<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
                  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1997
                         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)                                      Identification No.)

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

Registrant's telephone number, including area code:  (860) 273-0123
Securities registered pursuant to Section 12(b) of the Act:

                                           Name of each exchange on
       Title of each class                     which registered
       -------------------                 ------------------------

Common Stock $.01 par value                 New York Stock Exchange

6.25% Class C Voting Mandatorily            New York Stock Exchange
  Convertible Preferred Stock
  $.01 par value

9 1/2% Cumulative Monthly Income            New York Stock Exchange
  Preferred Securities, Series A
  (issued by a subsidiary)

6 3/8% Notes due August 15, 2003            New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None
--------------------------------------------------------------------------------

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

                                         Yes  |X|     No  |_|

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

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 1998 was $11,485,043,678.

As of January 31, 1998, 145,637,336 shares of the registrant's Common Stock $.01
par value were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's 1997 annual report to shareholders (the "Annual
Report").      (Parts I, II and IV)

Portions of the registrant's proxy statement to be filed on or about March 20,
1998 (the "Proxy Statement").      (Parts III and IV)
<PAGE>   2

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                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

PART I

Item  1.   Business.
           A.  Organization of Business                                        3
           B.  Financial Information about Industry Segments                   4
           C.  Description of Industry Segments
               1.  Aetna U.S. Healthcare                                       4
               2.  Aetna Retirement Services                                  14
               3.  Aetna International                                        18
               4.  Large Case Pensions                                        20
               5.  General Account Investments                                22
               6.  Other Matters
                   a.  Regulation                                             23
                   b.  NAIC IRIS Ratios                                       26
                   c.  Ratios of Earnings to Fixed Charges and Earnings
                       to Combined Fixed Charges and Preferred Stock
                       Dividends                                              27
                   d.  Trademarks                                             27
                   e.  Ratings                                                28
                   f.  Miscellaneous                                          28

Item  2.   Properties.                                                        29
Item  3.   Legal Proceedings.                                                 29
Item  4.   Submission of Matters to a Vote of Security Holders.               29
Executive Officers of Aetna Inc.                                              30

PART II

Item  5.   Market for Registrant's Common Equity and Related
           Stockholder Matters.                                               32
Item  6.   Selected Financial Data.                                           32
Item  7.   Management's Discussion and Analysis of Financial
           Condition and Results of Operations.                               32
Item  8.   Financial Statements and Supplementary Data.                       32
Item  9.   Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure.                               32

PART III

Item 10.   Directors and Executive Officers of the Registrant.                33
Item 11.   Executive Compensation.                                            33
Item 12.   Security Ownership of Certain Beneficial Owners and Management.    33
Item 13.   Certain Relationships and Related Transactions.                    33

PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports
           on Form 8-K.                                                       33
Index to Financial Statement Schedules                                        40
Signatures                                                                    58
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PART I

Item 1.  Business.

A.  Organization of Business

Aetna Inc. and its subsidiaries (collectively, the "Company") constitute one of
the nation's largest health benefits companies, based on membership, and one of
the nation's largest insurance and financial services organizations centered
around three core businesses: health care, retirement services and
international.

Aetna Inc., a Connecticut corporation, became the parent corporation of Aetna
Services, Inc. ("Aetna Services") and Aetna U.S. Healthcare, Inc. (formerly U.S.
Healthcare, Inc.) as a result of a merger transaction on July 19, 1996. The
merger was accounted for as a purchase of U.S. Healthcare. (See Note 2 of Notes
to Financial Statements in the Annual Report.) Aetna sold its property-casualty
operations on April 2, 1996. (See Note 3 of Notes to Financial Statements in the
Annual Report for a discussion of certain indemnifications and other information
related to the property-casualty sale.)

The Company's business operations are conducted in the following segments: Aetna
U.S. Healthcare, Aetna Retirement Services, Aetna International and Large Case
Pensions. The principal products included in these segments are:

Aetna U.S. Healthcare:
     Health products (including health maintenance organization, 
       point-of-service, preferred provider organization and indemnity products)
     Group life and disability insurance
     Long-term care insurance

Aetna Retirement Services:
     Financial services
     Individual life insurance

Aetna International:
     Primarily life and health insurance and financial services

Large Case Pensions:
     Retirement products (including pension and annuity products) primarily for
       defined benefit and defined contribution plans

In addition, the Corporate segment includes interest expense and corporate
expenses not directly related to the Company's business segments, such as staff
area expenses, national advertising and contributions.
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B.  Financial Information about Industry Segments

Required financial information by industry segment is set forth in Note 17 to
the Financial Statements, which is incorporated herein by reference to the
Annual Report. Revenue and income from continuing operations attributable to
each industry segment are incorporated herein by reference to the Selected
Financial Data in the Annual Report.

Certain reclassifications have been made to 1996 and 1995 financial information
to conform to 1997 presentation.

C.  Description of Industry Segments

1.  Aetna U.S. Healthcare

Products and Services

Aetna U.S. Healthcare provides a full spectrum of health products (managed care
and indemnity) and group insurance products (life, disability and long-term
care) on both an insured and an employer-funded basis. Under insured plans, the
Company assumes all or a majority of health care cost, utilization, mortality,
morbidity or other risk depending on the product. Under employer-funded plans,
the customer, and not the Company, assumes all or a majority of these risks.

Aetna U.S. Healthcare consists of the Health Risk business and the Group
Insurance and Other Health business.

Health products include health maintenance organization, point-of-service,
preferred provider organization and indemnity products. The Health Risk business
includes health products offered on an insured basis.

The Group Insurance and Other Health business 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.

The following table summarizes premiums and fees and other income for the Health
Risk and Group Insurance and Other Health businesses:

<TABLE>
<CAPTION>
(Millions)                                            1997          1996         1995
                                                      ----          ----         ----
<S>                                                 <C>           <C>          <C>     
Health Risk                                         $ 9,735.0     $6,749.5     $4,960.9
Group Insurance and Other Health                      2,573.5      2,511.6      2,301.1
                                                    ---------     --------     --------
    Total Aetna U.S. Healthcare                     $12,308.5     $9,261.1*    $7,262.0
                                                    =========     ========     ========

U.S. Healthcare Pre Merger (historical amounts)           N/A***  $ 2,384.7**  $3,542.1
                                                    =========     =========    ========
</TABLE>

*     Includes U.S. Healthcare premiums and fees and other income from July 19,
      1996 through December 31, 1996.
**    Reflects premiums and fees and other income from January 1, 1996 through
      July 18, 1996.
***   Not applicable.

Under insured plans, Aetna U.S. Healthcare charges a premium and under
employer-funded plans, Aetna U.S. Healthcare charges a fee for administrative
and claim services.
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The principal Commercial health products offered by Aetna U.S. Healthcare are:

Health Maintenance Organization ("HMO") plans offer comprehensive managed care
benefits generally through participating network physicians, hospitals and other
providers. When an individual enrolls in one of the Company's HMOs, he or she
selects a primary care physician ("PCP") from among the physicians participating
in the Aetna U.S. Healthcare network. PCPs generally are family practitioners,
internists, general practitioners or pediatricians who provide necessary
preventive and primary medical care, and are generally responsible for
coordinating other necessary health care, including making referrals to
participating network specialists. Preventive care and quality improvement are
emphasized in these plans. The Company offers HMO plans with varying levels of
copayments which result in different levels of premium rates. HMO plans are
principally offered on an insured basis. Commercial HMO membership totaled 3.3
million and 3.0 million as of December 31, 1997 and 1996, respectively.

Point-of-Service ("POS") plans blend the characteristics of HMO and indemnity
plans. Members can have comprehensive HMO-style benefits through network
providers with minimum out-of-pocket expense (copayments) and also can go
directly, without a referral, to any provider they choose, subject to, among
other things, certain deductibles and coinsurance, with member cost sharing
limited by out-of-pocket maximums. POS plans are offered on both an insured and
employer-funded basis. Commercial POS membership totaled 3.7 million and 3.5
million as of December 31, 1997 and 1996, respectively.

Preferred Provider Organization ("PPO") plans offer the member the ability to
select any health care provider, with benefits paid at a higher level when care
is received from a network provider. Coverage is subject to deductibles and
coinsurance, with member cost sharing limited by out-of-pocket maximums. PPO
plans are offered on both an insured and employer-funded basis. PPO membership
totaled 3.6 million and 3.7 million as of December 31, 1997 and 1996,
respectively.

Indemnity plans offer the member the ability to select any health care provider
for covered services. Some managed care and medical cost containment features
may be included in these plans, such as inpatient precertification, limiting
payments to reasonable and customary charges and additional benefits for
preventive services (e.g. cancer screening). Coverage is subject to deductibles
and coinsurance, with member cost sharing limited by out-of-pocket maximums.
Indemnity plans are offered on both an insured and employer-funded basis.
Indemnity membership totaled 2.6 million and 3.1 million as of December 31, 1997
and 1996, respectively.

In addition to Commercial health products, the Company also offers coverage for
Medicare beneficiaries and individuals eligible for Medicaid benefits. Such
coverages include the following:
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Through contracts with the Health Care Financing Administration ("HCFA"), Aetna
U.S. Healthcare HMOs offer coverage for Medicare-eligible individuals in certain
geographic areas. Generally, services must be obtained through network
providers, with the exception of emergency and urgent care. Members generally
receive enhanced benefits over standard Medicare fee-for-service coverage,
including vision, hearing and pharmacy coverage. Such Medicare plans are offered
on an insured basis. Medicare membership totaled .4 million and .3 million as of
December 31, 1997 and 1996, respectively.

The Company also served as an administrator of Medicare benefits in certain
states, providing claim services for physicians, hospitals, skilled nursing
facilities and home health agencies in exchange for a fee. The contract with
HCFA to provide these services expired on September 30, 1997.

The Company has contracts with certain state and local agencies to offer
coverage for Medicaid-eligible individuals. Benefits are determined by the
contracting agencies. Medicaid is offered on an insured basis. Medicaid
membership totaled .1 million as of December 31, 1997 and 1996.

Aetna U.S. Healthcare offers a variety of specialty health care coverages
offered as either supplements to health products or as stand-alone products.
Such coverages include indemnity and managed dental plans, prescription drug and
vision programs, and network-based workers' compensation case management
services.

These specialty health coverages and services are included in either Health Risk
or Group Insurance and Other Health business, with the exception of behavioral
health (including employee assistance programs) and network-based workers'
compensation case management services, which are included in Group Insurance and
Other Health.

During 1997, the Company sold certain subsidiaries primarily to more effectively
focus its health business resources. On December 5, 1997, the Company sold Human
Affairs International ("HAI"), a behavioral health management business. Aetna
U.S. Healthcare will continue to market HAI's behavioral health services,
including employee assistance programs, through a long-term strategic
arrangement with the acquiring company. During 1997, the Company also sold
Healthcare Data Interchange Corporation, a provider of health care electronic
data interchange services, and Aetna Professional Management Corporation, a
physician practice management business.

In addition, the Company acquired Virginia Mason Health Plan, Inc., and Frontier
Health Holdings, Inc., both of which are health maintenance organizations,
during 1997. The purchase price of these acquisitions, both individually and in
the aggregate, was not material.

Aetna U.S. Healthcare group insurance products consist primarily of the
following:

Group Life Insurance consists principally of renewable term coverage, the
amounts of which may be fixed or linked to individual employee wage levels.
Basic and supplemental term coverage and spouse and dependent coverages are
available. Group universal life and accidental death benefit coverages are also
available. Group life insurance is offered on an insured basis. Group life
insurance membership totaled 9.9 million and 9.6 million as of December 31, 1997
and 1996, respectively.
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Group Disability Insurance provides coverage for disabled employees' income
replacement benefits for both short-term disability and long-term disability.
The Company also offers a managed disability product with additional case
management features. Group disability insurance coverages are offered on both an
insured and employer-funded basis. Group disability membership totaled 2.6
million and 2.4 million as of December 31, 1997 and 1996, respectively.

Long-Term Care Insurance provides coverage for long-term care expenses in a
nursing home, adult day care or home setting. Long-term care insurance is
offered on an insured basis. Long-term care membership totaled .1 million as of
December 31, 1997 and 1996.

Many group insurance members participate in more than one type of Aetna U.S.
Healthcare coverage and are counted in each.

Provider Networks

General

Aetna U.S. Healthcare provides members of its managed care plans with access to
health care services through networks of independent health care providers. The
Company contracts with providers to participate in its provider networks as it
expands into new geographic areas or as considered necessary in order to serve
members. The providers in the Company's networks are independent contractors and
are neither employees nor agents of the Company.

The HMOs operated by Aetna U.S. Healthcare most closely adhere to the individual
practice model. Under the individual practice model, the HMO contracts with
independent physicians who are broadly dispersed throughout a community and who
care for patients in their own offices. Participating physicians generally also
have patients who are not members of the Company's HMOs. In the Company's HMOs,
the primary care physician plays an important role in practicing preventive
medicine and acts on behalf of the HMO member to coordinate the care provided by
specialist physicians, hospitals, and other health care providers.

Aetna U.S. Healthcare uses a variety of practices to help contain the rate of
increase in the cost of medical services. In addition to contracts with health
care providers, such procedures include the development and implementation of
standards for the appropriate utilization of health care resources and working
with health care providers to review data in order to help them improve
consistency and quality.

At December 31, 1997, Aetna U.S. Healthcare had approximately 330,000 providers
in its networks nationwide.

Contracting

Primary Care Physicians

Compensation by the Company's HMOs to PCPs is principally on a capitated basis,
although fee-for-service contracts also exist. Under a capitation arrangement,
physicians receive a monthly fixed fee for each HMO member, regardless of the
medical services provided to the member. In some instances, the capitation rate
is subject to adjustment based on the attainment of certain criteria including
comprehensiveness of care, quality of care and utilization. This quality-based
incentive program is administered via the Company's Quality Care Compensation
System. In a fee-for-service arrangement, network physicians are paid for health
care services provided to the member based upon a fee schedule.
<PAGE>   8

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Hospitals

The Company enters into contracts that provide for all-inclusive per diem, per
case and capitated hospitalization rates, with fixed rates for ambulatory
surgery and emergency room services. Certain contracted hospitals' final
compensation is based upon attainment of agreed-upon quality and other measures.

Aetna U.S. Healthcare HMOs generally require precertification of elective
admissions and monitoring of the length of hospital stays. Participating
physicians generally admit their HMO patients to hospitals using referral
procedures that direct the hospital to contact the Company's patient management
unit, which confirms the patient's membership status while obtaining pertinent
data. This unit also coordinates related activities, including the subsequent
transition to the home environment and home care, if necessary. Case management
assistance for complex or "catastrophic" cases is provided by a special case
unit.

Specialist and Ancillary Services

Specialist physicians participating in the Company's networks are generally
reimbursed at contracted rates per visit or procedure.

Aetna U.S. Healthcare's HMOs have fixed-fee capitated payment arrangements for
most pharmacy, mental health, substance abuse, and laboratory services. In those
HMO markets where the Company has a significant presence, most radiology,
diagnostic imaging, podiatric and physical therapy services also have fixed-fee
capitated payment arrangements.

Integrated Delivery Systems

Aetna U.S. Healthcare has developed and continues to develop contractual
relationships with national and regional Integrated Delivery Systems ("IDS") to
provide comprehensive medical services. Under these arrangements, the Company's
HMOs contract with an IDS for a fixed, per member fee. This fee covers most or
all of the care required by the member which is generally delivered by the IDS
and its affiliated PCPs, hospitals and specialists.

Quality Assessment

Quality assessment programs begin with the initial selection of providers.
Providers wanting to participate in the Company's HMO networks must satisfy an
extensive set of criteria, including licensing, hospital admission privileges,
demonstrated proficiency, written references, patient access, office standards,
after-hours coverage and many other factors.

Participating physicians are recertified regularly. Recertification covers many
aspects of patient care including an analysis of member grievances filed with
the Company, the transfer and termination rate of members from the practice,
on-site interviews, analysis of utilization patterns, extensive member surveys
and analysis of drug prescription patterns. Committees, each composed of a peer
group of participating private physicians, review participating PCPs being
considered for recertification.

The Company also offers quality and outcome measurement and improvement
programs, and health care data analysis systems for providers and purchasers of
health care. 
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With an emphasis on quality improvement, the Company seeks accreditation for
certain of its HMO plans from the National Committee for Quality Assurance
("NCQA"), a national organization established to review the quality and medical
management systems of HMOs and other managed care plans. Accreditation by NCQA
is a nationally recognized standard. As of December 31, 1997, a majority of the
Company's HMO membership is serviced by health plans which have been granted
full, three-year accreditation.

Principal Markets and Sales

Total health membership is widely dispersed throughout the United States. One or
more products offered by the Health Risk business are available in all 50
states. Health Risk membership is concentrated in the Mid-Atlantic and Northeast
regions where the majority of HMO members are located.

Products offered by the Group Insurance and Other Health business are available
in all 50 states. This business consists primarily of large customers (i.e.,
those with at least 3,000 eligible lives).

The following table presents total health membership by region and funding
arrangement, for the years indicated:

<TABLE>
<CAPTION>
(Thousands)               1997(1)                     1996(1)                    1995(1)(2)
                 ------------------------    ------------------------    ------------------------
                 Risk    Nonrisk    Total    Risk    Nonrisk    Total    Risk    Nonrisk    Total
                 ----    -------    -----    ----    -------    -----    ----    -------    -----
<S>              <C>      <C>       <C>      <C>      <C>       <C>      <C>      <C>      <C>  
Mid-Atlantic     1,863    1,159     3,022    1,911    1,115     3,026      367      736     1,103
Northeast        1,089      735     1,824    1,127      776     1,903      438      698     1,136
Southeast          752    1,717     2,469      594    1,784     2,378      456    1,737     2,193
Mid-West           503    1,915     2,418      459    1,966     2,425      456    1,938     2,394
West Central       405    1,862     2,267      484    1,823     2,307      498    1,740     2,238
West(3)            723    1,011     1,734      730      969     1,699    1,449      978     2,427
                 -----    -----    ------    -----    -----    ------    -----    -----    ------
 Total Health                                                                             
  Membership(4)  5,335    8,399    13,734    5,305    8,433    13,738    3,664    7,827    11,491
                 =====    =====    ======    =====    =====    ======    =====    =====    ======
</TABLE>

(1)   Health membership as of December 31, 1997 reflects system and plan
      conversions. The conversions predominately affect Indemnity and PPO
      membership and have an immaterial impact on all other Health products.
      December 31, 1996 and 1995 reflects adjustments based on known corrected
      data from the conversions, as applied to December 31, 1996 and 1995
      membership previously reported.
(2)   Excludes U.S. Healthcare membership of 2,433 thousand for 1995. U.S.
      Healthcare membership is primarily risk and concentrated in the
      Mid-Atlantic and Northeast regions.
(3)   Decreased membership as of December 31, 1996 resulted primarily from the
      award of a risk contract with the Civilian Health and Medical Program of
      the Uniformed Services ("CHAMPUS") to another contractor. The Company
      remained the primary provider through March 31, 1996.
(4)   Includes the following products: Commercial, Medicare and Medicaid HMO,
      POS, PPO and Indemnity.

For membership composition of Aetna U.S. Healthcare's products by funding
arrangement, see Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") - Aetna U.S. Healthcare in the Annual Report.

For both Health Risk and Group Insurance and Other Health businesses, products
and services are marketed primarily to employers for the benefit of employees
and their dependents. Frequently, employers offer employees a choice of
coverages, from which the employee makes his or her selection during a
designated annual open enrollment period. In some instances, Aetna U.S.
Healthcare is the only health care coverage offered. Employers pay all or a
portion of the monthly premiums, and employees, through payroll deductions, pay
any premium not provided as an employee benefit.
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Within the Health Risk business, Medicare coverage is sold on an individual
basis as well as through employer groups to their retirees. Medicaid is marketed
to individuals rather than employer groups. Because these coverages are sold
primarily on an individual basis, Medicare and Medicaid marketing costs are
typically higher than for other products.

Aetna U.S. Healthcare products are sold primarily through Company sales
personnel who frequently work with independent consultants and brokers who
assist in the production and servicing of business. Sales representatives also
sell to employers on a direct basis.

For large customers, independent consultants and brokers are frequently involved
in employer health plan selection decisions and sales.

Marketing and sales efforts are promoted by an advertising program which
includes television, radio, billboards and print media, supported by market
research and direct marketing efforts.

Health Pricing

For insured Commercial plans, customer contracts are generally established in
advance of the policy period, for a duration of one year. In determining the
premium rates to be charged to the customer, prospective and retrospective
rating methodologies are used.

Under prospective rating, a fixed premium rate is determined at the beginning of
the policy period. Unanticipated increases in medical costs cannot be recovered
in the current policy year; however, prior experience for a product in the
aggregate is considered, among other factors, in determining premium rates for
future periods. Federally-qualified HMOs are required to set premiums in this
manner.

Aetna U.S. Healthcare Commercial HMO plans establish premium rates prior to
contract inception, without regard to actual utilization of services incurred by
individual members, using one of three approved community rating methods. These
rates may vary from account to account to reflect projected family size and
contract mix, benefit levels, renewal date, and other factors. Under one of
these methods, "traditional community rating", an HMO establishes premium rates
based on its revenue requirements for its entire enrollment in a given
community. Under "community rating by class", an HMO establishes premium rates
based on its revenue requirements for broad classes of membership distinguished
by factors such as age and sex. Under "group specific community rating", an HMO
establishes premium rates based on the HMO's revenue requirements for providing
services to the group. State laws, in certain of the states in which the Company
operates HMOs, require the filing with and approval by the state of HMO premium
rates, and certain states may prohibit the use of one or more of these rating
methods. In addition to reviewing anticipated medical costs, some states also
review anticipated administrative costs as part of the approval process. Future
results of the Company could be affected if the premium rates requested by the
Company are not approved or are adjusted downward by state regulators.
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Under retrospective rating, a preliminary premium rate is determined at the
beginning of the policy period. Once the policy period has ended, the actual
experience is reviewed. If the experience is positive (i.e., actual claim costs
and other expenses are less than those expected) then a refund is credited to
the policy. If the experience is negative, then the resulting deficit may, in
certain instances, be recovered through contractual provisions; otherwise the
deficit is considered in setting future premium levels. If a customer elects to
terminate coverage, these deficits generally cannot be recovered. Retrospective
rating is generally used for non-HMO health customers which exceed 300 lives.

Aetna U.S. Healthcare has contracts with HCFA to provide HMO coverage to
Medicare beneficiaries who choose health care coverage through an HMO. Under
these contracts, which are typically executed annually, HCFA pays the HMO at a
fixed, capitated rate based on membership and adjusted for demographic factors
and a user fee. Inflation, changes in utilization patterns and benefit plans,
demographic factors such as age and sex, and both local county and national fee
for service average per capita Medicare costs are considered in the rate
calculation process. Amounts payable under Medicare risk arrangements are
subject to periodic unilateral revision by HCFA. In addition to premiums
received from HCFA, some of the Medicare products offered by Aetna U.S.
Healthcare require a modest premium to be paid by the member. Under Medicare
risk arrangements, Aetna U.S. Healthcare assumes the risk of higher than
expected medical expenses. Medicare contracts typically generate higher per
member per month revenues, but also higher per member per month medical
expenses, than Commercial plans.

Aetna U.S. Healthcare also has HMO contracts with a variety of federal
government employee groups under the Federal Employees Health Benefit Program.
Premium rates are subject to federal government review and audit. Premium rates
for these contracts are set prospectively but are subject to retrospective
adjustments.

Premiums and fees from the federal government accounted for 19% of Aetna U.S.
Healthcare's revenue in 1997. Contracts with HCFA accounted for 82% of these
premiums and fees, with the balance from federal employee related benefit
programs.

The Company has contracts with state and local agencies to provide fully-insured
health benefits to persons eligible for Medicaid benefits. These contracts are
generally for a period of one to three years. Aetna U.S. Healthcare receives a
fixed monthly payment based on membership in return for the coverage of health
care services. The rates are subject to unilateral revision by the contracting
agencies upon renewal. Aetna U.S. Healthcare assumes the risk of higher than
expected medical expenses.

Contracts with the customer to provide administrative services for
employer-funded plans are generally for a period of one to three years,
frequently with built in inflation factors. Aetna U.S. Healthcare has entered
into certain guarantees with respect to certain functions such as customer
service response time, claim processing accuracy and claim processing turnaround
time, as well as certain guarantees that claim expenses to be incurred by the
customer will fall within a certain range. With any of these guarantees, Aetna
U.S. Healthcare is financially at risk if the conditions of the arrangements are
not met.
<PAGE>   12

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Competition

Competition in the health care industry has intensified in recent years,
primarily due to more aggressive marketing and pricing, a proliferation of
competing products, including new products developed in an effort to contain
health care costs, and increased quality and price sensitivity. New entrants
into the marketplace as well as significant consolidation within the industry
have also contributed to the more intense competitive environment.

Aetna U.S. Healthcare believes that the most significant factors which
distinguish competing health plans are quality of service and managed care
programs (including NCQA accreditation status), comprehensiveness of coverage,
cost (including both premium and member out-of-pocket costs), product design,
financial stability and the geographic scope of provider networks and the
providers available in such networks. Aetna U.S. Healthcare believes that it is
competitive in each of these areas. The ability to increase the number of
persons covered by Aetna U.S. Healthcare benefits or to increase revenues is
affected by competition in any particular area. In addition, the ability to
increase the number of persons enrolled in Health Risk products is affected by
the desire and ability of employers to self fund their employees' insurance.
Competition may also affect the availability of services from health care
providers, including primary care physicians, specialists and hospitals.

Within the Health Risk business, Aetna U.S. Healthcare competes with local and
regional managed care plans, in addition to managed care plans sponsored by
large health insurance companies and Blue Cross/Blue Shield plans. Additional
competitors include other types of medical and dental provider organizations,
various specialty service providers, integrated health care delivery
organizations, and in certain plans, with programs sponsored by the federal or
state governments.

Within the Other Health component of the Group Insurance and Other Health
business, Aetna U.S. Healthcare competes primarily with other commercial
insurance companies and third party administrators.

For the Group Insurance industry, Aetna U.S. Healthcare believes that the most
significant factors which distinguish competing companies are price, quality of
service, comprehensiveness of coverage, and product array and design. Specialty
carriers have increased market penetration in the disability business. The
deeply-penetrated group life market remains highly competitive, while
competition continues to intensify in the emerging long-term care market.

Reserves

For the Health Risk business, medical claims payable reflects estimates of the
ultimate cost of claims that have been incurred but not yet reported and
reported but not yet 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 results.
<PAGE>   13

Page 13

For Group Insurance products, reserves are established as premiums become due to
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 and are computed on the
basis of assumed or guaranteed yield and benefit payments. Assumptions are based
on the Company's historical claim experience. For long-term disability products,
reserves are established for (i) lives currently in payment status (using both
standard industry, as well as the Company's own morbidity and interest rate
assumptions), (ii) lives who have not yet satisfied the waiting period, but are
expected to do so and (iii) claims that have been incurred but not reported.
Long-term care reserves are a long-term obligation calculated using industry
data for morbidity and mortality assumptions.

Group health and group insurance premiums are generally recorded as premium
revenue over the term of the coverage. Some group contracts allow for premiums
to be adjusted to reflect emerging experience. Such premiums are recognized as
the related experience emerges.

Reinsurance

Aetna U.S. Healthcare uses reinsurance agreements with nonaffiliated insurers
for Group Insurance businesses to control its exposure to large losses and
certain other risks. The Company maintains catastrophic life reinsurance which
provides protection against accidents involving five or more covered lives. For
disability business, reinsurance arrangements for excess coverage are
established on a case-by-case basis to reflect the circumstances of the specific
disability risks. In addition, the Company carries excess medical malpractice
professional liability insurance.

Group Life Insurance In Force and Other Statistical Data

The following table summarizes changes in group life insurance in force before
deductions for reinsurance ceded to other companies for the years indicated:

<TABLE>
<CAPTION>
(Dollars in Millions)                     1997        1996        1995
                                          ----        ----        ----
<S>                                       <C>         <C>         <C>     
In force, end of year                     $284,978    $278,499    $274,429
                                          ========    ========    ========
Terminations (lapses and all other)       $ 14,576    $ 18,014    $ 14,119
                                          ========    ========    ========
Number of policies and contracts
 in force, end of year:
    Group Life Contracts (1)                13,849      15,288      19,175
    Group Conversion Policies (2)           32,660      33,538      33,358
</TABLE>

(1)   Due to the diversity of coverages and size of covered groups, statistics
      are not provided for average size of policies in force.

(2)   Reflects conversion privileges exercised by insureds under group life
      policies to replace those policies with individual life policies.

Factors Affecting Forward-Looking Information

For information regarding certain important factors that may materially affect
Aetna U.S. Healthcare's business, see MD&A - Forward-Looking Information/Risk
Factors and financial results discussions in the Annual Report.
<PAGE>   14

Page 14

2.  Aetna Retirement Services

Products and Services

Aetna Retirement Services ("ARS") offers financial services and individual life
insurance products. Primarily all products are offered through Aetna Life
Insurance and Annuity Company ("ALIAC")and Aetna Insurance Company of America
("AICA") indirect, wholly owned subsidiaries of the Company. Investment advisory
services are offered through ALIAC and Aeltus Investment Management Inc.
("Aeltus"), registered investment advisers and indirect, wholly owned
subsidiaries of the Company. Aeltus has also served as subadviser to Aetna
mutual funds. Financial planning services are offered through Financial Network
Investment Corporation ("FNIC"), a broker/dealer acquired in 1997 and Aetna
Financial Services, Inc. ("AFSI"), indirect wholly owned subsidiaries of the
Company.

Financial Services

Financial services products principally include annuity contracts that offer a
variety of funding and payout options for individual and employer-sponsored
retirement plans qualified under Internal Revenue Code Sections 401, 403, 408
and 457 (collectively, "qualified plans") and nonqualified annuity contracts.
These contracts may be deferred or immediate ("payout annuities"). Financial
services also include investment advisory services, financial planning and
pension plan administrative services.

Individual Life Insurance

Individual life insurance products include universal life and variable universal
life, which have both life insurance and investment characteristics, traditional
whole life and term insurance. Universal life and variable universal life
products accounted for approximately 96% of life insurance new business premiums
in 1997.

Investment Options

ARS products provide annuity and certain life insurance customers with variable
and/or fixed investment options. Variable ("nonguaranteed") options provide for
full assumption by the customer of investment risks. Assets supporting variable
options are held in separate accounts that invest in Aetna mutual funds and/or
unaffiliated mutual funds. Aetna mutual funds include funds managed by Aeltus
and beginning in 1997, funds managed by outside investment advisors under
subadvisory arrangements. Separate account investment income and realized
capital gains and losses are not reflected in the Company's consolidated results
of operations. Fixed options can be either "fully guaranteed" or "experience
rated". Fully guaranteed options provide guarantees on investment return,
maturity values, and if applicable, benefit payments. Experience rated options
require the customer to assume investment (including realized capital gains and
losses) and other risks subject, among other things, to certain minimum
guarantees. The effect of such realized gains and losses (as long as minimum
guarantees are not triggered) does not impact the Company's results.
<PAGE>   15

Page 15

Fees and Investment Margins

Insurance charges, investment management or other fees earned by ARS, vary by
product and depend, among other factors, on the funding option selected by the
customer under the product. For variable annuities or life insurance products
where assets are allocated to variable funding options, ARS charges the separate
account an asset-based insurance fee and expense charge. In addition, where the
customer selects an Aetna mutual fund as a variable funding option, ARS receives
an asset-based investment management fee and, in the case of those funds
subadvised by outside managers, ALIAC pays a subadvisory fee to the fund
manager. For unaffiliated mutual funds, ARS receives distribution fees and/or
expense reimbursements. For fixed funding options, ARS derives an investment
margin, which is based on the difference between income earned on the
investments supporting the liability and interest credited to customers. Other
fees or charges, such as administrative fees, may be assessed depending on the
nature of the product.

ARS also provides direct investment advisory services to unaffiliated customers
through Aeltus and FNIC generally for fees based on assets under management.
FNIC and AFSI provide financial planning services generally for fees which may
or may not be asset based.

Assets Under Management

The substantial portion of fees or other charges and investment margins are
based on assets under management. Assets under management are principally
affected by deposits, investment growth (i.e., interest credited to customer
accounts for fixed options or market performance for variable options) and
persistency (i.e., customer retention). Assets under management, excluding net
unrealized capital gains and losses on debt securities other than those held in
separate accounts, were $45.0 billion, $32.1 billion and $25.1 billion at
December 31, 1997, 1996 and 1995, respectively. Approximately 94% and 93% of
assets under management at December 31, 1997 and 1996, respectively, allowed for
contractholder withdrawal, 77% and 75% of which, respectively, are subject to
market value adjustments or deferred surrender charges at December 31, 1997.

To encourage customer retention and recover acquisition expenses, contracts
typically impose a surrender charge on policyholder balances withdrawn within a
period of time after the contract's inception which may be waived at the
Company's discretion. The period of time and level of the charge vary by
product. In addition, an approach incorporated into recent variable annuity
contracts with fixed funding options allows contractholders to receive an
incremental interest rate if withdrawals from the fixed account are spread over
a period of five years. Further, more favorable credited rates may be offered
after policies have been in force for a period of time. Existing tax penalties
on annuity distributions prior to age 59-1/2 provide further disincentive to
customers for premature surrenders of annuity balances, but generally do not
impede transfers of those balances to products of competitors.
<PAGE>   16

Page 16

Life Insurance In Force and Other Statistical Data

For individual life insurance products, life insurance in force is a key
determinant of earnings as contract charges for cost of insurance coverage are
typically based on amounts of coverage in force less accumulated policy
reserves. The key drivers of life insurance in force are new sales, surrenders
and mortality. The following table summarizes changes in life insurance in force
before deductions for reinsurance ceded to other companies:

(Amounts in millions, except number of policies and average size
of policies in force)

<TABLE>
<CAPTION>
                                1997         1996         1995
                                ----         ----         ----
<S>                             <C>          <C>          <C>     
Sales and additions:
  Permanent:
    Nonparticipating            $  4,281     $  4,357     $  5,212
    Participating                     13           12           12
  Term:
    Nonparticipating               1,586        1,382        2,160
    Participating                     53          133          390
                                --------     --------     --------
     Total                      $  5,933     $  5,884     $  7,774
                                ========     ========     ========

Terminations:
  Surrenders and conversions    $  1,865     $  1,646     $  1,620
  Lapses                           2,126        2,098        1,874
  Other                            1,130          330          281
                                --------     --------     --------
     Total                      $  5,121     $  4,074     $  3,775
                                ========     ========     ========

In force, end of year:
  Permanent                     $ 36,614     $ 35,883     $ 34,614
  Term                            13,181       13,100       12,559
                                --------     --------     --------
     Total                      $ 49,795     $ 48,983     $ 47,173
                                ========     ========     ========

Number of policies in force, 
 end of year:
  Nonparticipating               597,221      627,233      626,880
  Participating                   97,533      105,098      113,045
                                --------     --------     --------
     Total                       694,754      732,331      739,925
                                ========     ========     ========

Average size of policies in 
 force, end of year:
  Nonparticipating              $ 72,654     $ 66,385     $ 62,009
  Participating                   65,664       69,883       73,433
</TABLE>

See Note 12 of Notes to Financial Statements in the Annual Report for a
discussion of participating life insurance contracts.

The following table summarizes premiums and deposits for ARS:

<TABLE>
<CAPTION>
(Millions)                      1997         1996         1995
                                ----         ----         ----
<S>                             <C>          <C>          <C>      
Premiums                        $   158.5    $   180.7    $   260.2
Deposits                          4,969.0      4,564.8      3,785.1
                                ---------    ---------    ---------
                                $ 5,127.5    $ 4,745.5    $ 4,045.3
                                =========    =========    =========
</TABLE>

Principal Markets and Method of Distribution

ARS products and services are offered primarily to individuals, pension plans,
small businesses and employer-sponsored groups in the health care, government,
education (collectively "not-for-profit" organizations) and corporate markets.
ARS products generally are sold through pension professionals, independent
agents and brokers, third party administrators, banks, dedicated career agents
and financial planners.
<PAGE>   17

Page 17

Competition

ARS competes with other insurance companies, as well as an array of financial
services companies including banks, mutual funds and other investment managers.
Principal competitive factors are reputation for investment performance, product
features, service, cost and the perceived financial strength of the investment
manager or sponsor.

Competition may affect, among other matters, both business growth and the
pricing of ARS' products and services.

Reserves

Reserves for limited payment contracts (annuities with life contingent payout)
are computed on the basis of assumed investment yield, mortality, morbidity and
expenses and include a margin for adverse deviation. The assumptions vary by
plan, year of issue and policy duration. Reserves for investment contracts
(deferred annuities and immediate annuities without life contingent payouts) are
equal to cumulative deposits plus credited interest less withdrawals and charges
thereon. Of those investment contracts which are experience rated, the reserves
also reflect net realized capital gains/losses (which ARS reflects through
credited rates on an amortized basis) and unrealized capital gains/losses
related to Financial Accounting Standard ("FAS") No. 115.

Reserves for universal life products (which are all experience rated) are equal
to cumulative deposits less withdrawals and charges plus credited interest
thereon, plus/less net realized capital gains/losses (which ARS reflects through
credited rates on an amortized basis). These reserves also reflect unrealized
capital gains/losses related to FAS No. 115. Reserves for all other fixed
individual life contracts are computed on a basis consistent with that described
above for limited payment contracts.

Reserves, as described above, are computed amounts that, with additions from
premiums and deposits to be received, and with interest on such reserves
compounded annually at assumed rates, are expected to be sufficient to meet the
Company's policy obligations at their maturities or to pay expected death or
retirement benefits or other withdrawal requests.

Reinsurance

ARS retains no more than $10 million of risk per individual life insured.
Amounts in excess of the retention limit are reinsured with unaffiliated
companies.

Factors Affecting Forward-Looking Information

For information regarding certain important factors that may materially affect
ARS' business, see MD&A - Forward-Looking Information/Risk Factors and financial
results discussions in the Annual Report.
<PAGE>   18

Page 18

3.  Aetna International

Aetna International, through subsidiaries and joint venture operations, sells
primarily life and health insurance and financial services products in non-U.S.
markets.

The Company continues to increase its investments in emerging international and
financial services markets, primarily in Asia Pacific and Latin America, where
it believes demographic and other characteristics afford the opportunity for
long-term business growth. The Company seeks to enter new emerging markets in
their early stages of development, seeking to be among the first foreign
entrants, and then to build sufficient scale of operations to compete with local
and other foreign companies. The Company also explores opportunities for
additional investments, or divestitures where appropriate, in markets where it
has established operations.

The Company may invest in a new market or increase its position in a market
through a combination of acquisitions, joint ventures or by starting new
independent operations. Over the past 5 years, the Company has invested $882
million in its international operations, of which $473 million was invested in
1997, a majority of which related to the acquisition of 49% of a joint venture
in Brazil with Sul America Seguros, Brazil's largest insurance company.

In October 1997, the Company was granted approval to operate a joint venture
insurance business in Shanghai. The approval was given by The People's Bank of
China, a regulatory body for financial institutions in China. The joint venture,
to be formed with China Pacific Insurance Company, the second largest insurer in
China, will provide life insurance products to individual Chinese citizens and
foreign nationals in the Shanghai region.

The Company classifies its operations in international regions as either
"established" or "start-up", depending on the stage of their business
developments.

Aetna International conducts its business in several geographic regions:

      o     Asia Pacific - Operations are conducted through majority owned
            subsidiaries in Taiwan and Malaysia, as well as through other equity
            subsidiaries (where the Company has between a 20% and 50% interest)
            in Hong Kong and New Zealand. The products and services sold by
            these subsidiaries include individual and group life and health
            insurance, deposit administration and related financial products and
            services.



<PAGE>   19

Page 19

      o     Latin America - Operations are conducted through wholly owned and
            majority-owned subsidiaries in Chile, and equity subsidiaries in
            Mexico, Peru and Brazil. The products and services sold by these
            subsidiaries include individual and group life and health insurance,
            annuities, personal and commercial property-casualty insurance, and
            pension fund administration services.

      o     Canada - Operations are conducted through wholly owned subsidiaries.
            The products and services sold by these subsidiaries include
            individual and group life, health and disability insurance and
            administration services to group plans.

      o     Other - Operations include primarily start-up operations
            (subsidiaries in the initial years of operation) in Argentina, the
            Philippines and Indonesia, as well as corporate overhead expenses.
            The products and services sold by these subsidiaries include
            individual and group life and health insurance, and health and
            pension fund administration services.

Each of the subsidiaries through which Aetna International conducts business
operates within guidelines established by the Company. Methods of distributing
products vary by country and product depending on local laws, customs and the
needs of the particular market. Distribution channels include career agents,
independent agents and brokers, financial institutions and direct sales.
Competition varies by country and includes well established local companies, as
well as companies based in North America, Europe, Australia and Japan that have
a strong international presence.

The following table sets forth Aetna International's revenue (including only its
share of net income for equity subsidiaries and excluding net realized capital
gains or losses), and operating earnings or losses (i.e., net income or loss
excluding net realized capital gains or losses) by region, premiums and life
insurance in force, before deductions for reinsurance ceded to other companies:

<TABLE>
<CAPTION>
                                                                       Operating
                                         Revenue                        Earnings
                             ------------------------------    ----------------------------
(Millions)                   1997       1996       1995        1997      1996      1995
                             ----       ----       ----        ----      ----      ----
<S>                          <C>        <C>        <C>         <C>       <C>       <C>    
Asia Pacific                 $1,037.2   $  845.1   $  698.2    $  60.1   $  54.3   $  46.0
Latin America                   443.9      352.0      355.2       76.7      56.0      47.9
Start-ups and other             477.7      427.4      408.8       (8.1)     (4.8)     (5.2)
                             --------   --------   --------    --------  -------   -------
                             $1,958.8   $1,624.5   $1,462.2    $ 128.7   $ 105.5   $  88.7
                             ========   ========   ========    =======   =======   =======

Premiums (included in
  revenue above)             $1,434.1   $1,166.1   $1,038.5
                             ========   ========   ========

Life insurance in force,
  end of year                $ 78,750   $ 76,672   $ 59,384
                             ========   ========   ========
</TABLE>

Factors Affecting Forward-Looking Information

For information regarding certain important factors that may materially affect
Aetna International's business, see MD&A - Forward-Looking Information/Risk
Factors and financial results discussions in the Annual Report.
<PAGE>   20

Page 20

4. Large Case Pensions

Principal Products

Large Case Pensions manages a variety of retirement products (including pension
and annuity products) offered to IRC Section 401 qualified defined benefit and
defined contribution plans. Contracts provide nonguaranteed, partially
guaranteed (experience rated) and fully guaranteed investment options through
General and Separate Account products. The majority of Large Case Pensions'
products that use Separate Accounts provide contractholders with a vehicle for
investments under which the contractholders assume the investment risks as well
as the benefit of favorable performance. Large Case Pensions earns a management
fee on these Separate Accounts.

In 1993, the Company discontinued its fully guaranteed large case pension
products. (For additional information, see MD&A - Large Case Pensions in the
Annual Report.)

At December 31, assets under management, including Separate Accounts and
excluding net unrealized capital gains and losses on debt securities, were $29.7
billion in 1997, $35.3 billion in 1996 and $45.6 billion in 1995. The decline in
assets under management is primarily attributable to the transfer of assets
under management to the ARS segment, reflecting the consolidation of the
Company's investment advisory services, the continuing runoff of the underlying
liabilities and the sale of Insurance Company Investment Management, a
specialized asset manager, in 1996.

The following table summarizes premiums and deposits:

<TABLE>
<CAPTION>
(Millions)                   1997          1996          1995
                             ----          ----          ----
<S>                          <C>           <C>           <C>      
Premiums                     $   155.0     $   214.1     $   244.4
Deposits                       1,598.6       1,781.8       1,600.2
                             ---------     ---------     ---------
  Total                      $ 1,753.6     $ 1,995.9     $ 1,844.6
                             =========     =========     =========
</TABLE>

Reserves

When the Company discontinued the fully guaranteed large case pension products,
it established a reserve for expected future losses on the runoff of the
business. For additional information on this reserve, see Note 9 of Notes to
Financial Statements in the Annual Report.

The Company also maintains reserves for guaranteed investment contracts equal to
amounts deposited plus credited interest thereon. Reserves for single premium
annuity contracts reflect the present value of benefits based on actuarial
assumptions established at the time of contract purchase. Such assumptions are
based on the Company's experience, which is periodically reviewed against
published industry data. These products provide guarantees on investment return,
maturity values, and if applicable, benefit payments. The interest credited on
these contracts during 1997 ranged from 3.5% to 17.7% with an average rate of
8.6% (compared with 8.7% in 1996). For the contracts in force at December 31,
1997, the average credited rate was 8.5%. None of these contracts allow for
contractholder withdrawal, except in extraordinary circumstances.
<PAGE>   21

Page 21

Reserves for experience rated contracts reflect cumulative deposits, less
withdrawals and charges, plus credited interest thereon, plus/less net realized
capital gains/losses (which the Company intends to reflect in credited rates)
and net unrealized capital gains/losses related to FAS No. 115.

Factors Affecting Forward-Looking Information

For information regarding certain important factors that may materially affect
Large Case Pension's business, see MD&A - Forward-Looking Information/Risk
Factors and financial results discussions in the Annual Report.
<PAGE>   22

Page 22

5. General Account Investments

Consistent with the nature of the contract obligations involved in the Company's
health, life, annuity and pension operations, the majority of general account
assets have been invested in intermediate and long-term, fixed-income
obligations such as treasury obligations, mortgage-backed securities, corporate
debt securities and mortgage loans.

For information concerning the valuation of investments, see Notes 1, 4, and 7
of Notes to Financial Statements in the Annual Report.

The following table sets forth the distribution of invested assets, cash and
cash equivalents and accrued investment income of the Company's general account
portfolio (excluding Discontinued Operations) as of the end of the years
indicated:  (1) (2)

<TABLE>
<CAPTION>
 (Millions)                                    1997         1996       1995
                                               ----         ----       ----
<S>                                            <C>          <C>        <C>      
Debt securities:                               
  Bonds:                                       
    United States Government and               
      government agencies and                  
      authorities                              $ 3,928.6    $ 3,773.1  $ 3,720.5
    States, municipalities and                 
      political subdivisions                       206.6        355.3       81.5
    U.S. Corporate securities:                 
      Utilities                                  2,505.5      2,420.3    2,333.0
      Financial                                  5,216.8      4,546.5    4,704.3
      Transportation/capital goods               2,589.4      2,492.8    2,729.9
      Health care/consumer products              1,735.3      1,803.7    1,924.8
      Natural resources                          1,559.9      1,317.9    1,278.8
      Other                                      1,506.2      1,519.8    1,859.2
                                               ---------    ---------  ---------
        Total U.S. Corporate securities         15,113.1     14,101.0   14,830.0
    Foreign:                                   
      Government, including political          
       subdivisions                              2,629.8      2,505.4    1,968.3
      Utilities                                    689.1        790.2      780.1
      Other                                      3,830.4      3,513.1    2,986.3
                                               ---------    ---------  ---------
        Total foreign securities                 7,149.3      6,808.7    5,734.7
    Residential mortgage-backed securities:    
      Pass-throughs                              1,812.5      1,848.4    1,864.4
      Collateralized mortgage obligations        2,710.4      2,764.7    3,073.9
                                               ---------    ---------  ---------
        Total residential mortgage-backed      
          securities                             4,522.9      4,613.1    4,938.3
    Commercial/Multifamily mortgage-           
      backed securities                          1,622.0      1,144.3      774.0
    Other asset-backed securities                1,635.1      1,464.6    1,772.5
                                               ---------    ---------  ---------
        Total bonds                             34,177.6     32,260.1   31,851.5
  Redeemable preferred stocks                       67.4         76.2        8.8
                                               ---------    ---------  ---------
        Total debt securities                   34,245.0     32,336.3   31,860.3
                                               ---------    ---------  ---------
                                               
Equity securities:                             
  Common stocks                                    866.4      1,185.3      566.9
  Nonredeemable preferred stocks                   175.0        147.5       92.8
                                               ---------    ---------  ---------
        Total equity securities                  1,041.4      1,332.8      659.7
                                               ---------    ---------  ---------
                                               
Short-term investments                           1,003.9        723.2      607.8
Mortgage loans                                   4,207.8      6,700.9    8,327.2
Real estate                                        369.5        850.2    1,277.3
Policy loans                                       746.9        707.3      629.4
Other                                              947.4        835.5      688.6
                                               ---------    ---------  ---------
        Total investments                      $42,561.9    $43,486.2  $44,050.3
                                               =========    =========  =========
                                               
Cash and cash equivalents                      $ 1,805.8    $ 1,462.6  $ 1,712.7
                                               =========    =========  =========
                                               
Accrued investment income                      $   545.8    $   598.6  $   618.3
                                               =========    =========  =========
</TABLE>

(1)   Excludes Separate Accounts.
(2)   Includes $7.9 billion, $8.7 billion and $10.3 billion of investments
      supporting discontinued products in 1997, 1996 and 1995, respectively.
<PAGE>   23

Page 23

The following table summarizes the Company's investment results:  (1)

(Dollar amounts in millions)

<TABLE>
<CAPTION>
                        Net              Earned Net        Net Realized     Change in Net
                     Investment          Investment        Capital          Unrealized Capital
                     Income (2)        Income Rate (3)     Gains (4)        Gains and Losses (5)
                     ----------        ---------------     ----------       --------------------
<S>                  <C>               <C>                 <C>              <C>       
For the year:
1997                 $3,377.5          7.7%                $  334.2         $   (50.7)
1996                  3,565.2          8.0                    134.4              10.8
1995                  3,575.1          7.9                     47.2           1,002.8
</TABLE>

(1)   Excludes Separate Accounts, investments in affiliates and Discontinued
      Operations.
(2)   Net investment income excludes net realized capital gains and losses and
      is after deduction of investment expenses, but before deduction of income
      taxes.
(3)   The Earned Net Investment Income Rate for any given year is equal to (a)
      net investment income divided by (b) the average of cash, invested assets
      excluding unrealized, and investment income due and accrued at the
      beginning and end of the year.
(4)   Net realized capital gains are before income taxes and exclude gains and
      losses allocable to experience rated pension contractholders in all years.
(5)   Net unrealized capital gains (losses) are before federal income taxes and
      exclude changes in unrealized capital gains (losses) related to experience
      rated contractholders and discontinued products.

6.  Other Matters

a.  Regulation

General

The Company's operations are subject to comprehensive regulation throughout the
United States and the foreign jurisdictions in which it does business. The laws
of these jurisdictions establish supervisory agencies, including state health,
insurance and securities departments, with broad authority to grant licenses to
transact business and regulate many aspects of the products and services offered
by the Company, as well as solvency and reserve adequacy. Many agencies also
regulate investment activities on the basis of quality, diversification, and
other quantitative criteria. The Company's operations and accounts are subject
to examination at regular intervals by certain of these regulators.

Health Care

The federal government and the states in which the Company conducts its HMO and
other health operations have adopted laws and regulations that govern the
business activities of the Company to varying degrees. These laws and
regulations may restrict how the Company conducts its businesses and may result
in additional burdens and costs to the Company. Areas of governmental regulation
include licensure, premium rates, benefits, service areas, quality assurance
procedures, plan design, eligibility requirements, provider rates of payment,
surcharges on provider payments, provider contract forms, underwriting,
financial arrangements, financial condition (including reserves) and corporate
governance. These laws and regulations are subject to amendments and changing
interpretations in each jurisdiction.
<PAGE>   24

Page 24

States generally require HMOs to obtain a certificate of authority prior to
commencing operations. To establish an HMO in any state where it does not
presently operate an HMO, the Company generally has to obtain such a
certificate. The time necessary to obtain such a certificate varies from state
to state. Each HMO must file periodic financial and operating reports with the
states in which it does business. In addition, the HMOs are subject to state
examination and periodic license renewal.

The provision of services to certain employee health benefit plans is subject to
the Employee Retirement Income Security Act of 1974 ("ERISA"), a complex set of
laws and regulations subject to interpretation and enforcement by the Internal
Revenue Service and the Department of Labor ("DOL"). ERISA regulates certain
aspects of the relationships between the Company and employers who maintain
employee benefit plans subject to ERISA. Some of the administrative services and
other activities of the Company may also be subject to regulation under ERISA.
In addition, some states require licensure or registration of companies
providing third party claims administration services for benefit plans.

Certain legislative and regulatory changes related to health products have
recently been enacted or proposed, and a variety of other potential legislative
and regulatory changes are receiving a high level of attention at both the state
and federal level. For a discussion of these matters see MD&A - Regulatory
Environment in the Annual Report. For information regarding regulation of
pricing by the Company's HMOs, see "Aetna U.S.
Healthcare - Health Pricing", on page 10.

Investment and Retirement Products and Services

Operations conducted by ARS and Large Case Pensions are subject to regulation by
various insurance agencies where the Company conducts business, in particular
the insurance departments of Connecticut and New York. Among other matters,
these agencies may regulate premium rates, trade practices, agent licensing,
policy forms, underwriting and claims practices, the maximum interest rates that
can be charged on life insurance policy loans, and the minimum rates that must
be provided for accumulation of surrender value.

The Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD") and, to a lesser extent, the states regulate the
sales and investment management activities and operations of broker-dealer and
investment advisory subsidiaries of the Company. Regulations of the SEC,
Department of Labor and Internal Revenue Service also impact certain of the
Company's pension, annuity, life insurance and other investment and retirement
products. These products involve Separate Accounts of Aetna Life Insurance and
Annuity Company and Aetna Insurance Company of America and mutual funds
registered under the Investment Company Act of 1940.
<PAGE>   25

Page 25

International

The nature and extent of regulations affecting the Company's international
operations varies by jurisdiction and line of business. Most operations are
subject to local insurance laws. These laws typically regulate the types of
business that can be written, policy forms and terms, currency, permitted
investments, reserves, taxation and other matters affecting the conduct of the
business. International operations are also subject to a variety of additional
investment and other controls that may be imposed by governments. Certain
jurisdictions may require that portions of the business be reinsured through
designated state-affiliated institutions. As a foreign investor, the Company is
also subject to a variety of restrictions regarding permitted levels of equity
ownership, remittance of foreign earnings, repatriation of capital, exchange of
currency, and entry into new lines of business. Regulation of international
operations may also be subject to other political factors not typically
associated with doing business in the United States, such as more rapid change
of regulatory policy, possible nationalization of businesses, hostilities and
unrest.

Federal Employee Benefit Regulation

ARS and Large Case Pensions also provide a variety of products and services to
employee benefit plans that are covered by ERISA.

In December 1993, in a case involving an employee benefit plan and an insurance
company, the United States Supreme Court ruled that assets in the insurance
company's general account that were attributable to a portion of a group pension
contract issued to the plan that was not a "guaranteed benefit contract" were
"plan assets" for purposes of ERISA and that the insurance company was an ERISA
fiduciary with respect to those assets. In reaching its decision, the Court
declined to follow a 1975 DOL interpretive bulletin that had suggested that
insurance company general account assets were not plan assets.

Congress recently enacted the Small Business Job Protection Act (the "Act"),
which, among other matters, created a framework for resolving potential issues
raised by the Supreme Court decision. The Act provides that, absent criminal
conduct, insurers generally will not have liability with respect to general
account assets held under contracts that are not guaranteed benefit contracts
based on claims that those assets are plan assets. The relief afforded extends
to conduct that occurred before the date that is eighteen months after the DOL
issues final regulations required by the Act, except as provided in the
anti-avoidance portion of the regulations. The regulations, which were proposed
by the DOL on December 22, 1997, will address ERISA's application to the general
account assets of insurers attributable to contracts issued on or before
December 31, 1998 that are not guaranteed benefit contracts. The conference
report relating to the Act states that contracts issued after December 31, 1998
that are not guaranteed benefit contracts will be subject to ERISA's fiduciary
obligations. The Company is not currently able to predict how these matters may
ultimately affect its businesses.
<PAGE>   26

Page 26

HMO and Insurance Holding Company Laws

A number of states, including Connecticut, regulate affiliated groups of HMOs
and insurers such as the Company under holding company statutes. These laws may
require these companies to maintain certain levels of equity. For information
regarding restrictions on certain payments of dividends or other distributions
by HMO and insurance company subsidiaries of the Company, see MD&A - Liquidity
and Capital Resources in the Annual Report. Some of these laws also regulate
changes in control (as do Connecticut corporate laws), and other matters such as
transactions with affiliates. See also Note 16 of Notes to Financial Statements
in the Annual Report.

Insurance Company Guaranty Fund Assessments

Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for certain
obligations of insolvent insurance companies to policyholders and claimants. The
after-tax charges to earnings for guaranty fund obligations for the years ended
December 31, 1997, 1996 and 1995 were $5 million, $4 million and $8 million,
respectively. While the Company has historically recovered more than half of
guaranty fund assessments through statutorily permitted premium tax offsets,
significant increases in assessments could jeopardize future efforts to recover
such assessments. For information regarding certain other potential regulatory
changes relating to the Company's businesses, see MD&A - Forward-Looking
Information/Risk Factors.

b.  NAIC IRIS Ratios

The NAIC IRIS ratios cover 12 categories of financial data with defined usual
ranges for each category. The ratios are intended to provide insurance
regulators "early warnings" as to when a given company might warrant special
attention. An insurance company may fall out of the usual range for one or more
ratios and such variances may result from specific transactions that are in
themselves immaterial or eliminated at the consolidated level. In 1997, none of
Aetna Inc.'s significant insurance subsidiaries had more than two IRIS ratios
that were outside of the NAIC usual ranges.

Management does not expect that any of the Company's significant subsidiaries
will have more than two IRIS ratios outside of the NAIC usual ranges for 1998.
<PAGE>   27

Page 27

See MD&A - Liquidity and Capital Resources in the Annual Report for additional
discussion regarding solvency regulation.

c.   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' ratios of
earnings to fixed charges and ratios of earnings to combined fixed charges and
preferred stock dividends for the years indicated:

<TABLE>
<CAPTION>
(Millions)                             1997        1996       1995       1994      1993
                                       ----        ----       ----       ----      ----
<S>                                    <C>         <C>        <C>        <C>        <C>
Aetna Inc.

Ratio of Earnings to Fixed Charges     5.74        2.45       4.97       4.74       (a)
Ratio of Earnings to Combined Fixed
  Charges and Preferred Stock
  Dividends                            4.46        2.10       4.97       4.74       (a)
</TABLE>

(a)   The Company reported a pretax loss from continuing operations in 1993
      which was inadequate to cover fixed charges by $1.0 billion.

<TABLE>
<CAPTION>
(Millions)                             1997        1996
                                       ----        ----
<S>                                    <C>         <C> 
Aetna Services, Inc.

Ratio of Earnings to Fixed Charges     5.78        2.44
Ratio of Earnings to Combined Fixed
  Charges and Preferred Stock
  Dividends                            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. (See Note
14 of Notes to Financial Statements in the Annual Report.) During 1993, 1994 and
1995, there was no preferred stock outstanding. 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.

d.  Trademarks

The trademarks Aetna (Registered Trademark), Aetna U.S. Healthcare (Trademark
application pending), U.S. Healthcare (Registered Trademark), and Aetna
Retirement Services (Registered Trademark), together with the corresponding
design logos are owned by the Company. The Company considers these trademarks
and its other trademarks and trade names important in the operation of its
business. However, the business of the Company is not dependent on any
individual trademark or trade name.
<PAGE>   28

Page 28

e.  Ratings

The ratings of certain of Aetna Inc.'s 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)**
   February 4, 1997                                         *           A           A2           A-
   February 4, 1998                                         *           A           A2           A
Aetna Services, Inc.(commercial paper)**                                                    
   February 4, 1997                                         *           D-1         P-1          A-2
   February 4, 1998                                         *           D-1         P-1          A-1
Aetna Life Insurance Company(claims paying)                                                 
   February 4, 1997                                         A           AA-         Aa3          A
   February 4, 1998                                         A           AA-         A1           A+
Aetna Life Insurance and Annuity Company(claims paying)                                     
   February 4, 1997                                         A+          AA+         Aa2          AA-
   February 4, 1998                                         A+          AA+         Aa3          AA-
</TABLE>

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

In addition, certain of the Company's HMO subsidiaries are rated on their
claims paying ability by A.M. Best.  All such ratings are in the "Excellent" or
"Superior" categories.

f.  Miscellaneous

The Company had approximately 27,100 domestic employees at December 31, 1997. In
addition, the Company had approximately 13,200 international employees at
December 31, 1997 in its majority and wholly owned non-U.S. subsidiaries.

Management believes that the Company's computer facilities, systems and related
procedures are adequate to meet its business needs. The Company's data
processing systems and backup and security policies, practices and procedures
are regularly evaluated by the Company's management and its internal auditors
and are modified as considered necessary. See MD&A for information regarding the
Company's efforts to prepare its systems, applications and facilities to
accommodate Year 2000 date-sensitive information.

The federal government is a significant customer of the Aetna U.S. Healthcare
segment and the Company, accounting for approximately 13% of the Company's
consolidated revenue in 1997. No other customer accounted for 10% or more of the
Company's consolidated revenues in 1997. No other segment of the Company's
business is dependent upon a single customer or a few customers, the loss of
which would have a significant effect on the earnings of the segment. See Note
17 of Notes to Financial Statements in the Annual Report regarding segment
information.

The loss of business from any one, or a few, independent brokers or agents would
not have a material adverse effect on the earnings of the Company or any of its
segments.
<PAGE>   29

Page 29

Item 2.  Properties.

The home office of the Company is a building complex located at 151 Farmington
Avenue, Hartford, Connecticut, with approximately 1.6 million square feet. The
Company and certain of its subsidiaries also own or lease other space in the
greater Hartford area, Blue Bell, Pennsylvania and Fairfield, New Jersey, as
well as various field locations throughout the country. The Company believes its
properties are adequate and suitable for its business as presently conducted.

The foregoing does not include numerous investment properties held by the
Company in its general and separate accounts.

Item 3.  Legal Proceedings.

Purported 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 2, 1997 by Pamela Goodman and
Michael J. Oring. Other purported 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 Complaints seek, among other remedies,
unspecified damages resulting from defendants' alleged violations of federal
securities laws. The Complaints allege 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 litigation is still in
the preliminary stages, and the Company is defending the actions vigorously.

The Company also is involved in numerous other lawsuits arising, for the most
part, in the ordinary course of its business operations including litigation in
its health business concerning benefit plan coverage and other decisions made by
the Company, and alleged medical malpractice by participating providers. While
the ultimate outcome of these other lawsuits cannot be determined at this time,
after consideration of the defenses available to the Company and any related
reserves established, they 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.

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

None.
<PAGE>   30

Page 30

EXECUTIVE OFFICERS OF AETNA INC.*

The Chairman of the Company is elected and all other executive officers listed
below are appointed by the Board of Directors of the Company at its Annual
Meeting each year to hold office until the next Annual Meeting of the Board or
until their successors are elected or appointed. None of these officers have
family relationships with any other executive officer or Director.

<TABLE>
<CAPTION>
                                                                        Business Experience
Name of Officer               Principal Position             Age *      During Past Five Years *
---------------               ------------------             ---        ----------------------
<S>                           <C>                             <C>          <C>
Richard L. Huber              Chairman, Chief Executive       61           (1)
                              Officer and President

Thomas J. Calvocoressi        Vice President and
                              General Counsel                 44           (2)

Michael J. Cardillo           Executive Vice President,
                              Aetna U.S. Healthcare**         54           (3)

Frederick C. Copeland, Jr.    Executive Vice President,
                              International**                 56           (4)

Timothy A. Holt               Vice President,
                              Aetna Investment Management     44           (5)
                              Group

Thomas J. McInerney           Executive Vice President,**
                              Aetna Retirement Services       41           (6)
</TABLE>

*     As of March 2, 1998.

**    Executive Vice Presidents, in conjunction with certain other senior
      officers, are responsible for assisting the Chief Executive Officer in
      setting policy and overall direction for the Company.
<PAGE>   31

Page 31

(1)   Mr. Huber was named Chairman on March 1, 1998 and Chief Executive Officer
      and President on July 28, 1997. He had served as Vice Chairman for
      Strategy and Finance since February 1995. He served as President and Chief
      Operating Officer of Grupo Wasserstein Perella from September 1994 to
      February 1995 and as Vice Chairman of Continental Bank from 1990 to
      September 1994.

(2)   Mr. Calvocoressi assumed his current position on January 1, 1997. From
      March 1996 to January 1997, he served as Vice President and Deputy General
      Counsel of Aetna. He served as Vice President and Corporate Counsel from
      August 1994 to March 1996, as Vice President and Counsel from July 1993 to
      August 1994 and as Counsel, Office of General Counsel, from July 1991 to
      July 1993.

(3)   Mr. Cardillo has served in his current position since July 19, 1996. He
      also serves as President of Aetna U.S. Healthcare Inc. a position he
      assumed in March 1997 after serving as Co-President since July 19, 1996.
      Mr. Cardillo had been Co-President of U.S. Healthcare, Inc. since 1995 and
      Principal Marketing Officer since 1989.

(4)   Mr. Copeland assumed his current position on July 19, 1996. He also serves
      as President and Chief Executive Officer of Aetna International, Inc., a
      position he assumed in April 1996, after having served as President of
      Aetna International since July 1995. From January 1993 to July 1995, he
      served as Chairman, President and Chief Executive Officer of Fleet Bank,
      N.A., Connecticut. From September 1987 to January 1993, he served as
      President and Chief Executive Officer of Citibank Canada.

(5)   Mr. Holt assumed his current position on September 26, 1997, having served
      as Vice President and Chief Financial Officer of Aetna Retirement Services
      since 1996. He served as Vice President, Portfolio Management Group, from
      1992 to 1996.

(6)   Mr. McInerney assumed his current position on August 18, 1997, having
      served as Vice President, Strategic Planning, since March 1997. He also
      currently serves as President, Aetna Retirement Services, Inc. From 1996
      to 1997, he served as Vice President, National Accounts, for Aetna Health
      Plans and then as Vice President, National Accounts and Sales and
      Marketing, for the successor business, Aetna U.S. Healthcare. During 1995
      and 1996, he also served as Vice President, Corporate Strategy. From 1992
      to 1996, Mr. McInerney served as Vice President, Guaranteed Products.
<PAGE>   32

Page 32

PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

Aetna Inc.'s common stock is listed on the New York Stock Exchange. Its symbol
is AET. As of January 31, 1998, there were 20,910 record holders of the common
stock.

The dividends declared and the high and low sales prices with respect to the
Company's common stock for each quarterly period for the past two years are
incorporated herein by reference from "Quarterly Data" in the Annual Report.

Information regarding restrictions on the Company's present and future ability
to pay dividends is incorporated herein by reference from Note 16 of Notes to
Financial Statements and MD&A - Liquidity and Capital Resources in the Annual
Report.

Item 6.  Selected Financial Data.

The information contained in "Selected Financial Data" in the Annual Report is
incorporated herein by reference.

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

The information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Annual Report is incorporated herein
by reference.

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

The information contained in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-General Account Investments" in the Annual
Report is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data.

The 1997 Consolidated Financial Statements and the report of the registrant's
independent auditors and the unaudited information set forth under the caption
"Quarterly Data" are incorporated herein by reference to the Annual Report.

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

None.
<PAGE>   33

Page 33

PART III

Item 10.  Directors and Executive Officers of the Registrant.

Information concerning Executive Officers is included in Part I pursuant to
General Instruction G to Form 10-K.

Information concerning Directors and concerning compliance with Section 16 (a)
of the Securities Exchange Act of 1934 is incorporated herein by reference to
the Proxy Statement.

Item 11.  Executive Compensation.

The information under the captions "Director Compensation in 1997" and 
"Executive Compensation" in the Proxy Statement is incorporated herein by 
reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

The information under the caption "Security Ownership of Certain Beneficial
Owners, Directors, Nominees and Executive Officers" in the Proxy Statement is
incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions.

The information under the caption "Certain Transactions and Relationships" in
the Proxy Statement is incorporated herein by reference.

PART IV

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

(a) The following documents are filed as part of this report:

1.  Financial statements:

The Consolidated Financial Statements and the report of the registrant's
independent auditors are incorporated herein by reference to the Annual Report.

2. Financial statement schedules:

The supporting schedules of the consolidated entity are included in this Item
14. See Index to Financial Statement Schedules on page 40.
<PAGE>   34

Page 34

3.  Exhibits: 

(3)  Articles of Incorporation and By-Laws.

Aetna Inc. Amended and Restated Certificate of Incorporation, incorporated
herein by reference to the Company's Registration Statement on Form S-4 (File
No. 333-5791) filed on June 12, 1996.

Aetna Inc. Bylaws, as amended, incorporated herein by reference to the Company's
Form 10-K filed on February 28, 1997.

(4)  Instruments defining the rights of security holders, including indentures.

Senior Indenture, dated July 1, 1996, between the Company, Aetna Services, Inc.
(formerly Aetna Life and Casualty Company), and State Street Bank and Trust
Company of Connecticut, National Association, as Trustee, incorporated herein
reference to the Company's Form 10-Q filed on October 25, 1996.

Form of Subordinated Indenture between Aetna Services, Inc., Aetna Inc. and
State Street Bank and Trust Company of Connecticut, National Association, as
Trustee (including the forms of Subordinated Debt Securities and Subordinated
Debt Guarantees), incorporated herein by reference to the Company's and Aetna
Services, Inc.'s Registration Statement on Form S-3 (File No. 333-07167) filed
on June 28, 1996.

Designations, Rights and Preferences of 6.25% Class C Voting Preferred Stock,
incorporated herein by reference to the Company's 8-K filed on July 26, 1996.

Aetna Inc. Rights Agreement, incorporated herein by reference to the Company's
8-K filed on July 26, 1996.

Indenture, dated as of October 15, 1986, between Aetna Services, Inc. and The
First National Bank of Boston, Trustee, incorporated herein by reference to
Aetna Services, Inc.'s 1992 Form 10-K.

First Indenture Supplement, dated as of August 1, 1996, to Indenture, dated as
of October 15, 1986, between Aetna Services, Inc. and State Street Bank and
Trust Company, as Successor Trustee, incorporated herein by reference to the
Company's Form 10-Q filed on October 25, 1996.

Indenture, dated as of August 1, 1993, between Aetna Services, Inc. and State
Street Bank and Trust Company of Connecticut, National Association, as Trustee,
incorporated herein by reference to Aetna Services, Inc.'s Registration
Statement on Form S-3 (File No. 33-50427).

First Indenture Supplement, dated as of August 1, 1996, to the Indenture dated
as of August 1, 1993 between Aetna Services, Inc. and State Street Bank and
Trust Company of Connecticut, National Association, as Trustee, incorporated
herein by reference to the Company's Form 10-Q filed on October 25, 1996.

Written Action, dated as of November 15, 1994, establishing the terms of Series
A Preferred Securities of Aetna Capital L.L.C., incorporated herein by reference
to Aetna Services, Inc.'s Form 8-K filed on November 22, 1994.
<PAGE>   35

Page 35

3.  Exhibits (Continued): 

Subordinated Indenture, dated as of November 1, 1994, between Aetna Services,
Inc. and The First National Bank of Chicago, as Trustee, incorporated herein by
reference to Aetna Services, Inc.'s Form 8-K filed on November 22, 1994.

First Indenture Supplement, dated as of August 1, 1996, to the Indenture, dated
as of November 1, 1994, between Aetna Services, Inc. and The First National Bank
of Chicago, as Trustee, incorporated herein by reference to the Company's Form
10-Q filed on October 25, 1996.

Payment and Guarantee Agreement, dated November 22, 1994, of Aetna Services,
Inc. with respect to Aetna Capital L.L.C., incorporated herein by reference to
Aetna Services, Inc.'s Form 8-K filed on November 22, 1994.

Payment and Guarantee Agreement, dated as of August 1, 1996, of Aetna Inc. with
respect to Aetna Capital L.L.C., incorporated herein by reference to the
Company's Form 10-Q filed on October 25, 1996.

Amendment No. 1, dated as of August 1, 1996, to the Fiscal Agency Agreement,
dated as of July 17, 1986, between Aetna Services, Inc. and State Street Bank
and Trust Company, as successor Fiscal Agent, incorporated herein by reference
to the Company's Form 10-Q filed on October 25, 1996.

(10)  Material contracts.

Employment Agreement, dated as of March 30, 1996, by and between U.S.
Healthcare, Inc. and Joseph Sebastianelli, incorporated herein by reference to
the Company's Form 10-Q filed on October 25, 1996.**

Employment Agreement, dated as of March 30, 1996, by and between U.S.
Healthcare, Inc. and Michael Cardillo, incorporated herein by reference to the
Company's Form 10-Q filed on October 25, 1996.**

Stock Purchase Agreement, dated as of November 28, 1995, between The Travelers
Insurance Group Inc. and Aetna Services, Inc. relating to the purchase and sale
of 100% of the Common Stock of The Aetna Casualty and Surety Company and The
Standard Fire Insurance Company, incorporated herein by reference to Aetna
Services, Inc.'s 1995 Form 10-K.

Letter Agreement, dated as of January 19, 1995, between Aetna Services, Inc. and
Richard L. Huber, incorporated herein by reference to Aetna Services, Inc.'s
1995 Form 10-K.**

Employment Agreement, dated as of January 29, 1996, between Aetna Services, Inc.
and Ronald E. Compton, incorporated herein by reference to Aetna Services,
Inc.'s 1995 Form 10-K.**

Employment Agreement, dated as of December 19, 1995, between Aetna Services,
Inc. and Daniel P. Kearney, incorporated herein by reference to Aetna Services,
Inc.'s 1995 Form 10-K.**

The 1984 Stock Option Plan of Aetna Life and Casualty Company and amendments
thereto, incorporated herein by reference to the 1992 Form 10-K. **

Letter Agreement, dated as of January 31, 1996, between Aetna Services, Inc. and
The Travelers Insurance Group Inc., incorporated herein by reference to Aetna
Services, Inc.'s Form 10-Q filed on April 26, 1996. 
<PAGE>   36

Page 36

3.  Exhibits (Continued): 

Amendment, dated as of April 2, 1996, to Stock Purchase Agreement, dated as of
November 28, 1995, between Aetna Services, Inc. and The Travelers Insurance
Group Inc., incorporated herein by reference to Aetna Services, Inc.'s Form 10-Q
filed on April 26, 1996.

Registration Rights Agreement, dated as of March 30, 1996, between the Company
and Leonard Abramson, incorporated herein by reference to Aetna Services, Inc.'s
Form 10-Q filed on April 26, 1996.

Amendment No. 1, dated as of May 30, 1996, to the Registration Rights Agreement,
dated as of March 30, 1996, between the Company and Leonard Abramson,
incorporated herein by reference to the Company's Registration Statement on Form
S-4 (Registration No. 333-5791) filed on June 12, 1996.

Amended and Restated Agreement, dated as of May 30, 1996, between the Company
and Leonard Abramson, incorporated herein by reference to the Company's
Registration Statement on Form S-4 (Registration No. 333-5791) filed on June 12,
1996.

The Aetna Inc. 1996 Stock Incentive Plan, incorporated herein by reference to
the Company's Registration Statement on Form S-4 (Registration No. 333-5791)
filed on June 12, 1996.**

The Aetna Inc. Annual Incentive Plan, incorporated herein by reference to the
Company's Registration Statement on Form S-4 (Registration No. 333-5791) filed
on June 12, 1996.**

The Aetna Inc. Non-Employee Director Deferred Stock and Deferred Compensation
Plan, as amended, incorporated herein by reference to Company's Form 10-K filed
on February 28, 1997.**

The Supplemental Pension Benefit Plan for Certain Employees of Aetna Services,
Inc., incorporated herein by reference to the Company's Form 10-Q filed on
October 25, 1996.**

Amendment No. 1, dated March 1, 1996 to Letter Agreement, dated January 19,
1995, between Aetna Services, Inc. and Richard L. Huber, incorporated herein by
reference to the Company's Registration Statement on Form S-4 (Registration No.
333-5791) filed on June 12, 1996.**

Amended and Restated U.S. Healthcare, Inc. Savings Plan, incorporated herein by
reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.**

Amended and Restated Pension Plan for Employees of U.S. Healthcare, Inc.,
incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed
on March 25, 1996.**

Split Dollar Insurance Agreement, dated as of February 1, 1990, among Madlyn K.
Abramson, Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith
Abramson and David B. Soll, and U.S. Healthcare, Inc., and the related
Collateral Assignment Agreement, dated as of February 1, 1990, among Madlyn K.
Abramson, Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith
Abramson and David B. Soll, and U.S. Healthcare, Inc., incorporated herein by
reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.
<PAGE>   37

Page 37

3.  Exhibits (Continued): 

Split Dollar Insurance Agreement, dated as of January 21, 1991, among Marcy A.
Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson, David B.
Soll, Jerome Goodman and Edward M. Glickman, and U.S. Healthcare, Inc., and the
related Collateral Assignment Agreement, dated as of January 21, 1991, among
Marcy A. Shoemaker (formerly Marcy Abramson), Nancy Wolfson, Judith Abramson,
David B. Soll, Jerome Goodman and Edward M. Glickman, and U.S. Healthcare, Inc.,
incorporated herein by reference to U.S. Healthcare, Inc.'s 1995 Form 10-K filed
on March 25, 1996.

Description of Deferred Compensation Plan, incorporated herein by reference to
U.S. Healthcare, Inc.'s 1995 Form 10-K filed on March 25, 1996.**

Voting Agreement, dated as of March 30, 1996, among Leonard Abramson, Aetna Life
Insurance Company and Aetna Life Insurance and Annuity Company, incorporated
herein by reference to Aetna Services, Inc.'s Form 10-Q filed on April 26, 1996.

Agreement and Plan of Merger, dated as of March 30, 1996, among Aetna Services,
Inc., U.S. Healthcare, Inc., the Company, Antelope Sub, Inc. and New Merger
Corporation, incorporated herein by reference to Aetna Services, Inc.'s Form
10-Q filed on April 26, 1996.

Amendment No. 1, dated as of May 30, 1996, to the Agreement and Plan of Merger,
dated as of March 30, 1996, among Aetna Services, Inc., U.S. Healthcare, Inc.,
the Company, Antelope Sub. Inc. and New Merger Corporation, incorporated herein
by reference to the Company's Registration Statement on Form S-4 (Registration
No. 333-5791) filed on June 12, 1996.

Aetna Services, Inc. Credit Facility, incorporated herein by reference to Aetna
Services, Inc.'s Report on Form 8-K filed on July 16, 1996.

Notification from Aetna Services, Inc. dated October 22, 1996 electing to reduce
Credit Facility to $1.5 billion, incorporated herein by reference to the
Company's Form 10-K filed on February 28, 1997.

Amendment, dated as of September 4, 1997, to the Amended and Restated Agreement,
dated as of May 30, 1996, between the Company and Leonard Abramson, incorporated
herein by reference to Aetna Inc.'s Form 10-Q filed on November 4, 1997.

Amendment, dated as of September 8, 1997, to Employment Agreement, as of
December 19, 1995, between Aetna Services, Inc. and Daniel P. Kearney,
incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on November 4,
1997.**

Amendment No. 1, dated as of December 31, 1996, to the Supplemental Pension
Benefit Plan for Certain Employees of Aetna Services, Inc., incorporated herein
by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**

Amendment No. 2, dated as of February 28, 1997, to the Supplemental Pension
Benefit Plan for Certain Employees of Aetna Services, Inc., incorporated herein
by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**
<PAGE>   38

Page 38

3.  Exhibits (Continued): 

Employment Agreement, dated as of March 6, 1997, by and between the Company and
Joseph Sabastianelli, incorporated herein by reference to Aetna Inc.'s Form 10-Q
filed on May 6, 1997.**

Amendment dated as of April 9, 1997, to the Amended and Restated Agreement,
dated as of May 10, 1996, between the Company and Leonard Abramson, incorporated
herein by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.

Amendment dated as of July 22, 1996, to Letter Agreement, dated as of January
19, 1995, between the Company and Richard L. Huber incorporated herein by
reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**

Amendment dated as of July 22, 1996, to Employment Agreement, dated as of
January 19, 1995, between the Company and Ronald E. Compton, incorporated herein
by reference to Aetna Inc.'s Form 10-Q filed on May 6, 1997.**

Amendment dated as of July 22, 1996, to Employment Agreement, dated as of
December 19, 1995, between Aetna Services, Inc. and Daniel P. Kearney,
incorporated herein by reference to Aetna Inc.'s Form 10-Q filed on May 6,
1997.**

Employment Agreement, dated as of December 21, 1995, by and between Aetna
Services, Inc. and Frederick C. Copeland, Jr., as amended.**

Employment Agreement, dated as of December 21, 1995, by and between Aetna
Services, Inc. and Thomas McInerney, as amended.**

Description of certain arrangements not embodied in formal documents, as
described under the headings "Director Compensation" and "Executive
Compensation", incorporated herein by reference to the Aetna Services, Inc. 1997
Proxy Statement.

(11) Statement re: computation of per share earnings.

Incorporated herein by reference to Note 1 of Notes to Financial Statements in
the Annual Report.

(12) Statement re: computation of ratios.

Statement re: computation of ratio of earnings to fixed charges for the Company
for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 and Aetna
Services for the years ended December 31, 1997 and 1996.

Statement re: computation of ratio of earnings to combined fixed charges and
preferred stock dividends for the Company for the years ended December 31, 1997,
1996, 1995, 1994 and 1993 and Aetna Services for the years ended December 31,
1997 and 1996.

(13) Annual Report to security holders.

Selected Financial Data, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Consolidated Financial Statements and the
report of the Company's independent auditors, and unaudited Quarterly Data from
the Annual Report.
<PAGE>   39

Page 39

3.  Exhibits (Continued): 

(21)  Subsidiaries of the registrant.

A listing of subsidiaries of Aetna Inc.

(23)  Consents of experts and counsel.

Consent of Independent Auditors to Incorporation by Reference in the
Registration Statements on Form S-3 and Form S-8.

(24)  Powers of attorney.

(27)  Financial data schedule.

(b)   Reports on Form 8-K

      None

*     Exhibits other than those listed are omitted because they are not required
      or are not applicable. Copies of exhibits are available without charge by
      writing to the Office of the Corporate Secretary, Aetna Inc., 151
      Farmington Avenue, Hartford, Connecticut 06156.

**    Management contract or compensatory plan or arrangement.
<PAGE>   40

Page 40

INDEX TO FINANCIAL STATEMENT SCHEDULES
AETNA INC.

                                                                            Page
                                                                            ----

Independent Auditors' Report                                                  41

   I  Summary of Investments - Other than Investments in Affiliates as of
      December 31, 1997                                                       42

  II  Condensed Financial Information of 
      the Registrant:

      Aetna Inc. as of and for the years ended
      December 31, 1997 and 1996                                              43

      Aetna Services, Inc. (formerly Aetna Life
      and Casualty Company) for the year
      ended December 31, 1995                                                 49

 III  Supplementary Insurance Information as of
      and for the years ended December 31, 1997,
      1996 and 1995                                                           53

  IV  Reinsurance                                                             56

   V  Valuation and Qualifying Accounts and Reserves
      for the years ended December 31, 1997, 1996
      and 1995                                                                57

Certain of the required information is shown in the Financial Statements or
Notes thereto in the Annual Report. Certain information has been omitted from
the schedules filed because the information is not applicable.

Certain reclassifications have been made to 1996 and 1995 financial information
to conform to 1997 presentation.
<PAGE>   41

Page 41

                          INDEPENDENT AUDITORS' REPORT

The Shareholders and Board of Directors
Aetna Inc.:


Under date of February 3, 1998, we reported on the consolidated balance sheets
of Aetna Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997, as contained in
the 1997 annual report to shareholders. These consolidated financial statements
and our report thereon are incorporated by reference in the annual report on
Form 10-K for the year 1997. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.

In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.


                                       /s/ KPMG Peat Marwick LLP


Hartford, Connecticut
February 3, 1998
<PAGE>   42

Page 42

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE I

          Summary of Investments - Other than Investments in Affiliates

                             As of December 31, 1997

<TABLE>
<CAPTION>
                                                                       Amount
                                                                     at which
                                                                 shown in the
Type of Investment                          Cost        Value*  balance sheet
                                       ---------    ---------   -------------
(Millions)
<S>                                    <C>          <C>             <C>      
Debt securities:
   Bonds:
     United States Government
       and government agencies
       and authorities                 $ 3,762.3    $ 3,928.6       $ 3,928.6
     States, municipalities and
       political subdivisions              190.7        206.6           206.6

     U.S. Corporate securities:
       Utilities                         2,382.6      2,505.5         2,505.5
       Financial                         5,049.4      5,216.8         5,216.8
       Transportation/capital goods      2,417.7      2,589.4         2,589.4
       Health care/consumer products     1,641.5      1,735.3         1,735.3
       Natural resources                 1,467.1      1,559.9         1,559.9
       Other                             1,418.9      1,506.2         1,506.2
                                       ---------    ---------       ---------
        Total U.S. Corporate
         securities                     14,377.2     15,113.1        15,113.1
     Foreign:
       Government, including political
         subdivisions                    2,514.7      2,629.8         2,629.8
       Utilities                           612.4        689.1           689.1
       Other                             3,714.8      3,830.4         3,830.4
                                       ---------    ---------        --------
        Total foreign securities         6,841.9      7,149.3         7,149.3
     Residential mortgage-backed
      securities:
       Pass-throughs                     1,707.5      1,812.5         1,812.5
       Collateralized mortgage
        obligations                      2,549.6      2,710.4         2,710.4
                                       ---------    ---------       ---------
        Total residential
         mortgage-backed securities      4,257.1      4,522.9         4,522.9
     Commercial/Multifamily
      mortgage-backed securities         1,586.2      1,622.0         1,622.0
     Other asset-backed securities       1,612.9      1,635.1         1,635.1
                                       ---------    ---------       ---------
        Total bonds                     32,628.3     34,177.6        34,177.6
   Redeemable preferred stocks              65.7         67.4            67.4
                                       ---------    ---------       ---------
        Total debt securities          $32,694.0    $34,245.0       $34,245.0
                                       =========    =========       =========

Equity securities:
   Common stocks:
     Public utilities                  $    12.4    $    17.5       $    17.5
     Banks, trust and insurance
      companies                             92.8        232.2           232.2
     Industrial, miscellaneous
      and all other                        561.5        616.7           616.7
                                       ---------    ---------       ---------
        Total common stocks                666.7        866.4           866.4
   Nonredeemable preferred stocks          157.7        175.0           175.0
                                       ---------    ---------       ---------
        Total equity securities        $   824.4    $ 1,041.4       $ 1,041.4
                                       =========    =========       =========

Short-term investments                 $ 1,003.9                    $ 1,003.9
Mortgage loans                           4,207.8                      4,207.8
Real estate                                369.5                        369.5
Policy loans                               746.9                        746.9
Other                                      574.8(1)                     947.4(2)
                                       ---------                    ---------

        Total investments              $40,421.3                    $42,561.9
                                       =========                    =========
</TABLE>

----------

*     See Notes 1 and 4 of Notes to Financial Statements in the Company's 1997
      Annual Report.

(1)   Excludes investments in affiliates of $372.6 million.
(2)   Includes investments in affiliates of $372.6 million.
<PAGE>   43

Page 43

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                                   AETNA INC.

                              Statements of Income

<TABLE>
<CAPTION>
For the year ended December 31,
(Millions)                               1997         1996
                                         ----         ----
<S>                                      <C>          <C>    
Net investment income                    $    .5      $   1.2
                                         -------      -------

       Total revenue                          .5          1.2

Operating expenses                             -           .2
                                         -------      -------
       Total expenses                          -           .2
                                         -------      -------
Income before income taxes
 and equity in earnings of affiliates         .5          1.0
Income taxes                                  .1           .5
Equity in earnings of affiliates           900.7        204.6
                                         -------      -------

Income from continuing operations          901.1        205.1

Discontinued Operations, net of tax:
 Income from operations                     -           182.2
 Gain on sale                               -           263.7
                                         -------      -------
Net income                               $ 901.1      $ 651.0
                                         =======      =======
</TABLE>

----------


See Notes to Condensed Financial Statements.
<PAGE>   44

Page 44

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                                   AETNA INC.

                                 Balance Sheets

<TABLE>
<CAPTION>
As of December 31,
(Millions, except share data)                 1997           1996
                                              ----           ----
       ASSETS
<S>                                           <C>            <C>      
Investments:
   Short-term investments                     $     3.2      $     8.8
   Investments in affiliates                   11,049.2       10,842.3
                                              ---------      ---------
     Total investments                         11,052.4       10,851.1
Cash and cash equivalents                          22.1           26.9
Due from affiliates                                 5.4            6.0
Affiliate dividends receivable                    200.0          100.0
Deferred income taxes                               1.1            4.0
                                              ---------      ---------
Total assets                                  $11,281.0      $10,988.0
                                              =========      =========

       LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
   Dividends payable to shareholders          $    36.1      $    36.9
   Other liabilities                               29.3           40.1
   Current income taxes                            20.2           21.3
                                              ---------      ---------
         Total liabilities                         85.6           98.3
                                              ---------      ---------

Shareholders' Equity:
   Class C Voting Mandatorily
    Convertible Preferred Stock 
     ($.01 par value; 15,000,000 shares 
     authorized; 11,655,206 in 1997 and 
     11,655,546 in 1996 issued and
     outstanding)                                 865.4          865.4
   Common stock ($.01 par value; 500,000,000
     shares authorized; 145,794,844 and
     150,084,799 issued and outstanding in
     1997 and 1996)                             3,644.4        4,032.8
   Accumulated other comprehensive income         307.1          340.0
   Retained earnings                            6,378.5        5,651.5
                                              ---------      ---------
       Total shareholders' equity              11,195.4       10,889.7
                                              ---------      ---------

         Total liabilities and
            shareholders' equity              $11,281.0      $10,988.0
                                              =========      =========
</TABLE>

----------


See Notes to Condensed Financial Statements.
<PAGE>   45

Page 45

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                                   AETNA INC.

                       Statements of Shareholders' Equity

<TABLE>
<CAPTION>
                                                                                               Class C
                                                              Accumulated Other                Voting
                                                            Comprehensive Income               Mandatorily
For the two years ended                                     Unrealized                         Convertible
December 31, 1997                                Retained   Gains(Losses)         Foreign      Preferred      Common
(Millions, except share data)       Total        Earnings   on Securities         Currency     Stock          Stock
-----------------------------------------------------------------------------------------------------------------------
<S>                                 <C>          <C>        <C>                   <C>          <C>            <C>
Balances at December 31, 1995       $ 7,272.8    $ 5,195.6  $  797.0              $ (155.9)       -           $ 1,436.1
------------------------------------===================================================================================
Comprehensive income:
 Net income                             651.0        651.0
 Other comprehensive loss,
  net of tax:
  Unrealized losses on
   securities (($527.6) pretax)        (342.8)                (342.8)
  Foreign currency ($64.2 pretax)        41.7                                         41.7
                                    ---------
 Other comprehensive loss              (301.1)
                                    ---------
Total comprehensive income              349.9
                                    =========
Issued for U.S. Healthcare
 merger:
  Class C Voting mandatorily
   convertible preferred stock
   (11,655,546 shares)                  865.4                                                    865.4
  Common shares
      (34,988,615 shares)             2,580.1                                                                   2,580.1
  Stock options                          24.8                                                                      24.8
Common stock issued for benefit
   plans (1,563,491 shares)              75.1                                                                      75.1
Repurchase of common shares
   (1,194,400 shares)                   (83.3)                                                                    (83.3)
Common stock dividends                 (170.0)      (170.0)
Preferred stock dividends               (25.1)       (25.1)
                                    -----------------------------------------------------------------------------------
Balances at December 31, 1996       $10,889.7     $5,651.5  $  454.2              $ (114.2)    $ 865.4        $ 4,032.8
------------------------------------===================================================================================
Comprehensive income:
 Net income                             901.1        901.1
 Other comprehensive loss,
  net of tax:
  Unrealized gains on securities
   ($81.8 pretax)                        49.9                   49.9
  Foreign currency (($127.3)
   pretax)                              (82.8)                                       (82.8)
                                    ---------
 Other comprehensive loss               (32.9)
                                    ---------
Total comprehensive income              868.2
                                    =========
Common stock issued for benefit
 plans (1,883,945 shares)               134.7                                                                     134.7
Repurchase of common shares
 (6,173,900 shares)                    (523.1)                                                                   (523.1)
Common stock dividends                 (118.6)      (118.6)
Preferred stock dividends               (55.5)       (55.5)
                                    -----------------------------------------------------------------------------------
Balances at December 31, 1997       $11,195.4     $6,378.5  $  504.1              $ (197.0)    $ 865.4        $ 3,644.4
------------------------------------===================================================================================
</TABLE>


See Notes to Financial Statements.
<PAGE>   46

Page 46

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                                   AETNA INC.

                            Statements of Cash Flows

<TABLE>
<CAPTION>
For the years ended December 31,
(Millions)                                          1997         1996
                                                    ----         ----
<S>                                                 <C>          <C>      
Cash Flows from Operating Activities:
 Net income                                         $  901.1     $   651.0
 Adjustments to reconcile net income
  to net cash (used for) provided by
  operating activities:
   Income from Discontinued Operations                     -        (182.2)
   Equity in earnings of affiliates                   (901.4)       (204.6)
   Gain on sale of Discontinued Operations                 -        (263.7)
   Other, net                                           (8.4)         27.7
                                                     -------       -------
     Net cash (used for) provided by
     operating activities                               (8.7)         28.2
                                                     -------       -------
Cash Flows from Investing Activities:
 Proceeds from sales of short-term investments         619.4         184.4
 Cost of investments in short-term investments        (613.8)       (193.2)
 Cost of investment in U.S. Healthcare                     -      (5,243.9)
 Capital contributions to affiliates                  (421.0)       (500.0)
 Dividends received from affiliates                  1,007.2       5,938.0
 Other, net                                            (24.6)         35.2
                                                     -------       -------
   Net cash provided by investing activities           567.2         220.5
                                                     -------       -------
Cash Flows from Financing Activities:
 Common stock issued under benefit plans               134.7          75.1
 Common shares repurchased                            (523.1)        (83.3)
 Dividends paid to shareholders                       (174.9)       (237.3)
                                                     -------       -------
   Net cash used for financing activities             (563.3)       (245.5)
                                                     -------       -------
Net (decrease) increase in cash and cash
 equivalents                                            (4.8)          3.2
Cash and cash equivalents, beginning of year            26.9          23.7
                                                     -------       -------
Cash and cash equivalents, end of year              $   22.1       $  26.9
                                                    ========       =======
Supplemental disclosure of cash flow
 information:
    Interest paid                                   $      -       $      -
                                                    ========       ========
    Income taxes received, net                      $    1.0       $     .5
                                                    ========       ========
</TABLE>

----------


See Notes to Condensed Financial Statements.
<PAGE>   47

Page 47

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                                   AETNA INC.

                     Notes to Condensed Financial Statements

1.  Background of Organization

Aetna Inc. was incorporated under the Stock Corporation Act of the state of
Connecticut on March 25, 1996 for the purpose of effecting the combination of
Aetna Services, Inc. ("Aetna Services")(formerly Aetna Life and Casualty
Company) and Aetna U.S. Healthcare, Inc. ("Aetna U.S. Healthcare") (formerly
U.S. Healthcare, Inc. ("U.S. Healthcare")) in accordance with the terms of the
Agreement and Plan of Merger dated as of March 30, 1996. Aetna's merger with
Aetna U.S. Healthcare was consummated on July 19, 1996. As a result of the
merger, Aetna Services and Aetna U.S. Healthcare are each direct wholly owned
subsidiaries of Aetna Inc.

The accompanying condensed financial statements include for 1996 the results of
operations of Aetna Services from January 1, 1996 and of U.S. Healthcare from
July 19, 1996 which are reflected as Equity in Earnings of Affiliates on the
Statement of Income. These financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes thereto in the Annual
Report.

2.  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 1/2% Subordinated Debentures due
2024 (the "Subordinated Debentures") issued to Aetna Capital L.L.C., a wholly
owned subsidiary of Aetna Services. Aetna Capital L.L.C. has issued $275 million
of redeemable preferred stock and the Subordinated Debentures represent
substantially all of the assets of Aetna Capital L.L.C. See Note 13 to the
Consolidated Financial Statements in the Annual Report for a description of
outstanding debt.

3.  Dividends

Cash dividends paid to Aetna Inc. by Aetna Services and Aetna U.S. Healthcare
for the year ended December 31, 1997 were $.8 billion and $.3 billion,
respectively, and for the year end December 31, 1996 were $5.3 billion and $.6
billion, respectively. The 1996 dividends included the dividend by Aetna
Services of the net proceeds from the sale of the property-casualty operations.
The 1996 dividends from Aetna Services were used to finance the cash portion of
the U.S. Healthcare merger consideration. See Note 16 to the Consolidated
Financial Statements in the Annual Report for a description of dividend
restrictions.
<PAGE>   48

Page 48

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                                   AETNA INC.

               Notes to Condensed Financial Statements (Continued)

4.  New Accounting Standards

See Note 1 to the Consolidated Financial Statements in the Annual Report for a
description of new accounting standards.

5.  Discontinued Products

See Note 9 to the Consolidated Financial Statements in the Annual Report for a
description of discontinued products.

6.  Other Acquisitions and Dispositions

See Note 3 to the Consolidated Financial Statements in the Annual Report for a
description of other acquisitions and dispositions.

7.  Severance and Facilities Charges

See Note 8 to the Consolidated Financial Statements in the Annual Report for a
description of the 1996 severance and facilities charges.

8.  Income Taxes

See Note 10 to the Consolidated Financial Statements in the Annual Report for a
description of income taxes.
<PAGE>   49

Page 49

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                              AETNA SERVICES, INC.

                               Statement of Income

<TABLE>
<CAPTION>
For the year ended December 31,
(Millions)                               1995
                                         ----
<S>                                      <C>    
Premiums                                 $   1.2
Net investment income                        1.0
Net realized capital losses                  (.2)
                                         -------

       Total revenue                         2.0

Current and future benefits                   .4
Operating expenses                          39.2
Interest expense                           108.3
                                         -------

       Total benefits and expenses         147.9
                                         -------

Losses before income taxes
 (benefits) and equity in earnings
 of affiliates                            (145.9)
Income taxes (benefits):
  Current                                  (57.2)
  Deferred                                   3.1
Equity in earnings of affiliates           565.7
                                         -------

Income from continuing operations          473.9

Loss from Discontinued Operations,
 net of tax                               (222.2)
                                         -------

Net income                               $ 251.7
                                         =======
</TABLE>

----------


See Notes to Condensed Financial Statements.
<PAGE>   50

Page 50

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                              AETNA SERVICES, INC.

                        Statement of Shareholders' Equity

<TABLE>
<CAPTION>
                                                                     Accumulated Other
                                                                    Comprehensive Income
                                                                    --------------------
                                                                   Unrealized
The year ended December 31, 1995                      Retained    Gains (Losses)   Foreign     Common
(Millions, except share data)             Total       Earnings    on Securities    Currency    Stock
--------------------------------------------------------------------------------------------------------
<S>                                       <C>         <C>          <C>             <C>         <C>      
Balances at December 31, 1994             $ 5,503.0   $ 5,259.6    $ (941.5)       $  (130.0)  $ 1,314.9
--------------------------------------------------------------------------------------------------------
Comprehensive income:
 Net income                                   251.7       251.7
 Other comprehensive income, net of tax:
  Unrealized gains on securities
    ($2,697.9 pretax)                       1,738.5                 1,738.5
  Foreign currency (($39.8) pretax)           (25.9)                                   (25.9)
                                             ------
 Other comprehensive income                 1,712.6
                                            -------
Total comprehensive income                  1,964.3
                                            =======
Common stock issued for
 benefit plans (74,400 shares)                  5.2                                                  5.2
Treasury stock issued for
 benefit plans (1,994,935 shares)              92.2                                                 92.2
Gain on issuance of
 treasury stock                                23.8                                                 23.8
Common stock dividends                       (315.7)     (315.7)
                                          --------------------------------------------------------------
Balances at December 31, 1995             $ 7,272.8   $ 5,195.6   $   797.0        $  (155.9)  $ 1,436.1
------------------------------------------==============================================================
</TABLE>


See Notes to Condensed Financial Statements.
<PAGE>   51

Page 51

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                              AETNA SERVICES, INC.

                             Statement of Cash Flows

<TABLE>
<CAPTION>
For the year ended December 31,
(Millions)                                         1995
                                                   ----
<S>                                                <C>     
Cash Flows from Operating Activities:
   Net income                                      $  251.7
   Adjustments to reconcile net income
    to net cash used for operating activities:
     Loss from Discontinued Operations                222.2
     Decrease in premiums due and other
      receivables                                     116.4
     Increase in accrued investment income             (1.6)
     Depreciation and amortization                      0.1
     Increase in income taxes                           0.5
     Net decrease in other assets and other
      liabilities                                     (70.3)
     Increase in insurance reserve liabilities         45.2
     Equity in earnings of affiliates                (565.7)
     Net realized capital losses                        0.2
     Amortization of net investment discounts          (0.2)
     Other, net                                       (36.0)
                                                   --------
       Net cash used for operating activities         (37.5) 
                                                   --------
Cash Flows from Investing Activities:
 Proceeds from sales of:
    Short-term investments                          1,289.3
 Cost of investments in:
   Debt securities available for sale                  (0.1)
   Equity securities                                   (0.1)
   Short-term investments                          (1,272.2)
 Capital contributions to affiliates                 (303.0)
 Dividends received from affiliates                   451.7
 Other, net                                          (139.6)
                                                   --------
   Net cash provided by investing activities           26.0 
                                                   --------
Cash Flows from Financing Activities:
   Issuance of long-term debt                            .6
   Stock issued under benefit plans                   121.2
   Repayment of long-term debt                       (100.8)
   Net increase in short-term debt                    329.9
   Dividends paid to shareholders                    (315.7)
                                                   --------
     Net cash provided by financing activities         35.2
                                                   --------
Net increase in cash and cash equivalents              23.7
Cash and cash equivalents, beginning of year              -
                                                   --------
Cash and cash equivalents, end of year             $   23.7
                                                   ========
Supplemental disclosure of cash flow
 information:
     Interest paid                                 $  117.8
                                                   ========
     Income taxes received, net                    $   70.2
                                                   ========
</TABLE>

----------


See Notes to Condensed Financial Statements.
<PAGE>   52

Page 52

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE II

                         Condensed Financial Information

                              AETNA SERVICES, INC.

                     Notes to Condensed Financial Statements

The accompanying condensed financial statements should be read in conjunction
with the Consolidated Financial Statements and Notes thereto in the Annual
Report.

1.  Merger with U.S. Healthcare, Inc.

The merger between Aetna Services, Inc. ("Aetna Services") (formerly Aetna Life
and Casualty Company) and Aetna U.S. Healthcare, Inc. ("Aetna U.S. Healthcare")
(formerly U.S. Healthcare, Inc. ("U.S. Healthcare")) was consummated on July 19,
1996. As a result of the merger, Aetna Services and Aetna U.S. Healthcare are
each direct, wholly owned subsidiaries of Aetna Inc. (See pages 43 through 48
for condensed financial information of Aetna Inc. for the years ended December
31, 1997 and 1996.)

2.  Dividends

The amounts of cash dividends paid to Aetna Services by insurance affiliates for
the year ended December 31, 1995 were $451.7 million. See Note 16 to the
Consolidated Financial Statements in the Annual Report for a description of
dividend restrictions from the consolidated insurance subsidiaries to Aetna
Services.

3.  New Accounting Standards

See Note 1 to the Consolidated Financial Statements in the Annual Report for a
description of new accounting standards.

4. Other Acquisitions and Dispositions

See Note 3 to the Consolidated Financial Statements in the Annual Report for a
description of other acquisitions and dispositions.

5.  Income Taxes

See Note 10 to the Consolidated Financial Statements in the Annual Report for a
description of income taxes.
<PAGE>   53

Page 53

                           AETNA INC. AND SUBSIDIARIES

                                  SCHEDULE III

                       Supplementary Insurance Information

                 As of and for the year ended December 31, 1997

<TABLE>
<CAPTION>
                               Deferred                   Unpaid               Policyholders'
                                 policy     Future        claims                   funds left
                            acquisition     policy     and claim      Unearned       with the    Premium
Segment                           costs   benefits      expenses      premiums        Company    revenue
-------                     -----------  ---------     ---------    ----------    -----------  ---------
(Millions)
<S>                         <C>          <C>           <C>          <C>           <C>          <C>      
Aetna U.S. Healthcare       $    19.5    $ 1,166.5     $ 3,163.5    $    254.2    $   556.9    $10,844.6
Aetna Retirement Services     1,645.3      4,111.9          40.4             -     11,339.5        158.5
International                   702.5      3,430.7          89.0         105.0        384.1      1,434.1
Large Case Pensions                 -      9,128.0           1.5             -      6,480.7        155.0
                            ---------    ---------     ---------    ----------    ---------    ---------
Total                       $ 2,367.3    $17,837.1     $ 3,294.4    $    359.2    $18,761.2    $12,592.2
                            =========    =========     =========    ==========    =========    =========

<CAPTION>
                                          Other income
                                            (including                 Amortization of
                                    Net       realized       Current   deferred policy         Other
                             investment  capital gains    and future       acquisition     operating        Premiums
Segment                      income (1)    and losses)      benefits             costs      expenses(3)      written(4)
-------                     -----------  -------------    ----------      ------------     ---------       ---------
(Millions)                                                                                                
<S>                         <C>          <C>              <C>             <C>              <C>             <C>      
Aetna U.S. Healthcare       $   451.2    $ 1,605.6        $ 9,239.2       $     20.3       $ 2,797.1       $10,001.9
Aetna Retirement Services     1,114.7        629.3          1,034.1            110.6           385.6               -
International                   384.4        157.0          1,206.3             86.6           486.1           465.0
Large Case Pensions           1,408.7         58.8          1,199.9(2)             -            34.8               -
Corporate                        18.5        119.8                -                -           428.4               -
                            ---------   ----------       ----------        ---------       ---------       ---------
                                                                                                          
  Total                     $ 3,377.5    $ 2,570.5        $12,679.5       $    217.5       $ 4,132.0       $10,466.9
                            =========    =========        =========       ==========       =========       =========
</TABLE>

(1)   The allocation of net investment income is based upon the investment year
      method or specific identification of certain portfolios within specific
      segments.
                                                                       
(2)   Includes reductions of the loss on discontinued products.

(3)   Includes operating expenses, interest expense, amortization of goodwill
      and other acquired intangible assets and severance and facilities charges
      (reserve reductions).

(4)   Excludes life insurance business pursuant to Regulation S-X.
<PAGE>   54

Page 54

                           AETNA INC. AND SUBSIDIARIES

                                  SCHEDULE III

                       Supplementary Insurance Information

                 As of and for the year ended December 31, 1996

<TABLE>
<CAPTION>
                                Deferred                  Unpaid              Policyholders'
                                  policy      Future      claims                  funds left
                             acquisition      policy   and claim     Unearned       with the   Premium
Segment                            costs    benefits    expenses     premiums        Company   revenue
-------                      -----------   ---------   ---------    ---------    ----------- ---------
(Millions)
<S>                          <C>           <C>         <C>          <C>          <C>         <C>      
Aetna U.S. Healthcare        $    39.2     $ 1,309.2   $ 2,924.2    $   252.8    $   579.9   $ 7,765.2
Aetna Retirement Services      1,488.1       3,935.8        30.1            -     10,868.1       180.7
International                    699.6       3,370.1        73.5         80.8        434.0     1,166.1
Large Case Pensions                  -       9,168.3         1.4            -      8,019.7       214.1
                             ---------     ---------   ---------    ---------    ---------   ---------

  Total                      $ 2,226.9     $17,783.4   $ 3,029.2    $   333.6    $19,901.7   $ 9,326.1
                             =========     =========   =========    =========    =========   =========

<CAPTION>
                                          Other income
                                            (including                 Amortization of
                                    Net       realized       Current   deferred policy         Other
                             investment  capital gains    and future       acquisition     operating        Premiums
Segment                      income (1)    and losses)      benefits             costs      expenses(3)      written(4)
-------                      ----------  -------------    ----------      ------------     ---------       ---------
(Millions)                                                                                                
<S>                          <C>         <C>              <C>             <C>              <C>             <C>      
Aetna U.S. Healthcare        $   414.6   $ 1,553.9        $ 6,622.4       $    11.9        $ 2,973.9       $ 6,982.8
Aetna Retirement Services      1,086.7       494.8          1,035.9            74.3            386.5               -
International                    334.2       130.7            996.8            73.9            388.4           292.0
Large Case Pensions            1,649.2       112.3          1,521.3 (2)           -             58.6               -
Corporate                         80.5        17.5                -               -            717.9               -
                             ---------   ---------        ---------       ---------        ---------       ---------
                                                                                                           
  Total                      $ 3,565.2   $ 2,309.2        $10,176.4       $   160.1        $ 4,525.3       $ 7,274.8
                             =========   =========        =========       =========        =========       =========
</TABLE>

(1)   The allocation of net investment income is based upon the investment year
      method or specific identification of certain portfolios within specific
      segments.

(2)   Includes reductions of the loss on discontinued products.

(3)   Includes operating expenses, interest expense, amortization of goodwill
      and other acquired intangible assets and severance and facilities charges.

(4)   Excludes life insurance business pursuant to Regulation S-X.
<PAGE>   55

Page 55

                           AETNA INC. AND SUBSIDIARIES

                                  SCHEDULE III

                       Supplementary Insurance Information

                 As of and for the year ended December 31, 1995

<TABLE>
<CAPTION>
                                Deferred                  Unpaid                Policyholders'
                                  policy      Future      claims                    funds left
                             acquisition      policy   and claim      Unearned        with the    Premium
Segment                            costs    benefits    expenses      premiums         Company    revenue
-------                      -----------   ---------   ---------     ---------     -----------  ---------
(Millions)
<S>                          <C>           <C>         <C>           <C>           <C>          <C>      
Aetna U.S. Healthcare        $    50.5     $ 1,344.2   $ 2,426.3     $    86.8     $   634.4    $ 5,949.7
Aetna Retirement Services      1,320.8       3,917.4        30.2             -      10,704.4        260.2
International                    581.8       2,691.9        82.8          55.3         851.7      1,038.5
Large Case Pensions                  -       9,278.4         1.5             -      10,708.2        244.4
Corporate                            -             -       163.3            .3             -            -
                             ---------     ---------   ---------     ---------     ---------    ---------
  Total                      $ 1,953.1     $17,231.9   $ 2,704.1     $   142.4     $22,898.7    $ 7,492.8
                             =========     =========   =========     =========     =========    =========

<CAPTION>
                                          Other income
                                            (including                 Amortization of
                                    Net       realized       Current   deferred policy         Other
                             investment  capital gains    and future       acquisition     operating        Premiums
Segment                      income (1)    and losses)      benefits             costs      expenses(2)      written(3)
-------                      ----------  -------------    ----------      ------------     ---------       ---------
(Millions)                                                                                                
<S>                          <C>         <C>              <C>             <C>              <C>             <C>      
Aetna U.S. Healthcare        $   364.0   $ 1,301.7        $ 5,100.4       $    22.2        $ 2,038.4       $ 5,016.5
Aetna Retirement Services      1,044.1       401.8          1,061.4            46.1            303.8               -
International                    308.7       112.6            911.2            70.8            350.5           234.8
Large Case Pensions            1,850.6       153.4          2,015.6               -            100.1               -
Corporate                          7.7         2.0                -               -            292.7               -
                             ---------   ---------        ---------       ---------        ---------       ---------
  Total                      $ 3,575.1   $ 1,971.5        $ 9,088.6       $   139.1        $ 3,085.5       $ 5,251.3
                             =========   =========        =========       =========        =========       =========
</TABLE>

(1)   The allocation of net investment income is based upon the investment year
      method or specific identification of certain portfolios within specific
      segments.

(2)   Includes operating expenses, interest expense and amortization of goodwill
      and other acquired intangible assets.

(3)   Excludes life insurance business pursuant to Regulation S-X.
<PAGE>   56

Page 56

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE IV

                                  Reinsurance*

<TABLE>
<CAPTION>
For the years ended December 31,
(Millions)
                                                                                          Percentage
                                              Ceded to       Assumed                      of amount
                                  Gross       other          from other     Net           assumed
                                  amount      companies      companies      amount        to net
                                  ------      ---------      ---------      ------        ------
<S>                               <C>         <C>            <C>            <C>              <C> 
1997**

Premiums:
   Life insurance                 $ 2,209.5   $    88.2      $    29.5      $ 2,150.8        1.4%
   Accident and health insurance   10,441.5        62.6            5.5       10,384.4         .1
   Property-casualty insurance         82.5        30.9            5.4           57.0        9.5
                                  ---------   ---------      ---------      ---------

         Total premiums           $12,733.5   $   181.7      $    40.4      $12,592.2         .3%
                                  =========   =========      =========      =========

1996**

Premiums:
   Life insurance                 $ 2,285.5   $    85.6      $    42.8      $ 2,242.7        1.9%
   Accident and health insurance    7,073.2        62.1           23.5        7,034.6         .3
   Property-casualty insurance         95.1        50.1            3.8           48.8        7.8
                                  ---------   ---------      ---------      ---------

         Total premiums           $ 9,453.8   $   197.8      $    70.1      $ 9,326.1         .8%
                                  =========   =========      =========      =========

1995**

Premiums:
   Life insurance                 $ 2,232.9   $    72.1      $    43.9      $ 2,204.7        2.0%
   Accident and health insurance    5,286.4        48.3            9.4        5,247.5         .2
   Property-casualty insurance         98.2        57.6              -           40.6          -
                                  ---------   ---------      ---------      ---------

         Total premiums           $ 7,617.5   $   178.0      $    53.3      $ 7,492.8         .7%
                                  =========   =========      =========      =========
</TABLE>

*     Excludes intercompany transactions.

**    Net life insurance in force was $387.8 billion, $381.4 billion and $362.8
      billion at December 31, 1997, 1996 and 1995, respectively.
<PAGE>   57

Page 57

                           AETNA INC. AND SUBSIDIARIES

                                   SCHEDULE V

                 Valuation and Qualifying Accounts and Reserves

<TABLE>
<CAPTION>
For the years ended December 31,
(Millions)
                                                                     Additions
                                                  Balance     -------------------------
                                                  at                        Charged
                                                  beginning   Charged       (credited)                   Balance  
                     Balance at                   of period   (credited)    to other                     at end
                     beginning                    as          to costs and  accounts-     Deductions-    of
                     of period     Adjustments    adjusted    expenses (1)  describe (2)  describe (3)   period
                     ---------     -----------    --------    ------------  ------------  ------------   ------
<S>                  <C>           <C>            <C>         <C>           <C>          <C>             <C>    
1997                                                                                                     

Asset valuation                                                                                          
reserves:                                                                                                
    Mortgage loans   $    247.0    $        -     $  247.0    $   (10.6)    $   (45.0)   $    (76.9)     $ 114.5
    Real estate           142.1             -        142.1          6.1          14.8         (61.7)       101.3
    Other                   2.8             -          2.8            -             -             -          2.8
                     ----------    ----------     --------    ---------     ---------    ----------       ------
                                                                                                         
                     $    391.9    $        -     $  391.9    $    (4.5)    $   (30.2)   $   (138.6)     $ 218.6
                     ==========    ==========     ========    ==========    ==========   ==========      =======
                                                                                                         
1996                                                                                                     

Asset valuation                                                                                          
reserves:                                                                                                
    Mortgage loans   $    604.9    $        -     $  604.9    $   (33.0)    $   (67.6)   $   (257.3)     $ 247.0
    Real estate           130.6          52.9 (4)    183.5         27.1           1.9         (70.4)       142.1
    Other                   2.8             -          2.8            -             -             -          2.8
                     ----------    ----------     --------    ---------     ---------    ----------       ------
                                                                                                         
                     $    738.3    $     52.9     $  791.2    $    (5.9)    $   (65.7)   $   (327.7)     $ 391.9
                     ==========    ==========     ========    =========     =========    ==========      =======

1995                                                                                                     

Asset valuation                                                                                          
reserves:                                                                                                
    Mortgage loans   $    647.5    $    208.5 (5) $  856.0    $    10.4     $    (5.0)   $   (256.5)     $ 604.9
    Real estate           111.4             -        111.4          3.3          55.5         (39.6)       130.6
    Other                   6.0             -          6.0            -             -          (3.2)         2.8
                     ----------    ----------     --------    ---------     ---------    ----------       ------
                                                                                                         
                     $    764.9    $    208.5     $  973.4    $    13.7     $    50.5    $   (299.3)     $ 738.3
                     ==========    ==========     ========    =========     =========    ==========      =======
</TABLE>

(1)   Charged (credited) to net realized capital (gains) losses in the
      Consolidated Statements of Income.
(2)   Reflects additions to (reductions of) reserves related to assets
      supporting experience rated contracts and discontinued products for which
      a corresponding reduction was included in Policyholders' Funds Left with
      the Company in the Consolidated Balance Sheets and the reserve for future
      losses, respectively.
(3)   Reduction in reserves is primarily a result of related asset write-downs
      (including foreclosures of real estate) and sales.
(4)   As a result of the adoption of FAS No. 121, valuation reserves at January
      1, 1996 were increased by $52.9 million in connection with the reversal of
      previously recorded accumulated depreciation related to properties held
      for sale.
(5)   The general reserve at December 31, 1997 excluded reserves of
      approximately $208.5 million related to experience rated products.
<PAGE>   58

Page 58

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Date:  March 2, 1998
                                       AETNA INC.
                                       (Registrant)

                                       By /s/ Robert J. Price
                                          --------------------------------------
                                                  (Signature)
                                          Robert J. Price
                                          Vice President and
                                          Corporate Controller

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 2, 1998.


  *                                       *
-----------------------------------       --------------------------------------
Richard L. Huber,                         Gerald Greenwald, Director
Chairman, Chief Executive Officer,
President and Director
(Principal Executive Officer and
Principal Financial Officer)


  *                                         *
-----------------------------------       --------------------------------------
Leonard Abramson, Director                Ellen M. Hancock, Director



  *                                         *
-----------------------------------       --------------------------------------
Betsy Z. Cohen, Director                  Michael H. Jordan, Director



  *                                         *
-----------------------------------       --------------------------------------
William H. Donaldson, Director            Jack D. Kuehler, Director



  *                                         *
-----------------------------------       --------------------------------------
Barbara Hackman Franklin, Director        Frank R. O'Keefe, Jr., Director



  *                                         *
-----------------------------------       --------------------------------------
Jerome S. Goodman, Director               Judith Rodin, Director


  *                                 
----------------------------------- 
Earl G. Graves, Director



/s/ Robert J. Price
-----------------------------------
    Robert J. Price, Vice President
    and Corporate Controller
    (Controller)

* By /s/ Robert J. Price
     ------------------------------
         Robert J. Price
         (Attorney-in-Fact)
<PAGE>   59

Page 59

                                INDEX TO EXHIBITS

Exhibit                                                                   Filing
Number     Description of Exhibit                                         Method

(10)       Material contracts.

(10.1)     Employment Agreement, dated as of December 21, 1995,       Electronic
           by and between Aetna Services, Inc. and Frederick 
           C. Copeland, Jr., as amended.

(10.2)     Employment Agreement, dated as of December 19, 1995, by    Electronic
           and between Aetna Services, Inc. and Thomas McInerney, 
           as amended.

(12)       Statement re computation of ratios.                        Electronic

           Statement re: computation of ratio of earnings to fixed
           charges for the Company for the years ended December
           31, 1997, 1996, 1995, 1994 and 1993 and Aetna Services
           for the year ended December 31, 1997 and 1996.

           Statement re: computation of ratio of earnings to
           combined fixed charges and preferred stock dividends
           for the Company for the years ended December 31, 1997,
           1996, 1995, 1994, and 1993 and Aetna Services for the
           year ended December 31, 1997 and 1996.

(13)       Annual Report to security holders.                         Electronic

           Selected Financial Data, Management's Discussion and
           Analysis of Financial Condition and Results of
           Operations, Consolidated Financial Statements and the
           report of the Company's independent auditors, and
           unaudited Quarterly Data from the Annual Report.

(21)       Subsidiaries of the registrant.                            Electronic

           A listing of subsidiaries of Aetna Inc.

(23)       Consents of experts and counsel.                           Electronic

           Consent of Independent Auditors to Incorporation by
           Reference in the Registration Statements on Form S-3
           and Form S-8.

(24)       Powers of attorney.                                        Electronic

(27)       Financial data schedule.

(27.1)     Financial data schedule for December 31, 1997.             Electronic

(27.2)     Financial data schedule for March 31, 1997, June 30,       Electronic
           1997, September 30, 1997 and December 31, 1996.

(27.3)     Financial data schedule for March 31, 1996, June 30,       Electronic
           1996, September 30, 1996 and December 31, 1995.