, Inc. and Aetna U.S. Healthcare of California Inc. filed
appeals with the California Court of Appeal and will continue to defend this
matter vigorously. While the ultimate outcome of the lawsuits referred to in
this paragraph cannot be determined at this time, after consideration of the
defenses available to the Company and any related reserves established, and
after consultation with counsel, the lawsuits referred to in this paragraph are
not expected to result in liability for amounts material to the financial
condition of the Company, although they may adversely affect results of
operations in future periods.






                                    Page 59
<PAGE>   60
Item 5. Other Information.

(a) Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges
and Preferred Stock Dividends

The following table sets forth the Company's and Aetna Services' ratio of
earnings to fixed charges and ratio of earnings to combined fixed charges and
preferred stock dividends for the periods indicated.

<TABLE>
<CAPTION>
                                              As Restated
                                            Nine Months Ended
                                               September 30,                            Years Ended December 31,
                                            -----------------            -----------------------------------------------------
Aetna Inc.                                  1999         1998            1998        1997        1996        1995         1994
----------                                  ----         ----            ----        ----        ----        ----         ----
<S>                                         <C>          <C>            <C>         <C>         <C>         <C>          <C>
Ratio of Earnings to Fixed Charges          4.57         4.94            4.96        5.74        2.45        4.97         4.74
Ratio of Earnings to Combined Fixed
  Charges and Preferred Stock Dividends     3.86         3.91            3.94        4.46        2.10        4.97         4.74
                                            ----         ----            ----        ----        ----        ----         ----
</TABLE>



<TABLE>
<CAPTION>
                                                 Nine Months Ended
                                                   September 30,                  Years Ended December 31,
                                                  ---------------               -----------------------------
Aetna Services, Inc.                              1999       1998                1998         1997       1996
--------------------                              ----       ----                ----         ----       ----
<S>                                               <C>        <C>                 <C>          <C>        <C>
Ratio of Earnings to Fixed Charges                3.60       4.48                4.31         5.78       2.44
Ratio of Earnings to Combined Fixed
  Charges and Preferred Stock Dividends           3.60       4.48                4.31         5.78       2.44
                                                  ----       ----                ----         ----       ----
</TABLE>


For purposes of computing both the ratio of earnings to fixed charges and the
ratio of earnings to combined fixed charges and preferred stock dividends,
"earnings" represent consolidated earnings from continuing operations before
income taxes, cumulative effect adjustments and extraordinary items plus fixed
charges and minority interest. "Fixed charges" consist of interest (and the
portion of rental expense deemed representative of the interest factor) and
include the dividends paid to preferred shareholders of a subsidiary. (Refer to
Note 16 of Notes to the Consolidated Financial Statements in Aetna Inc.'s 1998
Annual Report on Form 10-K/A.) During 1995 and 1994 there was no preferred stock
outstanding, and as a result, the ratios of earnings to combined fixed charges
and preferred stock dividends were the same as the ratios of earnings to fixed
charges.

(b) Ratings

The ratings of certain Aetna Inc. subsidiaries follow:

<TABLE>
<CAPTION>
                                                                                          Rating Agencies
                                                                      ----------------------------------------------------
                                                                                                   Moody's
                                                                                      Duff &       Investors      Standard
                                                                      A.M. Best       Phelps       Service        & Poor's
                                                                      ---------       ------       -------        --------
<S>                                                                   <C>              <C>          <C>            <C>
Aetna Services, Inc. (senior debt)**
    July 28, 1999                                                         *              A            A3             A
    October 27, 1999 (1)                                                  *              A            A3             A

Aetna Services, Inc. (commercial paper)**
    July 28, 1999                                                         *             D-1           P-2           A-1
    October 27, 1999 (1)                                                  *             D-1           P-2           A-1

Aetna Life Insurance Company (claims paying/financial strength)
    July 28, 1999                                                         A             AA-           A1             A+
    October 27, 1999 (1)                                                  A             AA-           A1             A+

Aetna Life Insurance and Annuity Company
        (claims paying/financial strength)
    July 28, 1999                                                         A             AA            Aa3           AA-
    October 27, 1999 (1)                                                  A             AA            Aa3           AA-
                                                                      ---------       ------       -------        --------
</TABLE>

*   Nonrated by the agency.
** Fully and unconditionally guaranteed by Aetna Inc.

(1)  Moody's Investors Service and Standard & Poor's have the debt and financial
     strength ratings on outlook negative.





                                    Page 60
<PAGE>   61
Item 5. Other Information. (Continued)

(c)  Securities and Exchange Commission Review

     The Securities and Exchange Commission is conducting an accounting review
     of Aetna Inc.'s public filings, including accounting for the PHC and other
     acquisitions and dispositions. The review process is not complete.

Item 6. Exhibits and Reports on Form 8-K.

(a)  Exhibits

     (4)  Rights Agreement dated as of September 24, 1999, between Aetna Inc.
          and First Chicago Trust Company of New York, as Rights Agent,
          incorporated herein by reference to Aetna Inc.'s Registration
          Statement on Form 8-A filed October 15, 1999.

     (12) Statement Re: Computation of Ratios.

          Statement re: computation of ratio of earnings to fixed charges and
          ratio of earnings to combined fixed charges and preferred stock
          dividends for the nine months ended September 30, 1999 and for the
          years ended December 31, 1998, 1997, 1996, 1995 and 1994 for Aetna
          Inc. and for the nine months ended September 30, 1999 and for the
          years ended December 31, 1998, 1997 and 1996 for Aetna Services, Inc.

     (15) Letter Re: Unaudited Interim Financial Information.

          Letter from KPMG LLP acknowledging awareness of the use of a report on
          unaudited interim financial information, dated October 27, 1999.

     (27) Financial Data Schedule.


(b) Reports on Form 8-K.

     The Company filed a report on Form 8-K on August 9, 1999 related to the
     acquisition of the Prudential health care business.







                                    Page 61
<PAGE>   62
                                   SIGNATURES





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



                                                      Aetna Inc.
                                         -------------------------------------
                                                      Registrant



Date February 15, 2000                   By    /s/ Alan M. Bennett
                                              ---------------------------
                                                   Alan M. Bennett
                                                   Vice President
                                                   and Corporate Controller
                                                   (Chief Accounting Officer)










                                    Page 62
<PAGE>   63
                                   AETNA INC.


                                  EXHIBIT INDEX




<TABLE>
<CAPTION>
EXHIBIT
 NUMBER         DESCRIPTION
 ------         -----------
<S>             <C>
   (12)         Statement Re:  Computation of Ratios.

                Statement re: computation of ratio of earnings to fixed
                charges and ratio of earnings to combined fixed charges and
                preferred stock dividends for the nine months ended
                September 30, 1999 and for the years ended December 31,
                1998, 1997, 1996, 1995 and 1994 for Aetna Inc. and for the
                nine months ended September 30, 1999 and for the years
                ended December 31, 1998, 1997 and 1996 for Aetna Services,
                Inc.

   (15)         Letter Re: Unaudited Interim Financial Information.

                Letter from KPMG LLP acknowledging awareness of the use of
                a report on unaudited interim financial information, dated
                October 27, 1999.

   (27)         Financial Data Schedule.
</TABLE>








                                    Page 63