1
                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549


                                    Form 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934, for the quarter ended June 30, 2001.

                                       or

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



                         Commission File Number 1-16095


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



                                                                   
              Pennsylvania                                                23-2229683
     (State or other jurisdiction of                                   (I.R.S. Employer
     incorporation or organization)                                   Identification No.)

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


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

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

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

                           Yes [X]            No [ ]

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


                                             
Common Capital Stock (par value $.01)                    142,786,921
-------------------------------------           -----------------------------------
           (Class)                              Shares Outstanding at June 30, 2001




                                     Page 1
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                                TABLE OF CONTENTS






                                                                 Page
PART I.  FINANCIAL INFORMATION
                                                              
Item 1. Financial Statements.
        Consolidated Statements of Income                          3
        Consolidated Balance Sheets                                4
        Consolidated Statements of Shareholders' Equity            5
        Consolidated Statements of Cash Flows                      6
        Condensed Notes to Consolidated Financial Statements       7
        Independent Auditors' Review Report                       27

Item 2. Management's Discussion and Analysis of
        Financial Condition and Results of Operations.            28

Item 3. Quantitative and Qualitative Disclosures
        About Market Risk.                                        48


PART II.OTHER INFORMATION

Item 1.  Legal Proceedings.                                       48

Item 4.  Submission of Matters to a Vote of Security Holders.     52

Item 5.  Other Information.                                       52

Item 6.  Exhibits and Reports on Form 8-K.                        54

Signatures                                                        55



                                     Page 2
   3
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

CONSOLIDATED STATEMENTS OF INCOME




                                                                                 Three Months Ended           Six Months Ended
                                                                                       June 30,                    June 30,
                                                                                ---------------------     -------------------------
(Millions, except per common share data)                                            2001         2000          2001            2000
----------------------------------------                                        --------     --------     ---------       ---------
                                                                                                            
Revenue:
  Health care premiums                                                          $5,040.8     $5,476.4     $10,108.5       $10,935.8
  Other premiums                                                                   593.5        362.3       1,028.2           738.3
  Administrative services contract fees                                            465.9        486.9         932.5           985.9
  Net investment income                                                            361.0        386.7         772.0           813.8
  Other income                                                                      13.2         19.8          27.4            43.8
  Net realized capital gains (losses)                                               62.0        (12.7)         96.5           (41.2)
                                                                                --------     --------     ---------       ---------
Total revenue                                                                    6,536.4      6,719.4      12,965.1        13,476.4
                                                                                --------     --------     ---------       ---------
Benefits and expenses:
  Health care costs                                                              4,566.8      4,777.0       9,171.0         9,451.8
  Current and future benefits                                                      744.4        527.4       1,365.7         1,101.8
  Operating expenses:
     Salaries and related benefits                                                 564.7        638.1       1,185.7         1,238.7
     Other                                                                         570.5        559.8       1,063.7         1,153.4
  Interest expense                                                                  33.6         56.4          63.9           125.3
  Amortization of goodwill and other acquired intangible assets                    107.3        109.2         214.5           218.4
  Reduction of reserve for anticipated future losses on discontinued products      (94.5)      (146.0)        (94.5)         (146.0)
                                                                                --------     --------     ---------       ---------
Total benefits and expenses                                                      6,492.8      6,521.9      12,970.0        13,143.4
                                                                                --------     --------     ---------       ---------
Income (loss) from continuing operations before income taxes and cumulative
  effect adjustment                                                                 43.6        197.5          (4.9)          333.0
Income taxes:
  Current                                                                            1.1         62.3          29.8           128.9
  Deferred                                                                          31.9         25.6           3.4            19.1
                                                                                --------     --------     ---------       ---------
Total income taxes                                                                  33.0         87.9          33.2           148.0
                                                                                --------     --------     ---------       ---------
Income (loss) from continuing operations before cumulative effect adjustment        10.6        109.6         (38.1)          185.0
Cumulative effect adjustment, net of tax (Note 7)                                     --           --            .5              --
                                                                                --------     --------     ---------       ---------
Income (loss) from continuing operations                                            10.6        109.6         (37.6)          185.0
Income from discontinued operations, net of tax                                       --         77.0            --           171.6
                                                                                --------     --------     ---------       ---------
Net income (loss)                                                               $   10.6     $  186.6     $   (37.6)      $   356.6
                                                                                ========     ========     =========       =========
Results per common share:
Income (loss) from continuing operations:
  Basic                                                                         $    .07     $    .78     $    (.26)      $    1.31
  Diluted (1)                                                                        .07          .77            --            1.30
Net income (loss):
  Basic                                                                              .07         1.32          (.26)           2.53
  Diluted (1)                                                                        .07         1.30            --            2.50
                                                                                --------     --------     ---------       ---------


(1)  Since the Company reported a net loss for the six months ended June 30,
     2001, the effect of dilutive securities has been excluded from earnings
     (loss) per common share computations for that period because including such
     securities would result in an anti-dilutive per common share amount.


See Condensed Notes to Consolidated Financial Statements.


                                     Page 3
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Item 1.  Financial Statements.


CONSOLIDATED BALANCE SHEETS




                                                                                       June 30,  December 31,
 (Millions, except share data)                                                            2001          2000
 -----------------------------                                                       ---------     ---------
                                                                                             
Assets
Current assets:
  Cash and cash equivalents                                                          $ 1,685.8     $ 1,652.5
  Investment securities                                                               14,367.4      14,308.8
  Other investments                                                                      328.5         374.6
  Premiums receivable, net                                                               796.9         838.6
  Other receivables, net                                                                 590.6         735.8
  Accrued investment income                                                              257.8         260.3
  Collateral received under securities loan agreements                                   512.4         596.8
  Loaned securities                                                                      500.9         584.1
  Deferred income taxes                                                                  159.0         112.3
  Other assets                                                                           169.2         303.7
                                                                                     ---------     ---------
Total current assets                                                                  19,368.5      19,767.5
                                                                                     ---------     ---------
Long-term investments                                                                  1,449.9       1,344.3
Mortgage loans                                                                         1,875.0       1,826.6
Investment real estate                                                                   339.7         319.2
Reinsurance recoverables                                                               1,278.5       1,318.5
Goodwill and other acquired intangible assets, net                                     7,488.9       7,703.4
Property and equipment, net                                                              366.1         390.0
Deferred income taxes                                                                    290.5         295.0
Other assets                                                                             149.0         128.7
Separate Accounts assets                                                              12,985.4      14,352.5
                                                                                     ---------     ---------
Total assets                                                                         $45,591.5     $47,445.7
                                                                                     =========     =========
Liabilities and shareholders' equity
Current liabilities:
  Health care costs payable                                                          $ 3,163.5     $ 3,171.1
  Future policy benefits                                                                 822.3         832.0
  Unpaid claims                                                                          551.4         528.2
  Unearned premiums                                                                      292.1         274.7
  Policyholders' funds                                                                 1,035.8       1,089.0
  Collateral payable under securities loan agreements                                    512.4         596.8
  Short-term debt                                                                        490.4       1,592.2
  Income taxes payable                                                                   163.0         297.8
  Deferred income taxes                                                                   28.7            --
  Accrued expenses and other liabilities                                               1,349.7       1,621.6
                                                                                     ---------     ---------
Total current liabilities                                                              8,409.3      10,003.4
                                                                                     ---------     ---------
Future policy benefits                                                                 8,553.5       8,684.8
Unpaid claims                                                                          1,237.1       1,211.6
Policyholders' funds                                                                   2,439.8       2,649.6
Long-term debt                                                                         1,595.0            --
Other liabilities                                                                        313.3         416.7
Separate Accounts liabilities                                                         12,985.4      14,352.5
                                                                                     ---------     ---------
Total liabilities                                                                     35,533.4      37,318.6
                                                                                     ---------     ---------

Commitments and contingent liabilities (Notes 3, 4 and 16)
Shareholders' equity:
  Common stock and additional paid-in capital ($.01 par value, 759,900,000
   shares authorized, 142,786,921 issued and outstanding in 2001; $.01 par
   value, 762,500,000 shares authorized, 142,618,551 shares issued and
   outstanding in 2000)
                                                                                       3,874.5       3,898.7
  Accumulated other comprehensive income                                                  27.9          35.1
  Retained earnings                                                                    6,155.7       6,193.3
                                                                                     ---------     ---------
Total shareholders' equity                                                            10,058.1      10,127.1
                                                                                     ---------     ---------
Total liabilities and shareholders' equity                                           $45,591.5     $47,445.7
                                                                                     =========     =========


See Condensed Notes to Consolidated Financial Statements.


                                     Page 4
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Item 1.  Financial Statements.


CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY



                                                                                              Accumulated Other
                                                                                               Comprehensive
                                                                                               Income (Loss)
                                                                                 --------------------------------------
                                                                        Common
                                                                     Stock and
                                                                    Additional      Unrealized
(Millions, except share data)                                          Paid-in   Gains (Losses)     Foreign   Cash Flow    Retained
Six Months Ended June 30, 2001                           Total         Capital   on Securities     Currency      Hedges    Earnings
------------------------------                       ---------      ----------   -------------     --------   ---------    --------
                                                                                                         
Balances at December 31, 2000                        $10,127.1        $3,898.7       $    29.4      $   5.7       $  --    $6,193.3

Comprehensive income:
   Net loss                                              (37.6)                                                               (37.6)
   Other comprehensive loss, net of tax:
      Unrealized losses on securities
        ($(9.5) pretax) (1)                               (6.2)                           (6.2)
      Foreign currency ($(1.4) pretax)                     (.9)                                        (.9)
      Derivative losses ($(.2) pretax) (1)                 (.1)                                                     (.1)
                                                     ---------
   Other comprehensive loss                               (7.2)
                                                     ---------
Total comprehensive loss                                 (44.8)
                                                     =========
Common stock issued for benefit plans
   (2,768,370 shares)                                     71.4            71.4
Repurchase of common shares
   (2,600,000 shares)                                    (95.6)          (95.6)
                                                     ---------      ----------       ---------     -------    ---------    --------
Balances at June 30, 2001                            $10,058.1        $3,874.5       $    23.2     $   4.8        $ (.1)   $6,155.7
                                                     =========      ==========       =========     =======    =========    ========
Six Months Ended June 30, 2000
------------------------------
Balances at December 31, 1999                        $10,703.2        $3,719.3       $  (206.1)    $(449.5)       $  --    $7,639.5
Comprehensive income:
   Net income                                            356.6                                                                356.6
   Other comprehensive income, net of tax:
      Unrealized gains on securities
        ($81.4 pretax) (1)                                52.9                            52.9
      Foreign currency ($136.8 pretax)                   118.5                                       118.5
                                                     ---------
   Other comprehensive income                            171.4
                                                     ---------
Total comprehensive income                               528.0
                                                     =========
Capital contributions from former Aetna                   15.9            15.9
Dividends to former Aetna                               (287.0)                                                              (287.0)
                                                     ---------      ----------       ---------     -------    ---------    --------
Balances at June 30, 2000                            $10,960.1        $3,735.2       $  (153.2)    $(331.0)       $  --    $7,709.1
                                                     =========      ==========       =========     =======    =========    ========


(1)  Net of reclassification adjustments.


See Condensed Notes to Consolidated Financial Statements.


                                     Page 5
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Item 1.  Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                                                           Six Months Ended June 30,
                                                                                                           ------------------------
(Millions)                                                                                                   2001            2000
----------                                                                                                ---------       ---------
                                                                                                                    
Cash flows from operating activities:
  Net income (loss)                                                                                       $   (37.6)      $   356.6
  Adjustments to reconcile net income (loss) to net cash provided by
    (used for) operating activities:
      Cumulative effect adjustment                                                                              (.7)             --
      Income from discontinued operations                                                                        --          (171.6)
      Amortization of goodwill and other acquired intangible assets                                           214.5           218.4
      Depreciation and other amortization                                                                      97.2            93.1
      Accretion of net investment discount                                                                    (15.4)          (18.8)
      Net realized capital (gains) losses                                                                     (96.5)           41.2
  Changes in assets and liabilities:
      (Increase) decrease in accrued investment income                                                          2.5            (3.6)
      (Increase) decrease in premiums due and other receivables                                               289.1           (36.8)
      Decrease in income taxes                                                                               (133.0)          (11.4)
      Net change in other assets and other liabilities                                                       (342.4)         (220.7)
      Net decrease in health care and insurance liabilities                                                  (109.0)         (456.8)
      Other, net                                                                                                (.7)           16.1
Discontinued operations, net                                                                                     --           679.1
                                                                                                          ---------       ---------
Net cash provided by (used for) operating activities                                                         (132.0)          484.8
                                                                                                          ---------       ---------
Cash flows from investing activities:
  Proceeds from sales and investment maturities of:
      Debt securities available for sale                                                                    9,597.4         6,952.2
      Equity securities                                                                                       110.7           264.3
      Mortgage loans                                                                                          341.1           392.1
      Investment real estate                                                                                    7.7            12.0
      Other investments                                                                                     2,836.1         2,876.1
      NYLCare Texas                                                                                              --           420.0
  Cost of investments in:
      Debt securities available for sale                                                                   (9,380.6)       (6,459.6)
      Equity securities                                                                                      (108.4)         (110.1)
      Mortgage loans                                                                                         (127.8)         (211.1)
      Investment real estate                                                                                   (5.6)           (7.9)
      Other investments                                                                                    (2,897.0)       (2,569.0)
      Increase in property and equipment                                                                      (85.0)          (38.3)
      Other, net                                                                                             (182.0)         (100.5)
Discontinued operations, net                                                                                     --           710.7
                                                                                                          ---------       ---------
Net cash provided by investing activities                                                                     106.6         2,130.9
                                                                                                          ---------       ---------
Cash flows from financing activities:
  Deposits and interest credited for investment contracts                                                      96.6           134.1
  Withdrawals of investment contracts                                                                        (463.4)         (525.5)
  Issuance of long-term debt                                                                                1,566.1              --
  Net decrease in short-term debt                                                                          (1,101.8)         (403.5)
  Capital contributions from former Aetna                                                                        --            15.9
  Dividends paid to former Aetna                                                                                 --          (157.0)
  Common stock issued under benefit plans                                                                      71.4              --
  Common stock acquired                                                                                       (95.6)             --
  Other, net                                                                                                  (14.6)           18.6
Discontinued operations, net                                                                                     --          (371.2)
                                                                                                          ---------       ---------
Net cash provided by (used for) financing activities                                                           58.7        (1,288.6)
                                                                                                          ---------       ---------
Net increase in cash and cash equivalents of discontinued operations                                             --        (1,018.6)
                                                                                                          ---------       ---------
Net increase in cash and cash equivalents of continuing operations                                             33.3           308.5
Cash and cash equivalents, beginning of period                                                              1,652.5         1,309.2
                                                                                                          ---------       ---------
Cash and cash equivalents, end of period                                                                  $ 1,685.8       $ 1,617.7
                                                                                                          =========       =========
Supplemental cash flow information:
  Interest paid                                                                                           $    44.3       $   136.9
  Income taxes paid                                                                                           143.3           140.3
                                                                                                          ---------       ---------



See Condensed Notes to Consolidated Financial Statements.


                                     Page 6
   7
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
The consolidated financial statements include Aetna Inc. (a Pennsylvania
corporation) and its wholly-owned subsidiaries (collectively, the "Company"). At
June 30, 2001, the Company's operations included three business segments: Health
Care, Group Insurance and Large Case Pensions. Health Care consists of health
and dental plans that include health maintenance organizations ("HMOs"),
point-of-service ("POS") plans, preferred provider organizations ("PPOs") and
indemnity benefit products. Such plans are generally offered on both a full risk
and an employer-funded basis. Under full risk plans, the Company assumes all or
a majority of the health care cost, utilization, mortality, morbidity or other
risk, depending on the product. Under employer-funded plans, the plan sponsor
under an administrative services contract ("ASC"), and not the Company, assumes
all or a majority of these risks. The Group Insurance segment includes group
life insurance products offered on a full risk basis, as well as group
disability and long-term care insurance products offered on both a full risk and
employer-funded basis. Large Case Pensions manages a variety of retirement
products (including pension and annuity products) primarily for defined benefit
and defined contribution plans. These products provide a variety of funding and
benefit payment distribution options and other services. These segments reflect
the reorganization, in the first quarter of 2001, of the Company's internal
structure for making operating decisions and assessing performance.
Corresponding information for 2000 has been restated to reflect this change.

Prior to December 13, 2000, the Company (formerly Aetna U.S. Healthcare Inc. and
its wholly-owned subsidiaries) was a subsidiary of a Connecticut corporation
named Aetna Inc. ("former Aetna"). On December 13, 2000, former Aetna spun off
shares of the Company to shareholders (of former Aetna). As part of the same
transaction, the remaining entity, which contained former Aetna's financial
services and international businesses, was merged with a newly formed subsidiary
of ING Groep N.V. ("ING"). The businesses sold to ING are reflected as
discontinued operations, since the Company is the successor of former Aetna for
accounting purposes. Refer to Note 15.


These consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and are
unaudited. All significant intercompany balances have been eliminated. Certain
reclassifications have been made to the 2000 financial information to conform to
the 2001 presentation.

These interim statements necessarily rely heavily on estimates, including
assumptions as to annualized tax rates. In the opinion of management, all
adjustments necessary for a fair statement of results for the interim periods
have been made. All such adjustments are of a normal, recurring nature. The
accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes as
presented in Aetna Inc.'s 2000 Annual Report on Form 10-K. Certain financial
information that is normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America, but that is not required for interim reporting purposes, has been
condensed or omitted.

New Accounting Standard
As of January 1, 2001, the Company adopted Financial Accounting Standard ("FAS")
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended and interpreted by FAS No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FAS Statement No.
133, FAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an Amendment of FASB Statement No. 133, and certain FAS No.
133 implementation issues, issued by the Financial Accounting Standards Board
("FASB"). This standard, as amended, requires companies to record all
derivatives on the balance sheet as either assets or liabilities and to measure
those instruments at fair value. The manner in which companies are to record
gains or losses resulting from changes in the fair values of those derivatives
depends on the use of the derivative and whether it qualifies for hedge
accounting. The adoption of this standard did not have a material effect on the
Company's financial position or results of operations. (Refer to Note 7.)


                                     Page 7
   8
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Future Accounting Standards
In June 2001, the FASB issued FAS No. 141, Business Combinations. This standard
supersedes previous accounting standards for business combinations. FAS No. 141
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method and therefore, prospectively prohibits
the use of the pooling-of-interest method. All of the Company's previous
acquisitions have been recorded under the purchase method.

In June 2001, the FASB approved FAS No. 142, Goodwill and Other Intangible
Assets. This standard, which becomes effective for the Company on January 1,
2002, eliminates goodwill amortization from the income statement and requires an
evaluation of goodwill impairment upon adoption of this standard, as well as
subsequent evaluations on an annual basis, and more frequently if circumstances
indicate a possible impairment (however, this standard is effective for all
goodwill and intangible assets acquired after June 30, 2001). The Company
anticipates that these evaluations will be calculated based on an implied fair
value approach, which utilizes a discounted cash flow analysis. Impairment, if
any, resulting from the initial application of the new standard will be
classified as a cumulative effect of a change in accounting principle.
Subsequent impairments, if any, would be classified as an operating expense.
Also, intangible assets that meet certain criteria will qualify for recording on
the balance sheet and will continue to be amortized in the income statement.

The Company is currently evaluating the impact of adoption of this standard on
its recorded amount of goodwill and intangible assets. The Company cannot
currently predict whether an impairment of goodwill will result from the
adoption of this standard, although it is reasonably possible. Although this
standard will increase the Company's results of operations in the future due to
the elimination of goodwill amortization from the Company's income statement,
any impairment would result in a charge, as discussed above.


                                     Page 8
   9
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.    EARNINGS (LOSS) PER COMMON SHARE

The reconciliation of the numerator and denominator of the basic and diluted
earnings (loss) per common share ("EPS") for the three and six months ended June
30, was as follows:



Three Months Ended June 30,                                      Income (Loss)          Shares      Per Common
(Millions, except per common share data)                           (Numerator)    (Denominator)   Share Amount
----------------------------------------                          -----------    -------------    ------------
                                                                                        
2001
Basic EPS:
  Net income                                                          $ 10.6            142.7           $ .07
                                                                      ======                            =====
Effect of dilutive securities:
   Stock options(1)                                                                       1.5
                                                                                        -----
Diluted EPS:
  Net income and assumed conversions                                  $ 10.6            144.2           $ .07
                                                                      ======            =====           =====
2000(2)
Basic EPS:
   Income from continuing operations                                  $109.6            141.0           $ .78
                                                                      ======                            =====
Effect of dilutive securities:
   Stock options and other(3)                                                             2.2
                                                                                        -----
Diluted EPS:
  Income from continuing operations and assumed conversions           $109.6            143.2           $ .77
                                                                      ======            =====           =====

Six Months Ended June 30,
----------------------------------------
2001(4)
Basic EPS:
  Net loss                                                            $(37.6)           143.0           $(.26)
                                                                      ======            =====           =====
2000(2)
Basic EPS:
   Income from continuing operations                                  $185.0            141.1           $1.31
                                                                      ======                            =====
Effect of dilutive securities:
   Stock options and other(3)                                                             1.6
                                                                                        -----
Diluted EPS:
  Income from continuing operations and assumed conversions           $185.0            142.7           $1.30
                                                                      ======            =====           =====


(1)  Options to purchase shares of common stock for the three months ended June
     30, 2001 of 14.6 million shares (with exercise prices ranging from $27.38
     to $54.21) were not included in the calculation of diluted earnings per
     common share because the options' exercise price was greater than the
     average market price of common shares.

(2)  Basic EPS related to discontinued operations for the three and six months
     ended June 30, 2000 were $.55 and $1.22, respectively. Diluted EPS related
     to discontinued operations for the three and six months ended June 30, 2000
     were $.54 and $1.20, respectively.

(3)  Options to purchase shares of common stock and stock appreciation rights
     ("SARs") for the three and six months ended June 30, 2000 of 9.5 million
     shares (with exercise prices ranging from $61.63 to $112.63) and 9.6
     million shares (with exercise prices ranging from $56.88 to $112.63),
     respectively, were not included in the calculation of diluted earnings per
     common share because the options' and SARs' exercise price was greater than
     the average market price of common shares.

(4)  Since the Company reported a net loss for the six months ended June 30,
     2001, the effect of dilutive securities has been excluded from EPS
     computations for that period, since including such securities would result
     in an anti-dilutive per common share amount.

3.    ACQUISITION OF THE PRUDENTIAL HEALTH CARE BUSINESS

On August 6, 1999, the Company acquired from The Prudential Insurance Company of
America ("Prudential") the Prudential health care business ("PHC") for
approximately $1 billion. The acquisition was accounted for as a purchase. In
addition to recording the assets and liabilities acquired at fair value, the
purchase price allocation at the acquisition date included a fair value
adjustment of: a reinsurance agreement (see further discussion below); the
unfavorable component of the contracts underlying the acquired medical risk
business; and the above-market compensation component related to supplemental
fees to be received under the Company's agreement to service Prudential's ASC
business. Refer to the Company's 2000 Annual Report on Form 10-K for further
discussion of the PHC acquisition.



                                     Page 9
   10
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.    ACQUISITION OF THE PRUDENTIAL HEALTH CARE BUSINESS (CONTINUED)

Effective with the date of the acquisition, the Company and Prudential entered
into a reinsurance agreement for which the Company paid a premium. Under the
agreement, Prudential agreed to indemnify the Company from certain health
insurance risks that arose following the closing by reimbursing the Company for
75% of medical costs (as calculated under the agreement) of PHC in excess of
certain threshold medical cost ratio levels through 2000 for substantially all
the acquired medical and dental risk business. This reinsurance agreement ended
on December 31, 2000, except that the agreement provides for a period of time
during which medical cost reimbursements (as calculated in accordance with the
agreement) will be finalized, which is expected to be completed by the end of
2001. Reinsurance recoveries under this agreement (reflected as a reduction of
health care costs) were $2 million pretax for the six months ended June 30, 2001
and $36 million and $46 million pretax for the three and six months ended June
30, 2000, respectively. There were no reinsurance recoveries during the three
months ended June 30, 2001. For the three and six months ended June 30, 2000,
the Company recorded asset amortization of $6 million and $13 million pretax,
respectively, related to the fair value adjustment of the reinsurance agreement.
There was no such asset amortization during the three and six months ended June
30, 2001. For the three and six months ended June 30, 2001, the Company recorded
liability amortization of $3 million and $5 million pretax, respectively,
related to the fair value adjustment of the unfavorable component of the
contracts underlying the acquired medical risk business. For the three and six
months ended June 30, 2000, such liability amortization was $9 million and $22
million pretax, respectively.

The Company also agreed to service Prudential's ASC business following the
closing. In exchange for servicing the ASC business, Prudential remitted fees
received from its ASC customers to the Company and paid certain supplemental
fees. The supplemental fees were fixed in amount and declined over a period,
which ended in February 2001. For the three and six months ended June 30, 2001,
the Company recorded total fees for servicing the Prudential ASC business of
approximately $22 million and $49 million pretax, respectively, including
supplemental fees of approximately $1 million pretax, which was net of asset
amortization of $7 million pretax related to the above-market compensation
component related to the supplemental fees under the ASC business for the six
months ended June 30, 2001 (there were no supplemental fees or amortization
during the three months ended June 30, 2001). For the three and six months ended
June 30, 2000, the Company recorded total fees for servicing the Prudential ASC
business of approximately $98 million and $204 million pretax, respectively,
including supplemental fees of approximately $36 million and $84 million pretax,
respectively, which was net of asset amortization of $4 million and $11 million
pretax, respectively.

4.    AGREEMENT TO SELL CERTAIN MEDICAID BUSINESSES

On August 1, 2001, the Company completed the sale of its New Jersey Medicaid and
New Jersey Family Care businesses to AmeriChoice. The agreement covers
approximately 118,000 New Jersey Medicaid beneficiaries and members of the New
Jersey Family Care program for uninsured children and adults. The sale price is
not material to the Company's financial position, and the results of this
business were not material to the Company's results of operations.


                                    Page 10
   11
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.    INVESTMENTS

Investment securities at June 30, 2001 and December 31, 2000 were as follows:



                                         June 30,     December 31,
(Millions)                                  2001             2000
----------                             ---------      -----------
                                               
Debt securities available for sale     $13,844.3        $13,869.9
Equity securities                           99.7            116.5
Other investment securities                423.4            322.4
                                       ---------        ---------
Total investment securities            $14,367.4        $14,308.8
                                       =========        =========


Net investment income includes amounts related to experience-rated
contractholders of $57 million and $75 million for the three months ended June
30, 2001 and 2000, respectively, and $123 million and $154 million for the six
months ended June 30, 2001 and 2000, respectively. Interest credited to
contractholders is included in current and future benefits.

Net realized capital gains (losses) related to experience-rated contractholders
of $(1) million and $(16) million for the three months ended June 30, 2001 and
2000, respectively, and $15 million and $(29) million for the six months ended
June 30, 2001 and 2000, respectively, were deducted from net realized capital
gains (losses) as reflected on the Consolidated Statements of Income, and an
offsetting amount is reflected on the Consolidated Balance Sheets in
policyholders' funds.

The total recorded investment in mortgage loans that are considered to be
impaired (including problem loans, restructured loans and potential problem
loans) and related specific reserves at June 30, 2001 and December 31, 2000 were
as follows:



                                             June 30, 2001            December 31, 2000
                                        ----------------------     -----------------------
                                             Total                      Total
                                          Recorded    Specific       Recorded     Specific
(Millions)                              Investment    Reserves     Investment     Reserves
----------                              ----------    --------     ----------     --------
                                                                      
Supporting discontinued products            $116.7       $13.8         $124.6        $22.2
Supporting experience-rated products          42.3         5.2           39.1          6.0
Supporting remaining products                 29.7         1.7           30.3          1.8
                                            ------       -----         ------        -----
Total impaired loans                        $188.7(1)    $20.7         $194.0(1)     $30.0
                                            ======       =====         ======        =====


(1)  Includes impaired loans of $45.8 million and $28.8 million at June 30, 2001
     and December 31, 2000, respectively, for which no specific reserves are
     considered necessary.

The activity in the specific and general reserves for the six months ended June
30, 2001 and 2000 was as follows:



                                                    Supporting
                                      Supporting    Experience-  Supporting
                                    Discontinued         Rated    Remaining
(Millions)                              Products      Products     Products     Total (1)
----------                          ------------   -----------   ----------    ------
                                                                   
Balance at December 31, 2000               $28.4         $12.8         $2.8     $44.0
Principal write-offs                        (7.8)          (.4)         (.2)     (8.4)
                                           -----         -----         ----     -----
Balance at June 30, 2001                   $20.6         $12.4         $2.6     $35.6
                                           =====         =====         ====     =====
Balance at December 31, 1999               $28.9         $13.6         $3.4     $45.9
Principal write-offs                          --           (.3)         (.1)      (.4)
                                           -----         -----         ----     -----
Balance at June 30, 2000                   $28.9         $13.3         $3.3     $45.5
                                           =====         =====         ====     =====


(1)  Total reserves at June 30, 2001 and 2000 include $20.7 million and $31.8
     million of specific reserves, respectively, and $14.9 million and $13.7
     million of general reserves, respectively.


                                    Page 11
   12
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.    INVESTMENTS (CONTINUED)

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



                                                    Three Months Ended                                Six Months Ended
                                                      June 30, 2001                                     June 30, 2001
                                            ----------------------------------------        ---------------------------------------
                                             Average                                         Average
                                            Impaired        Income              Cash        Impaired       Income              Cash
(Millions)                                     Loans        Earned          Received           Loans       Earned          Received
----------                                  --------        ------          --------        --------       ------          --------
                                                                                                         
Supporting discontinued products              $120.7          $5.5              $5.2          $123.5         $5.5             $ 7.4
Supporting experience-rated products            42.3           1.0               1.0            42.4          1.5               2.0
Supporting remaining products                   29.7            .5                .7            30.5           .5               1.7
                                              ------          ----              ----          ------         ----             -----
Total                                         $192.7          $7.0              $6.9          $196.4         $7.5             $11.1
                                              ======          ====              ====          ======         ====             =====




                                                    Three Months Ended                                Six Months Ended
                                                      June 30, 2000                                     June 30, 2000
                                            ----------------------------------------       ----------------------------------------
                                             Average                                        Average
                                            Impaired        Income              Cash       Impaired        Income              Cash
(Millions)                                     Loans        Earned          Received          Loans        Earned          Received
----------                                  --------        ------          --------       --------        ------          --------
                                                                                                         
Supporting discontinued products              $157.6          $2.5              $2.5         $157.9         $ 5.2             $ 5.2
Supporting experience-rated products            66.6           1.6               1.7           71.9           3.3               3.3
Supporting remaining products                   52.2           2.4               2.8           42.6           5.1               5.6
                                              ------          ----              ----         ------         -----             -----
Total                                         $276.4          $6.5              $7.0         $272.4         $13.6             $14.1
                                              ======          ====              ====         ======         =====             =====


6.    SUPPLEMENTAL CASH FLOW INFORMATION

Noncash investing and financing activities included the acquisition of real
estate through foreclosures of mortgage loans amounting to approximately $1
million for the six months ended June 30, 2001. There were no such foreclosures
during the six months ended June 30, 2000.

7.    ACCOUNTING CHANGE - ADOPTION OF FAS NO. 133

As discussed in Note 1, the Company adopted FAS No. 133 as of January 1, 2001,
which did not have a material effect on the Company's financial position or
results of operations.

The Company's Use of Derivatives
The Company uses derivative instruments ("derivatives") in order to manage
interest rate and price risk (collectively, market risk). By using derivatives
to manage market risk, the Company exposes itself to credit risk and additional
market risk.

Credit risk is the exposure to loss if a counterparty fails to perform under the
terms of the derivative contract. The Company generally does not require
collateral or other security for its derivatives. However, the Company minimizes
its credit risk by entering into transactions with counterparties that maintain
high credit ratings, as well as by limiting single counterparty exposure and
monitoring the financial condition of counterparties. Market risk is the
exposure to changes in the market price of the underlying instrument and the
related derivative. Such price changes result from movements in interest rates
and equity markets, and as a result, assets and liabilities will appreciate or
depreciate in market value.

The Company uses primarily futures contracts, forward contracts and interest
rate swap agreements to manage market risk.


                                    Page 12
   13
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.    ACCOUNTING CHANGE - ADOPTION OF FAS NO. 133 (CONTINUED)

Futures contracts represent commitments either to purchase or to sell securities
at a specified future date and specified price. Futures contracts trade on
organized exchanges and therefore, have minimal credit risk. Forward contracts
are agreements to exchange fixed amounts of two different financial instruments
or currencies at a specified future date and specified price. Interest rate swap
agreements are contracts to exchange interest payments on a specified principal
(notional) amount for a specified period.

From time to time, the Company uses option contracts for the purpose of
increasing net investment income. Option contracts grant the purchaser, for a
fee, the right, but not the obligation, to buy or sell a financial instrument at
a given price during a specified period.

Derivatives are recognized on the Company's balance sheet in long-term
investments at fair value. The fair value of derivatives is estimated based on
quoted market prices, dealer quotations or internal price estimates believed to
be comparable to dealer quotations. These fair value amounts reflect the
estimated amounts that the Company would have to pay or would receive if the
contracts were terminated.

When the Company enters into a derivative contract, if certain criteria are met,
it may designate the derivative as one of the following: (i) a hedge of the fair
value of a recognized asset or liability or of an unrecognized firm commitment
("fair value hedge"); (ii) a hedge of a forecasted transaction or of the
variability of cash flows to be received or paid related to a recognized asset
or liability ("cash flow hedge"); or (iii) a foreign currency fair value or cash
flow hedge ("foreign currency hedge").

At hedge inception, the Company formally documents all relationships between
hedging instruments and hedged items, as well as its risk management objective
and strategy for the hedge transactions. This process includes linking all
derivatives that are designated as fair value or cash flow hedges to specific
assets and liabilities on the Company's balance sheet or to specific firm
commitments or forecasted transactions. The Company also formally assesses, both
at inception and on an ongoing basis, whether the derivatives used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items. If it is determined that a derivative is not highly
effective as a hedge, the Company discontinues hedge accounting prospectively,
as discussed below.

For a derivative designated as a fair value hedge, changes in the fair value,
along with the gain or loss on the related hedged asset or liability, are
recorded in current period earnings. For a derivative designated as a cash flow
hedge, the effective portion of changes in the fair value of the derivative are
recorded in accumulated other comprehensive income and are recognized in the
Consolidated Statements of Income when the hedged item affects earnings. Any
amounts excluded from the assessment of hedge effectiveness, as well as the
ineffective portion of the gain or loss are reported in earnings immediately. If
the derivative is not designated as a hedge, the gain or loss is recognized in
earnings in the period of change.

The Company's financial instruments and insurance products are reviewed to
determine whether a derivative may be "embedded" in such instruments or
products. The Company assesses whether the economic characteristics of the
embedded derivative are clearly and closely related to the remaining component
of the financial instrument or insurance product (that is, the host contract).
If it is determined that the embedded derivative is not clearly and closely
related to the host contract and that a separate instrument with the same terms
would qualify as a derivative, the embedded derivative is separated from the
host contract and carried at fair value.


                                    Page 13
   14
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.    ACCOUNTING CHANGE - ADOPTION OF FAS NO. 133 (CONTINUED)

The Company discontinues hedge accounting prospectively when it is determined
that one of the following has occurred: (i) the derivative is no longer highly
effective in offsetting changes in the fair value or cash flows of a hedged
item; (ii) the derivative expires or is sold, terminated, or exercised; (iii)
the derivative is undesignated as a hedge instrument because it is unlikely that
a forecasted transaction will occur; (iv) a hedged firm commitment no longer
meets the definition of a firm commitment; or (v) management determines that the
designation of the derivative as a hedge instrument is no longer appropriate.

If hedge accounting is discontinued, the derivative will continue to be carried
on the Company's balance sheet at its fair value. When hedge accounting is
discontinued because the derivative no longer qualifies as an effective fair
value hedge, the related hedged asset or liability will no longer be adjusted
for fair value changes. When hedge accounting is discontinued because it is
probable that a forecasted transaction will not occur, the accumulated gains and
losses included in accumulated other comprehensive income will be recognized
immediately in earnings. When hedge accounting is discontinued because the
hedged item no longer meets the definition of a firm commitment, any asset or
liability that was recorded pursuant to the firm commitment will be removed from
the balance sheet and recognized as a gain or loss in current period earnings.
In all other situations in which hedge accounting is discontinued, changes in
the fair value of the derivative are recognized in current period earnings.

Derivative Instruments and Hedging Activities
The Company has no derivatives designated as fair value hedges. The Company is
using interest rate swap agreements to manage certain exposures related to
changes in interest rates on investments supporting experience-rated and
discontinued products in the Company's Large Case Pensions business. The use of
these derivatives does not impact the Company's results of operations. Refer to
the Company's 2000 Annual Report on Form 10-K for further discussion of
experience-rated and discontinued products.

During the first quarter of 2001, the Company expected to issue approximately $1
billion of five- and ten-year fixed-rate debt securities to replace a portion of
its outstanding commercial paper. Prior to the transaction, the Company's risk
management objective was to secure financing at the then five- and ten-year U.S.
Treasury rates. Accordingly, the Company entered into certain forward contracts
on U.S. Treasury securities prior to the actual issuance of long-term debt,
which were designated as cash flow hedges and determined to be highly effective
under the Company's accounting policy.

Upon issuance of the long-term debt (refer to Note 11) and termination of these
forward contracts, the Company recognized a loss of approximately $5 million
pretax related to these derivatives, which is included in accumulated other
comprehensive income. During the six months ended June 30, 2001, the amount of
the loss that was reclassified from accumulated other comprehensive income and
recognized as part of interest expense was not material. Over the next twelve
months, approximately $.5 million of the loss is expected to be reclassified
from accumulated other comprehensive income and recognized as part of interest
expense.


                                    Page 14
   15
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.    ACCUMULATED OTHER COMPREHENSIVE INCOME

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



                                                                                  Six Months
                                                                                 Ended June 30,
                                                                        ------------------------------
(Millions)                                                               2001                     2000
----------                                                               ----                     ----
                                                                                           
Unrealized holding gains arising during the period (1)                  $12.9                    $48.5
Less:  reclassification adjustment for gains (losses) and other
  items included in net income (loss) (2)                                19.1                     (4.4)
                                                                        -----                    -----
Net unrealized gains (losses) on securities                             $(6.2)                   $52.9
                                                                        =====                    =====



(1)  Pretax unrealized holding gains arising during the period were $19.9
     million and $74.6 million for the six months ended June 30, 2001 and 2000,
     respectively.

(2)  Pretax reclassification adjustments for gains (losses) and other items
     included in net income were $29.4 million and $(6.8) million for the six
     months ended June 30, 2001 and 2000, respectively.

9.    SEVERANCE AND FACILITIES CHARGE

In December 2000, the Company recorded an after-tax severance and facilities
charge of $93 million ($143 million pretax) related to actions taken or expected
to be taken with respect to initiatives that are intended to strengthen the
Company's competitiveness, improve its profitability and concentrate its
resources on its core mission as a health care and related benefits company. The
charge consisted of two types of costs: those that relate to actions under a
plan for the involuntary termination of employees (approximately $123 million
pretax) and those that relate to an exit plan with respect to certain leased
facilities (approximately $20 million pretax). The severance portion of the
charge was based on a plan to eliminate 2,394 positions (primarily regional
sales personnel, customer service, information technology and other staff-area
personnel). The facilities portion of the charge represents the present value of
the difference between rent required to be paid by the Company and future
sublease rentals expected to be received by the Company related to certain
leased facilities, or portions of such facilities, that will be vacated.

The activity during the six months ended June 30, 2001 within the severance and
facilities reserve and the related number of positions eliminated were as
follows:



(Millions)                               Reserve                  Positions
----------                               -------                  ---------
                                                            
Balance at December 31, 2000              $140.0                      2,319
Actions taken (1)                          (95.0)                    (1,537)
                                          ------                     ------
Balance at June 30, 2001                  $ 45.0                        782
                                          ======                     ======


(1)  Includes $93.0 million of severance-related actions.

Severance actions and the vacating of leased facilities, as described above, are
expected to be completed by December 31, 2001. The remaining lease payments (net
of expected subrentals) on these vacated facilities are payable over
approximately the next eight years.

10.   DISCONTINUED PRODUCTS

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


                                    Page 15
   16
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10.   DISCONTINUED PRODUCTS (CONTINUED)

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

At the time of discontinuance, a receivable from Large Case Pensions' continuing
products equivalent to the net present value of the anticipated cash flow
shortfalls was established for the discontinued products. Interest on the
receivable is accrued at the discount rate that was used to calculate the
reserve. The offsetting payable, on which interest is similarly accrued, is
reflected in continuing products. Interest on the payable generally offsets the
investment income on the assets available to fund the shortfall. At June 30,
2001, the receivable from continuing products, net of related deferred taxes
payable of $82 million on the accrued interest income, was $337 million. At
December 31, 2000, the receivable from continuing products, net of related
deferred taxes payable of $77 million on accrued interest income, was $389
million. These amounts were eliminated in consolidation.

Results of discontinued products for the three and six months ended June 30,
2001 and 2000, were as follows (pretax, in millions):



                                                                          Charged (Credited)
                                                                             to Reserve for
Three months ended June 30, 2001                              Results         Future Losses          Net (1)
--------------------------------                              -------     -----------------       ------
                                                                                        
Net investment income                                          $ 99.6                $   --       $ 99.6
Net realized capital gains                                       18.0                 (18.0)          --
Interest earned on receivable from continuing products            7.2                    --          7.2
Other income                                                      8.0                    --          8.0
                                                               ------                ------       ------
  Total revenue                                                 132.8                 (18.0)       114.8
                                                               ------                ------       ------
Current and future benefits                                     106.9                   5.0        111.9
Operating expenses                                                2.9                    --          2.9
                                                               ------                ------       ------
  Total benefits and expenses                                   109.8                   5.0        114.8
                                                               ------                ------       ------
Results of discontinued products                               $ 23.0                $(23.0)      $   --
                                                               ======                ======       ======

Three months ended June 30, 2000
--------------------------------
Net investment income                                          $102.2                $   --       $102.2
Interest earned on receivable from continuing products            8.2                    --          8.2
Other income                                                      5.3                    --          5.3
                                                               ------                ------       ------
  Total revenue                                                 115.7                    --        115.7
                                                               ------                ------       ------
Current and future benefits                                     113.5                  (1.2)       112.3
Operating expenses                                                3.4                    --          3.4
                                                               ------                ------       ------
  Total benefits and expenses                                   116.9                  (1.2)       115.7
                                                               ------                ------       ------
Results of discontinued products                               $ (1.2)               $  1.2       $   --
                                                               ======                ======       ======



(1)  Amounts are reflected in the June 30, 2001 and 2000 Consolidated Statements
     of Income, except for interest earned on the receivable from continuing
     products, which was eliminated in consolidation.


                                    Page 16
   17
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10.   DISCONTINUED PRODUCTS (CONTINUED)



                                                                        Charged (Credited)
                                                                           to Reserve for
Six months ended June 30, 2001                               Results        Future Losses         Net(1)
------------------------------                               -------        -------------      ------
                                                                                     
Net investment income                                         $216.9               $   --      $216.9
Net realized capital gains                                      26.4                (26.4)         --
Interest earned on receivable from continuing products          14.3                   --        14.3
Other income                                                    18.1                   --        18.1
                                                              ------               ------      ------
  Total revenue                                                275.7                (26.4)      249.3
                                                              ------               ------      ------
Current and future benefits                                    214.6                 28.6       243.2
Operating expenses                                               6.1                   --         6.1
                                                              ------               ------      ------
  Total benefits and expenses                                  220.7                 28.6       249.3
                                                              ------               ------      ------
Results of discontinued products                              $ 55.0               $(55.0)     $   --
                                                              ======               ======      ======

Six months ended June 30, 2000
------------------------------
Net investment income                                         $223.9               $   --      $223.9
Net realized capital gains                                        .1                  (.1)         --
Interest earned on receivable from continuing products          16.3                   --        16.3
Other income                                                    18.3                   --        18.3
                                                              ------               ------      ------
  Total revenue                                                258.6                  (.1)      258.5
                                                              ------               ------      ------
Current and future benefits                                    229.7                 21.9       251.6
Operating expenses                                               6.9                   --         6.9
                                                              ------               ------      ------
  Total benefits and expenses                                  236.6                 21.9       258.5
                                                              ------               ------      ------
Results of discontinued products                              $ 22.0               $(22.0)     $   --
                                                              ======               ======      ======


(1)  Amounts are reflected in the June 30, 2001 and 2000 Consolidated Statements
     of Income, except for interest earned on the receivable from continuing
     products, which was eliminated in consolidation.

Assets and liabilities supporting discontinued products at June 30, 2001 and
December 31, 2000 were as follows (1):



                                                                         June 30,       December 31,
(Millions)                                                                  2001               2000
----------                                                              --------           --------
                                                                                  
Assets:
   Debt securities available for sale                                   $3,845.4           $3,898.0
   Equity securities                                                       184.5              205.5
   Mortgage loans                                                          769.8              784.1
   Investment real estate                                                  132.4              129.2
   Loaned securities                                                        85.5              121.1
   Other investments (2)                                                   488.8              445.5
                                                                        --------           --------
Total investments                                                        5,506.4            5,583.4
   Collateral received under securities loan agreements                     87.6              123.8
   Current and deferred income taxes                                        71.5               84.8
   Receivable from continuing products (3)                                 418.8              465.9
                                                                        --------           --------
Total assets                                                            $6,084.3           $6,257.9
                                                                        ========           ========
Liabilities:
   Future policy benefits                                               $4,591.0           $4,462.5
   Policyholders' funds                                                    348.5              548.8
   Reserve for anticipated future losses on discontinued products          959.9              999.4
   Collateral payable under securities loan agreements                      87.6              123.8
   Other                                                                    97.3              123.4
                                                                        --------           --------
Total liabilities                                                       $6,084.3           $6,257.9
                                                                        ========           ========


(1)  Assets supporting discontinued products are distinguished from assets
     supporting continuing products.

(2)  Includes debt securities on deposit as required by regulatory authorities
     of $56.6 million and $55.9 million at June 30, 2001 and December 31, 2000,
     respectively. These securities are considered restricted assets and were
     included in long-term investments on the Consolidated Balance Sheets.

(3)  The receivable from continuing products was eliminated in consolidation.


                                    Page 17
   18
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10.   DISCONTINUED PRODUCTS (CONTINUED)

At June 30, 2001 and December 31, 2000, net unrealized capital gains on
available-for-sale debt securities are included above in other liabilities and
are not reflected in consolidated shareholders' equity. The reserve for
anticipated future losses is included in future policy benefits on the
Consolidated Balance Sheets.

The reserve for anticipated future losses on discontinued products represents
the present value (at the risk-free rate at the time of discontinuance,
consistent with the duration of the liabilities) of the difference between the
expected cash flows from the assets supporting discontinued products and the
cash flows expected to be required to meet the obligations of the outstanding
contracts. Calculation of the reserve for anticipated future losses requires
projection of both the amount and the timing of cash flows over approximately
the next 30 years, including consideration of, among other things, future
investment results, participant withdrawal and mortality rates and the cost of
asset management and customer service. Since 1993, there have been no
significant changes to the assumptions underlying the calculation of the reserve
related to the projection of the amount and timing of cash flows.

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

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

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

The activity in the reserve for anticipated future losses on discontinued
products for the six months ended June 30, 2001 was as follows (pretax):



(Millions)
----------
                                                                      
Reserve at December 31, 2000                                             $999.4
Operating income                                                           17.7
Net realized capital gains                                                 26.4
Mortality and other                                                        10.9
Reserve reduction                                                         (94.5)
                                                                         ------
Reserve at June 30, 2001                                                 $959.9
                                                                         ======


Management reviews the adequacy of the discontinued products reserve quarterly
and, as a result, $61 million ($95 million pretax) of the reserve was released
in the second quarter of 2001, primarily due to favorable investment performance
that included equity gains and mortgage loan prepayment penalty income, as well
as favorable mortality and retirement experience. The review in the second
quarter of 2000 resulted in the release of approximately $95 million ($146
million pretax) of the discontinued products reserve. The current reserve
reflects management's best estimate of anticipated future losses.


                                    Page 18
   19
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11.   DEBT

Under the terms of its revolving credit facilities (refer to Aetna Inc.'s 2000
Annual Report on Form 10-K for a description of the Company's revolving credit
facilities), the Company is required to maintain a minimum level of
shareholders' equity, excluding net unrealized capital gains and losses on
securities, as of each fiscal quarter end. For fiscal quarters ending on or
after March 31, 2001, the minimum level is $7.5 billion increased by 50% of the
Company's consolidated net income for fiscal quarters ending on or after March
31, 2001, and decreased by up to $200 million of certain nonrecurring after-tax
charges the Company takes between December 13, 2000 and December 31, 2001
("Excluded Charges"). The Company met this requirement at June 30, 2001.

For fiscal quarters ending on or after March 31, 2001, the Company is also
required to maintain its ratio of consolidated total debt to consolidated
annualized earnings excluding interest expense, income tax expense, depreciation
expense, amortization expense, extraordinary gains or losses and the Excluded
Charges at or below 3.0. The Company met this requirement at June 30, 2001.

On February 14, 2001, the Company filed a shelf registration statement with the
Securities and Exchange Commission to sell debt securities, from time to time,
up to a total of $2.0 billion, with the amount, price and terms to be determined
at the time of sale. On March 2, 2001, the Company issued $900 million of debt
securities under this shelf registration statement consisting of $450 million of
7.375% bonds due in 2006 and $450 million of 7.875% bonds due in 2011. Also, on
June 18, 2001, the Company issued under this shelf registration statement, $700
million of 8.5% bonds due 2041. As a result of these issuances, the aggregate
amount available under the Company's revolving credit facilities was reduced
from $2.5 billion to approximately $1 billion, and the Company's $1.5 billion
bridge credit facility was terminated.

12.   CAPITAL STOCK

Effective June 18, 2001 the Board of Directors approved a grant of approximately
4 million stock options to executive, middle-management and nonmanagement
employees to purchase common stock of the Company primarily at $26.15 per share.
In addition, a grant of 375 thousand performance stock awards, which vest if
certain performance measurements are met, was also made.

13.   DIVIDEND RESTRICTIONS

The Company's business operations are conducted through subsidiaries that
principally consist of HMOs and insurance companies. In addition to general
state law restrictions on payments of dividends and other distributions to
shareholders applicable to all corporations, HMOs and insurance companies are
subject to further state regulations that, among other things, may require such
companies to maintain certain levels of equity, and restrict the amount of
dividends and other distributions that may be paid to their parent corporations.
These regulations generally are not directly applicable to Aetna Inc., as a
holding company, since it is not an HMO or insurance company. The additional
regulations applicable to Aetna Inc.'s HMO and insurance company subsidiaries
are not expected to affect Aetna Inc.'s ability to service its debt or to pay
dividends or the ability of any of Aetna Inc.'s subsidiaries to service its
debt, if any, or to pay dividends to Aetna Inc. (Refer to Note 11.)

Under regulatory requirements, the amount of dividends that may be paid to Aetna
Inc. by its domestic insurance and HMO subsidiaries through the end of 2001
without prior approval by state regulatory authorities is limited to
approximately $345 million in the aggregate. There are no such restrictions on
distributions from Aetna Inc. to its shareholders.


                                    Page 19
   20
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13.   DIVIDEND RESTRICTIONS (CONTINUED)

Effective January 1, 2001, the Company's insurance and HMO subsidiaries are
required to prepare their statutory financial statements in accordance with the
National Association of Insurance Commissioners' ("NAIC") Statements of
Statutory Accounting Principles ("Codification"), subject to the adoption of
Codification by their respective domicilary states. Currently, the NAIC is
working to formalize certain outstanding Codification matters and, as a result,
the Company has been permitted certain statutory accounting practices, primarily
related to health care receivables, in a number of states as of June 30, 2001.
At December 31, 2000, the combined statutory surplus of the Company's domestic
insurance and HMO subsidiaries was $3.4 billion. At June 30, 2001, such surplus
was $3.5 billion.

14.   SEGMENT INFORMATION

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



(Millions)                                                                 Group    Large Case   Corporate  Discontinued      Total
Three months ended June 30,                              Health Care   Insurance      Pensions    Interest    Operations    Company
---------------------------                              -----------    --------     ---------    --------  ------------  ---------
                                                                                                            
2001
Revenues from external customers                            $5,507.1      $352.7        $253.6      $   --         $  --   $6,113.4
Net investment income                                           99.1        69.7         192.2          --            --      361.0
                                                            --------      ------        ------      ------         -----   --------
Total revenue excluding realized capital gains (losses)     $5,606.2      $422.4        $445.8      $   --         $  --   $6,474.4
                                                            ========      ======        ======      ======         =====   ========

Operating earnings (loss) (1)                               $ (121.8)     $ 37.6        $ 10.1      $(21.8)        $  --   $  (95.9)
Other items, net of tax (2)                                      5.3          --          61.4          --            --       66.7
Realized capital gains (losses), net of tax                     45.1        (5.3)           --          --            --       39.8
                                                            --------      ------        ------      ------         -----   --------
Net income (loss)                                           $  (71.4)     $ 32.3        $ 71.5      $(21.8)        $  --   $   10.6
                                                            ========      ======        ======      ======         =====   ========

2000
Revenues from external customers                            $5,966.9      $335.6        $ 42.9      $   --         $  --   $6,345.4
Net investment income                                           97.6        72.9         216.2          --            --      386.7
                                                            --------      ------        ------      ------         -----   --------
Total revenue excluding realized capital gains (losses)     $6,064.5      $408.5        $259.1      $   --         $  --   $6,732.1
                                                            ========      ======        ======      ======         =====   ========

Operating earnings (loss) from continuing operations (1)    $   10.4      $ 48.2        $ 14.4      $(36.6)        $  --   $   36.4
Other items, net of tax (2)                                    (14.6)         --          94.9          --            --       80.3
Realized capital gains (losses), net of tax                     (8.4)       (3.1)          4.4          --            --       (7.1)
                                                            --------      ------        ------      ------         -----   --------
Income (loss) from continuing operations                       (12.6)       45.1         113.7       (36.6)           --      109.6
Income from discontinued operations, net of tax                   --          --            --          --          77.0       77.0
                                                            --------      ------        ------      ------         -----   --------
Net income (loss)                                           $  (12.6)     $ 45.1        $113.7      $(36.6)        $77.0   $  186.6
                                                            ========      ======        ======      ======         =====   ========


(1)  Operating earnings (loss) is comprised of income (loss) excluding realized
     capital gains and losses and other items. While operating earnings is the
     measure of profit or loss used by the Company's management when assessing
     performance or making operating decisions, it does not replace operating
     income or net income as a measure of profitability.

(2)  The other items excluded from operating earnings consist of $5.3 million
     after tax of favorable reserve developments (since March 31, 2001) related
     to Medicare markets the Company exited January 1, 2001 in the Health Care
     segment in 2001, an after-tax charge of $14.6 million related to the New
     Jersey insolvency assessment in the Health Care segment in 2000 and
     after-tax benefits of $61.4 million and $94.9 million from reductions of
     the reserve for anticipated future losses on discontinued products in the
     Large Case Pension segment in 2001 and 2000, respectively.


                                    Page 20
   21
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14.   SEGMENT INFORMATION (CONTINUED)



(Millions)                                                                   Group   Large Case  Corporate  Discontinued      Total
Six months ended June 30,                                   Health Care  Insurance     Pensions   Interest    Operations    Company
-------------------------                                   -----------  ---------    ---------  ---------   ----------- ----------
                                                                                                       
2001
Revenues from external customers                              $11,039.1     $705.6       $351.9     $   --       $   --   $12,096.6
Net investment income                                             207.1      156.3        408.6         --           --       772.0
                                                              ---------     ------       ------     ------       ------   ---------
Total revenue excluding realized capital gains (losses)       $11,246.2     $861.9       $760.5     $   --       $   --   $12,868.6
                                                              =========     ======       ======     ======       ======   =========
Operating earnings (loss) (1)                                 $  (194.5)    $ 82.8       $ 20.7     $(41.5)      $   --   $  (132.5)
Other items, net of tax (2)                                       (29.0)        --         61.4         --           --        32.4
Realized capital gains (losses), net of tax                        59.9        2.9          (.8)        --           --        62.0
Cumulative effect adjustment, net of tax                             .5         --           --         --           --          .5
                                                              ---------     ------       ------     ------       ------   ---------
Net income (loss)                                             $  (163.1)    $ 85.7       $ 81.3     $(41.5)      $   --   $   (37.6)
                                                              =========     ======       ======     ======       ======   =========

2000
Revenues from external customers                              $11,932.5     $681.1       $ 90.2     $   --       $   --   $12,703.8
Net investment income                                             201.4      151.7        460.7         --           --       813.8
                                                              ---------     ------       ------     ------       ------   ---------
Total revenue excluding realized capital gains (losses)       $12,133.9     $832.8       $550.9     $   --       $   --   $13,517.6
                                                              =========     ======       ======     ======       ======   =========


Operating earnings (loss) from continuing operations (1)      $    78.6     $ 94.4       $ 31.0     $(81.4)      $   --   $   122.6
Other items, net of tax (2)                                       (14.6)        --         94.9         --           --        80.3
Realized capital gains (losses), net of tax                       (15.3)      (7.8)         5.2         --           --       (17.9)
                                                              ---------     ------       ------     ------       ------   ---------
Income (loss) from continuing operations                           48.7       86.6        131.1      (81.4)          --       185.0
Income from discontinued operations, net of tax                      --         --           --         --        171.6       171.6
                                                              ---------     ------       ------     ------       ------   ---------
Net income (loss)                                             $    48.7     $ 86.6       $131.1     $(81.4)      $171.6   $   356.6
                                                              =========     ======       ======     ======       ======   =========


(1)  Operating earnings (loss) is comprised of income (loss) excluding realized
     capital gains and losses and other items. While operating earnings is the
     measure of profit or loss used by the Company's management when assessing
     performance or making operating decisions, it does not replace operating
     income or net income as a measure of profitability.

(2)  The other items excluded from operating earnings consist of an after-tax
     charge of $29.0 million for unfavorable reserve development related to
     Medicare markets the Company exited January 1, 2001 in the Health Care
     segment in 2001, an after-tax charge of $14.6 million related to the New
     Jersey insolvency assessment in the Health Care segment in 2000 and
     after-tax benefits of $61.4 million and $94.9 million from reductions of
     the reserve for anticipated future losses on discontinued products in the
     Large Case Pension segment in 2001 and 2000, respectively.

15.   SALE AND SPIN-OFF RELATED TRANSACTION

On December 13, 2000, Aetna Inc. (a Connecticut Corporation and former parent of
the Company) ("former Aetna") sold its financial services and international
businesses to ING in a transaction valued at approximately $7.7 billion. Under
the terms of the agreement and in an integrated transaction, former Aetna spun
off to its shareholders the shares of the Company. Essentially simultaneously,
former Aetna, which then was comprised of Aetna Financial Services and Aetna
International, was merged with a newly formed subsidiary of ING. In exchange for
each share of former Aetna, shareholders received one share of the Company and
$35.33 per share in cash. Refer to the Company's 2000 Annual Report on Form 10-K
for further discussion of the sale and spin-off related transaction.

The Company is the successor of former Aetna for accounting purposes and,
accordingly, the account balances and activities of the financial services and
international businesses have been segregated and reported as discontinued
operations.


                                    Page 21
   22
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15.   SALE AND SPIN-OFF RELATED TRANSACTION (CONTINUED)

Operating results of the discontinued operations for the three and six months
ended June 30, 2000 were as follows:



                                                                   Three Months Ended      Six Months Ended
(Million)                                                               June 30, 2000         June 30, 2000
---------                                                          ------------------      ----------------
                                                                                     
Revenue:
  Premiums                                                                  $  920.4             $1,478.9
  Net investment income                                                        351.2                711.8
  Fees and other income                                                        193.6                383.4
  Net realized capital losses                                                  (37.8)               (12.4)
                                                                            --------             --------
Total revenue                                                                1,427.4              2,561.7
                                                                            --------             --------
Benefits and expenses:
  Current and future benefits                                                  973.1              1,606.9
  Operating expenses:
    Salaries and related benefits                                              111.6                213.3
    Other                                                                      158.8                317.0
  Interest expense                                                              11.6                 25.4
  Amortization of goodwill and other acquired intangible assets                  8.6                 15.5
  Amortization of deferred policy acquisition costs                             58.1                116.8
                                                                            --------             --------
Total benefits and expenses                                                  1,321.8              2,294.9
                                                                            --------             --------
Income before income taxes (benefits)                                          105.6                266.8
Income taxes (benefits):
   Current                                                                      31.3                 61.8
   Deferred                                                                     (2.7)                33.4
                                                                            --------             --------
Total income taxes                                                              28.6                 95.2
                                                                            --------             --------
Income from discontinued operations                                         $   77.0             $  171.6
                                                                            ========             ========



                                    Page 22
   23



Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16.  COMMITMENTS AND CONTINGENT LIABILITIES

Shareholder Litigation

Four purported shareholder class action complaints were filed in the Superior
Court of Connecticut, Hartford County, alleging in substance that former Aetna
and its directors breached fiduciary duties to shareholders in responding to a
February 24, 2000 letter from WellPoint Health Networks, Inc. and ING America
Insurance Holdings, Inc. which had invited discussions concerning a possible
transaction. These actions were filed on behalf of George Schore, Michael
Demetrio and Gersh Korsinsky on March 3, 2000, The Rainbow Fund on March 7,
2000, Eleanor Werbowsky on March 7, 2000, and Catherine M. Friend on March 23,
2000. On July 26, 2000, the Connecticut court ordered consolidation of the four
Connecticut actions. On October 12, 2000, the plaintiffs in the four Connecticut
actions withdrew their complaints. A fifth, substantially similar complaint was
filed by Barnett Stepak on behalf of a purported class of former Aetna
shareholders on March 28, 2000 in the Supreme Court of New York, New York
County. The complaint in the New York action seeks various forms of relief,
including unspecified damages and equitable remedies. On June 21, 2001, the
court dismissed that complaint. The plaintiff has not appealed the dismissal,
and the time period for taking such appeal has expired.

Managed Care Class Action Litigation

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

On October 23, 2000, the Judicial Panel on Multidistrict Litigation transferred
a number of these actions to the United States District Court for the Southern
District of Florida (the "Florida Federal Court") for consolidated pretrial
proceedings. The actions so consolidated by this and subsequent orders,
including actions originally filed in the Florida District Court, include the
following actions brought by the named individuals on the indicated dates:

-        Anthony Conte (October 4, 1999)

-        Jo Ann O'Neill (October 7, 1999; by amendment dated November 9, 1999,
         Lydia K. Rouse and Danny E. Waldrop joined as additional plaintiffs)

-        Jeanne E. Curtright (October 28, 1999)

-        Raymond D. Williamson, III (November 22, 1999, and a second case was
         filed in the Florida Federal Court on June 23, 2000)

-        Michael V. Amorosi (December 3, 1999)

-        Eugene Mangieri, M.D. (January 19, 2000)

-        H. Robert Harrison, M.D., Martin Moran, M.D., Lance R. Goodman, M.D.,
         Sandy Springs Pediatrics & Adolescent Medicine, P.C., Pediatric
         Infectious Disease Associates, LLC, American Medical Association, and
         Medical Association of Georgia (February 16, 2000 naming Company
         defendants, and April 18, 2000 naming Prudential defendants)

-        Jennifer McCarron and Ira S. Schwartz (April 11, 2000)

-        John Romero and Catherine Romero (May 22, 2000)

-        Jo Ann O'Neill, Lydia K. Rouse and Danny E. Waldrop (June 23, 2000)

-        Glenn O'Brien and Christopher Gallagher (August 7, 2000)

-        Charles B. Shane, M.D., Edward L. Davis, D.O., Jeffrey Book, D.O.,
         Manual Porth, M.D., Dennis Breen, M.D., Glenn L. Kelly, M.D. and
         Michael Burgess, M.D. (August 11, 2000); Charles B. Shane, M.D., H.
         Robert Harrison, M.D., Eugene Mangieri, M.D., Jeffrey Book, D.O.,
         Dennis Breen, M.D., Edward L. Davis, D.O., Lance R. Goodman, M.D.,
         Glenn L. Kelly, M.D., Leonard J. Klay, M.D., Kevin Molk, M.D., Martin
         Moran, M.D., Manuel Porth, M.D., Thomas Backer, M.D., David Boxstein,
         M.D., Navid Ghalambor, M.D., Susan Hansen, M.D., Andres Taleisnik,
         M.D., Julio Taleisnik, M.D., Roger Wilson, M.D., California Medical
         Association, Denton County Medical Association, Denton County (March
         26, 2001) (Shane Amended Complaint)

-        Douglas Chapman (September 7, 2000)


                                    Page 23
   24
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16.  COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

The plaintiffs in the Conte, O'Neill, Williamson, Amorosi, McCarron, Romero,
O'Brien and Chapman cases (together with Curtright, the "Subscriber Cases") seek
to represent purported nationwide classes of current and former members of the
Company's health plans. The Subscriber Cases collectively seek various forms of
relief, including unspecified damages, treble damages, injunctive relief and
restitutionary relief for unjust enrichment, for alleged violations of the
Racketeering Influenced and Corrupt Organizations Act ("RICO") and the Employee
Retirement Income Security Act of 1974 ("ERISA"), and seek similar relief under
common law theories. In addition, the action by Jeanne E. Curtright seeks
similar relief on behalf of a class of California health plan members and
members of the California public for alleged violations of California Business
and Professions Code Sections 17200 and 17500 and under common law theories.
Each of former Aetna, Aetna Inc., Richard L. Huber and certain health
maintenance organizations that Aetna Inc. acquired from The Prudential Insurance
Company of America are named as defendants in one or more of these actions. The
complaints allege generally that defendants failed to adequately inform members
about defendants' managed care practices, including capitated payments to
providers and utilization management practices. In addition, the Chapman
complaint relates to the disclosure and determination of usual, customary and
reasonable charges for claims and alleges an undisclosed policy of discounting
procedures in order to reduce reimbursements to ERISA plan members.

On August 11, 2000, Aetna Inc. and former Aetna moved to dismiss the June 22,
2000 O'Neill Complaint. On June 12, 2001, the Florida Federal Court granted that
motion in part and denied it in part. It permitted plaintiffs to file an amended
complaint, which they did on June 29, 2001. The Company's response is due on
August 13, 2001. On September 29, 2000, plaintiffs moved for class
certification. The motion has been fully briefed, and the Florida Federal Court
heard argument on that motion on July 24, 2001.

The Curtright Subscriber Case was originally filed in the Superior Court of
California, County of Contra Costa. Defendants removed the action to the United
States District Court for the Northern District of California. Plaintiff moved
to remand the action to state court. Aetna Inc. moved to dismiss the action for
failure to state a claim upon which relief can be granted. The motions to remand
and dismiss were pending when the Curtright Subscriber Case was transferred to
the Florida Federal Court, which has not ruled on these motions.

The Shane, Mangieri and Harrison cases together comprise the "Provider Cases."
The amended Shane action is brought against Aetna Inc. and a number of other
managed care companies. The Mangieri action is brought against Aetna Inc. and
two other managed care companies. The Harrison actions are brought against Aetna
Inc., Prudential and a number of other managed care companies.

The Provider Cases collectively allege that Aetna Inc. and each other defendant
managed care organization improperly denied claims in whole or in part, did not
pay claims timely, and employed coercive economic power to force physicians to
enter into economically unfavorable contracts. The Shane Provider Case further
charges that Aetna Inc. and the other defendant managed care organizations
conspired and aided and abetted one another in the alleged wrongdoing. The
Provider Cases seek various forms of relief, including unspecified damages,
treble damages, punitive damages and injunctive relief, for alleged violations
of RICO, ERISA, state unfair trade statutes and state laws regarding the timely
payment of claims, and seek similar relief under common law theories.

The Provider Cases seek to represent purported nationwide classes of physicians
and other providers who currently or formerly provided services to members of
the Company and/or Prudential. In addition, the Harrison actions seek to
represent a class of Georgia physicians. The Shane plaintiffs seek to represent
a purported national subclass of physicians to the extent that each such
physician has a claim against each respective defendant which claim that
physician is not bound to arbitrate as to various state law claims. The Shane
plaintiffs also seek to represent a similar subclass of California physicians
with respect to claims asserted under California's unfair trade practices
statute.


                                    Page 24
   25
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16.  COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

On September 22, 2000, Aetna Inc. and the other defendants moved to dismiss the
August 11, 2000 Shane complaint. On March 2, 2001, the Florida Federal Court
granted that motion in part and permitted plaintiffs to file an amended
complaint. An amended complaint was filed on March 26, 2001 by the individuals
listed above, including the Harrison and Mangieri plaintiffs and others.

On April 30, 2001, Aetna Inc. and the other defendants moved to dismiss the
March 26, 2001 Shane complaint. On May 1, 2001, Aetna Inc. moved to compel
arbitration of all claims asserted against it by several of the named
plaintiffs, moved to compel arbitration and/or stay claims against Aetna Inc.
for its alleged participation in purported RICO violations by other defendants
and moved to compel arbitration and/or stay claims against other defendants for
their alleged participation in purported RICO violations by Aetna Inc.

On October 20, 2000, the Shane plaintiffs moved for class certification. The
parties fully briefed that motion based on the allegations of the August 11,
2000 Shane complaint. On May 7, 2001, the Florida Federal Court heard oral
argument.

On June 25, 2001, the United States Court of Appeals for the Eleventh Circuit
(the "Appeals Court") issued an order staying the Provider Cases pending before
the Florida Federal Court while the Appeals Court considers an appeal taken by
other defendants of an order of the Florida Federal Court concerning the effect
of arbitration clauses contained in contracts between certain individual
plaintiffs and the appellants.

Various motions to stay and dismiss have been filed and remain pending in the
other Subscriber Cases. They remain in the preliminary stages. The Company
intends to continue to defend the Subscriber Cases and the Provider Cases
vigorously.

In addition, a complaint was filed in the Superior Court of the State of
California, County of San Diego (the "California Superior Court") on November 5,
1999 by Linda Ross and The Stephen Andrew Olsen Coalition for Patients Rights,
purportedly on behalf of the general public of the State of California (the
"Ross Complaint"). The Ross Complaint, as amended, seeks injunctive relief
against former Aetna, Aetna Inc., Aetna U.S. Healthcare of California Inc. and
additional unnamed "John Doe" defendants for alleged violations of California
Business and Professions Code Sections 17200 and 17500. The Ross Complaint
alleges that defendants are liable for alleged misrepresentations and omissions
relating to advertising, marketing and member materials directed to the
Company's HMO members and the general public and for alleged unfair practices
relating to contracting of doctors. Trial is scheduled for June 7, 2002.
Defendants intend to continue to defend this action vigorously.

On February 15, 2001, two complaints were filed in the Superior Court for New
Haven County, Connecticut against Aetna Health Plans of Southern New England,
Inc., an indirect subsidiary of Aetna Inc. One complaint was filed by the
Connecticut State Medical Society on behalf of its members. The other complaint
was filed by Sue McIntosh, M.D., J. Kevin Lynch, M.D., Karen Laugel, M.D. and
Stephen R. Levinson, M.D. on behalf of a purported class of Connecticut State
Medical Society members who provided services to the Company's members on or
after July 19, 1996. Each complaint alleges in substance that the Company
engages in unfair and deceptive acts and practices intended to delay and reduce
reimbursement to physicians, and that the Company has been able to force
physicians to enter into one-sided contracts that infringe upon the
doctor-patient relationship. The Connecticut State Medical Society complaint
seeks injunctive relief and attorneys' fees under the Connecticut Unfair Trade
Practices Act ("CUTPA"). The McIntosh complaint asserts claims under CUTPA and
various common law doctrines and seeks similar injunctive relief, along with
unspecified monetary damages, punitive damages and attorneys' fees. The Company
removed both cases to the United States District Court for the District of
Connecticut, and has requested that the Judicial Panel on Multidistrict
Litigation transfer these cases to the Florida Federal Court for consolidated
pretrial proceedings with the Provider Cases. Each of these actions is in the
preliminary stages, and the Company intends to continue to defend each action
vigorously.


                                    Page 25
   26
Item 1.  Financial Statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16.  COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

NYLCare Texas Sale

On March 30, 2001, Health Care Service Corporation ("HCSC") provided the Company
with a letter demanding arbitration of claims arising out of its purchase from
Aetna Inc. of the NYLCare Texas HMOs. HCSC seeks damages in excess of $100
million, and punitive damages, for alleged contract breaches and fraud by Aetna
Inc. HCSC claims in substance that Aetna Inc. failed to calculate premium
deficiency and medical claim reserves for the sold companies in accordance with
applicable statutory accounting principles and practices and commonly accepted
actuarial standards and failed to disclose certain litigation claims. Aetna Inc.
believes it established these reserves appropriately and complied with the terms
and conditions of the Stock Purchase Agreement, and on April 19, 2001
transmitted an answer denying the material allegations. The parties have
selected arbitrators, and discovery has begun. Aetna Inc. intends to continue to
defend this matter vigorously.

Other Litigation and Regulatory Proceedings

The Company is involved in numerous other lawsuits arising, for the most part,
in the ordinary course of its business operations, including claims of bad
faith, medical malpractice, non-compliance with state regulatory regimes,
marketing misconduct, failure to timely pay medical claims and other litigation
in its health care business. Some of these other lawsuits are purported to be
class actions.

In addition, the Company's business practices are subject to review by various
state insurance and health care regulatory authorities and federal regulatory
authorities. Recently, there has been heightened review by these regulators of
the managed health care industry's business practices, including utilization
management and claim payment practices. As the largest national managed care
organization, the Company regularly is the subject of such reviews and several
such reviews currently are pending, some of which may be resolved during 2001.
These reviews may result in changes to or clarifications of the Company's
business practices, and may result in fines, penalties or other sanctions.

While the ultimate outcome of this other litigation and these regulatory
proceedings cannot be determined at this time, after consideration of the
defenses available to the Company, applicable insurance coverage 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.


                                    Page 26
   27
                       INDEPENDENT AUDITORS' REVIEW REPORT

The Board of Directors
Aetna Inc.:

We have reviewed the condensed consolidated balance sheet of Aetna Inc. and
Subsidiaries as of June 30, 2001, and the related condensed consolidated
statements of income for the three-month and six-month periods ended June 30,
2001 and 2000 and the related condensed consolidated statements of shareholders'
equity and cash flows for the six-month periods ended June 30, 2001 and 2000.
These condensed consolidated financial statements are the responsibility of the
Company's management.

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

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

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Aetna Inc. and Subsidiaries as of December 31, 2000, and the related
consolidated statements of income, shareholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated January 29,
2001, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2000, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.




                                  /s/ KPMG LLP


Hartford, Connecticut
August 7, 2001


                                    Page 27
   28
Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

The following discussion and analysis presents a review of Aetna Inc. and its
subsidiaries (collectively, the "Company") for the three and six months ended
June 30, 2001 and 2000. This review should be read in conjunction with the
consolidated financial statements and other data presented herein as well as
Management's Discussion and Analysis of Financial Condition and Results of
Operation ("MD&A") contained in the Company's 2000 Annual Report on Form 10-K.

OVERVIEW

General

At June 30, 2001, the Company's operations included three business segments:
Health Care, Group Insurance and Large Case Pensions. Health Care consists of
health and dental plans offered on both a full risk basis (where the Company
assumes all or a majority of the risk for health and dental care costs) and an
employer-funded basis (where the plan sponsor under an administrative services
contract, and not the Company, assumes all or a majority of this risk). Health
plans include health maintenance organization ("HMO"), point-of-service ("POS"),
preferred provider organization ("PPO") and indemnity benefit products. The
Group Insurance segment includes group life insurance products offered on a full
risk basis, as well as group disability and long-term care insurance products
offered on both a full risk and an employer-funded basis. Large Case Pensions
manages a variety of retirement products (including pension and annuity
products) primarily for defined benefit and defined contribution plans. These
products provide a variety of funding and benefit payment distribution options
and other services. These business segments reflect the Company's changes to its
internal structure for making operating decisions and assessing performance,
which became effective January 1, 2001. Corresponding information for 2000 has
been restated to reflect this change.

Refer to "MD&A-Overview" contained in the Company's 2000 Annual Report on Form
10-K for a discussion of the Company's spin-off from its former parent, Aetna
Inc., a Connecticut corporation, ("former Aetna"), and the merger of former
Aetna's financial services and international businesses with a subsidiary of ING
Groep N.V. ("ING") on December 13, 2000. The financial services and
international businesses are presented as discontinued operations for 2000,
because the Company is the successor of former Aetna for accounting purposes.
Refer to Note 15 of Condensed Notes to Consolidated Financial Statements for
further discussion of discontinued operations.

Turnaround Initiatives

The Company continues to implement strategic and operational initiatives with
the goal of improving the performance of its business. These initiatives
include, among other things, addressing rising medical costs, improving the
efficiency of operations, improving relations with health care providers and
exiting certain product markets as described in the Company's 2000 Form 10-K and
first quarter 2001 Form 10-Q. As reported in the first quarter 2001 Form 10-Q,
John W. Rowe, M.D. has become Chairman, in addition to remaining the Company's
President and Chief Executive Officer, and the Company has also strengthened its
management team through the addition of Ronald A. Williams, Executive Vice
President and Chief of Health Operations, William C. Popik, M.D., Senior Vice
President and Chief Medical Officer and Wei-Tih Cheng, Ph.D., Senior Vice
President and Chief Information Officer. Each of these executives has
significant health care or information technology experience and they are
focused on the further development and implementation of the Company's
turnaround plan.


                                    Page 28
   29
Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations (Continued)

OVERVIEW (CONTINUED)

The Company intends to build upon its strengths, including geographic breadth
and capacity to serve multi-state accounts; its large provider network; a
powerful brand name; workforce and technological capabilities; ability to
provide members with customized, personalized information; and broad product mix
with the potential to develop hybrid health care and group insurance consumer
products.

The Company's strategy is to provide distinctive, consumer-oriented products and
services to members in targeted markets. As it implements this strategy, the
Company intends to:

         -        Increase its focus on customers and growth opportunities in
                  the middle market segment (generally, cases with greater than
                  50 but less than 3000 employees), including many multi-state
                  cases with needs compatible with the Company's competitive
                  capabilities.

         -        Refocus its strategy for customers in the small business
                  market segment (generally, cases with 50 or less employees) to
                  be much more selective in the products the Company offers and
                  the business it writes. The Company does not intend to exit
                  the health small business market segment, but will target
                  markets that meet its competitive and financial criteria.

         -        Increase the percentage of national accounts (generally, cases
                  with greater than 3,000 employees) and middle market customers
                  with employer-funded plans. This would increase the relative
                  proportion of employer-funded customers as compared to risk
                  accounts.

The Company believes that this strategy will better enable it to provide
consumers with a wider range of product choices (including more open access
products), respond to market changes and can make it easier for members to
access health care benefits by making service simpler and more efficient. The
Company also intends to add value by providing members and their physicians with
information that helps them improve the quality of health care.

Consolidated Results

The Company reported net income of $11 million for the three months ended June
30, 2001 compared to income from continuing operations of $110 million for the
corresponding period in 2000. Net income per common share for the three months
ended June 30, 2001 was $.07, compared to income from continuing operations of
$.77 per common share for the corresponding period in 2000.

For the three months ended June 30, 2001, net income includes a reduction of the
reserve for loss on discontinued products in the Large Case Pensions business
segment of $61 million and net realized capital gains of $40 million. Income
from continuing operations for the three months ended June 30, 2000 includes a
reduction of the reserve for loss on discontinued products in the Large Case
Pensions business segment of $95 million and net realized capital losses of $7
million. Excluding these items, results would have been a net loss of $90
million for the three months ended June 30, 2001, compared to income from
continuing operations of $22 million for the corresponding period in 2000.

The Company reported a net loss of $38 million for the six months ended June 30,
2001 compared to income from continuing operations of $185 million for the
corresponding period in 2000. Net loss per common share for the six months ended
June 30, 2001 was $.26, compared to income from continuing operations of $1.30
per common share for the corresponding period in 2000.


                                    Page 29
   30
Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations (Continued)

OVERVIEW (CONTINUED)

For the six months ended June 30, 2001, the net loss includes the reduction of
the reserve for loss on discontinued products in the Large Case Pensions
business segment of $61 million, net realized capital gains of $62 million and a
cumulative effect adjustment of $.5 million related to the Company adopting
Financial Accounting Standard No. 133 (Refer to Note 7 in Condensed Notes to
Consolidated Financial Statements). Income from continuing operations for the
six months ended June 30, 2000 includes the reduction of the reserve for loss on
discontinued products in the Large Case Pensions business segment of $95 million
and net realized capital losses of $18 million. Excluding these items, results
would have been a net loss of $162 million for the six months ended June 30,
2001, compared to income from continuing operations of $108 million for the
corresponding period in 2000.

Certain reclassifications have been made to the 2000 financial information to
conform to the 2001 presentation.

HEALTH CARE

Operating Summary



                                            Three Months Ended June 30,                Six Months Ended June 30,
                                            ---------------------------                -------------------------
(Millions)                               2001           2000       % Change        2001           2000       % Change
----------                               ----           ----       --------        ----           ----       --------
                                                                                           
Premiums:
 Commercial HMO (1)                    $ 3,614.6     $ 3,558.8        1.6%     $  7,243.3     $  7,075.1        2.4%
 Medicare HMO                              505.4       1,038.5      (51.3)        1,011.6        2,120.1      (52.3)
 Other (2)                                 920.8         879.1        4.7         1,853.6        1,740.6        6.5
                                       ---------     ---------      -----        --------       --------      -----
Total premiums                           5,040.8       5,476.4       (8.0)       10,108.5       10,935.8       (7.6)
                                       ---------     ---------      -----        --------       --------      -----
Administrative services
 contract fees                             457.7         477.8       (4.2)          915.8          967.6       (5.4)
Net investment income                       99.1          97.6        1.5           207.1          201.4        2.8
Other income                                 8.6          12.7      (32.3)           14.8           29.1      (49.1)
Net realized capital gains
(losses)                                    69.9         (14.6)      --              93.2          (36.4)      --
                                       ---------     ---------      -----        --------       --------      -----
         Total revenue                   5,676.1       6,049.9       (6.2)       11,339.4       12,097.5       (6.3)
                                       ---------     ---------      -----        --------       --------      -----
Health care costs                        4,566.8       4,777.0       (4.4)        9,171.0        9,451.8       (3.0)
Salaries and related benefits              539.3         615.0      (12.3)        1,132.9        1,190.6       (4.8)
Other operating expenses                   544.7         538.6        1.1         1,016.6        1,112.8       (8.6)
Amortization of goodwill and
 other acquired intangible assets          107.3         109.2       (1.7)          214.5          218.4       (1.8)
                                       ---------     ---------      -----        --------       --------      -----
         Total benefits and
          expenses                       5,758.1       6,039.8       (4.7)       11,535.0       11,973.6       (3.7)
                                       ---------     ---------      -----        --------       --------      -----
Income (loss) before income
 taxes (benefit)                           (82.0)         10.1       --            (195.6)         123.9       --
Income taxes (benefit)                     (10.6)         22.7       --             (32.0)          75.2       --
Cumulative effect adjustment,
 net of tax                                 --            --         --                .5           --         --
                                       ---------     ---------      -----        --------       --------      -----
Net income (loss)                      $   (71.4)    $   (12.6)       -- %      $  (163.1)    $     48.7        -- %
                                       =========     =========      =====        ========       ========      =====
Net realized capital gains
 (losses), net of tax (included
 above)                                $    45.1     $    (8.4)       -- %      $    59.9     $    (15.3)       -- %
                                       =========     =========      =====        ========       ========      =====


(1)      Commercial HMO includes premiums related to POS members who access
         primary care physicians and referred care through an HMO network.

(2)      Includes POS, PPO, Indemnity, Medicaid HMO and Dental products.

Results

Health Care's net losses for the three and six months ended June 30, 2001
reflect decreases of $59 million and $212 million, respectively, from the net
loss and net income reported for the corresponding periods in 2000. Excluding
net realized capital gains or losses, results for the three and six months ended
June 30, 2001 decreased $112 million and $287 million, respectively, compared to
the corresponding periods in 2000.


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

HEALTH CARE (CONTINUED)

Excluding net realized capital gains and losses as well as amortization of
goodwill and other acquired intangible assets, which are mostly non-deductible
for income tax purposes, the effective tax rate was 32.5% and 31.8% for the
three and six months ended June 30, 2001, respectively, compared to 36.8% and
36.3% for the corresponding periods in 2000. The decreases primarily reflect the
impact of state income taxes on significantly lower results for the three and
six months ended June 30, 2001. State income taxes are impacted by where
earnings or losses are incurred, due to differing tax rates and/or limitations
of allowed losses in each period.

Net realized capital gains for the three months ended June 30, 2001 include a
capital gain of $38 million after tax resulting from contingent consideration
following the Company's 1997 sale of its behavioral health subsidiary, Human
Affairs International ("HAI"), as well as bond gains resulting from the
Company's rebalancing of its investment portfolio in a declining interest rate
environment. The Company records capital gains relating to the HAI sale as they
become realizable. Net realized capital gains for the six months ended June 30,
2001 include the capital gains in the second quarter of 2001 discussed above, as
well as capital gains in the first quarter of 2001 resulting from collections of
previously charged-off mortgage loans and the Company's rebalancing of its bond
investment portfolio, partially offset by capital losses resulting primarily
from the write-down of certain bonds. Net realized capital losses for the three
and six months ended June 30, 2000 primarily reflect the Company's rebalancing
of its investment portfolio in a rising interest rate environment.

The operating results discussion that follows segregates health and dental
products offered on a full risk basis ("Risk Products") from those offered on an
employer-funded basis, also known as administrative services contract ("ASC")
Products ("ASC Products"). To provide a comparison that management believes is
more reflective of Health Care's performance, this discussion, including the
information presented in the tables, excludes amortization of goodwill and other
acquired intangible assets and net realized capital gains or losses in all
periods and the cumulative effect adjustment in the six months ended June 30,
2001.



                                    Three Months Ended June 30,     Six Months Ended June 30,
(Millions)                             2001            2000           2001            2000
----------                             ----            ----           ----            ----
                                                                       
Operating earnings (losses):
  Risk Products                     $   (73.0)      $    35.8      $  (125.4)      $   141.8
  ASC Products                           42.9            48.8           74.7            99.4
                                    ---------       ---------      ---------       ---------
Total Health Care                   $   (30.1)      $    84.6      $   (50.7)      $   241.2
                                    =========       =========      =========       =========


Risk Products



                                                Three Months Ended June 30,                   Six Months Ended June 30,
                                                ---------------------------                   -------------------------
(Millions)                                 2001             2000          % Change        2001            2000          % Change
----------                                 ----             ----          --------        ----            ----          --------
                                                                                                      
Premiums:
 Commercial HMO (1)                     $ 3,614.6        $ 3,558.8             1.6%     $ 7,243.3       $ 7,075.1              2.4%
 Medicare HMO                               505.4          1,038.5           (51.3)       1,011.6         2,120.1            (52.3)
 Other (2)                                  920.8            879.1             4.7        1,853.6         1,740.6              6.5
                                        ---------        ---------       ---------      ---------       ---------        ---------
Total premiums                            5,040.8          5,476.4            (8.0)      10,108.5        10,935.8             (7.6)
Net investment income                        93.4             91.1             2.5          192.6           185.6              3.8
Other income                                  3.4              3.4              --            5.4             8.2            (34.1)
                                        ---------        ---------       ---------      ---------       ---------        ---------
         Total revenue                    5,137.6          5,570.9            (7.8)      10,306.5        11,129.6             (7.4)
                                        ---------        ---------       ---------      ---------       ---------        ---------
Health care costs                         4,566.8          4,777.0            (4.4)       9,171.0         9,451.8             (3.0)
Operating expenses (including
 salaries and related benefits)             678.9            733.6            (7.5)       1,320.8         1,449.4             (8.9)
                                        ---------        ---------       ---------      ---------       ---------        ---------
         Total benefits and
          expenses                        5,245.7          5,510.6            (4.8)      10,491.8        10,901.2             (3.8)
                                        ---------        ---------       ---------      ---------       ---------        ---------
Operating earnings (loss) before
 income taxes (benefit)                    (108.1)            60.3              --         (185.3)          228.4               --
Income taxes (benefit)                      (35.1)            24.5              --          (59.9)           86.6               --
                                        ---------        ---------       ---------      ---------       ---------        ---------
Operating earnings (loss)               $   (73.0)       $    35.8              --%     $  (125.4)      $   141.8               --%
                                        =========        =========       =========      =========       =========        =========


(1)      Commercial HMO includes premiums related to POS members who access
         primary care physicians and referred care through an HMO network.

(2)      Includes POS, PPO, Indemnity, Medicaid HMO and Dental products.


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

HEALTH CARE (CONTINUED)

For Risk Products, the operating losses for the three and six months ended June
30, 2001 reflect decreases of $109 million and $267 million, respectively, from
the operating earnings in the corresponding periods in 2000. These decreases
reflect lower results for Commercial HMO products as a result of significantly
higher per member medical costs outpacing per member premium rate increases,
partially offset by decreases in allocated operating expenses, including
salaries and related benefits, resulting from expense reduction initiatives.
Results for Medicare HMO products increased for the three months ended June 30,
2001 compared to the corresponding period in 2000 and were level for the six
months ended June 30, 2001 compared to the corresponding period in 2000. This
reflects the Company's exit of a number of Medicare service areas on January 1,
2001 as well as premium rate increases on renewing business, partially offset by
significantly higher per member medical costs. The decreases in results for the
three and six months ended June 30, 2001 also reflect lower results for
Indemnity, PPO, and POS medical products due primarily to higher claim costs
related to several large customers.

Health Care Costs Payable
-------------------------
For Risk Products, health care costs payable reflects estimates of the ultimate
cost of claims that have been incurred but not yet reported or reported but not
yet paid. Health care costs payable are estimated periodically, and any
resulting adjustments are reflected in current-period operating results within
health care costs. Health care costs payable are based on a number of factors,
including those derived from historical claim experience. An extensive degree of
judgment is used in this estimation process, considerable variability is
inherent in such estimates, and the adequacy of these estimates is highly
sensitive to changes in medical claims payment patterns and changes in medical
cost trends. A worsening (or improvement) of medical cost trend or changes in
claim payment patterns from those that were assumed in estimating health care
costs payable at June 30, 2001 would cause these estimates to change in the near
term, and such change could be material.

Commercial HMO
--------------
Commercial HMO premiums increased $56 million and $168 million for the three and
six months ended June 30, 2001, respectively, when compared to the corresponding
periods in 2000. These increases were due to significant premium rate increases
(partially offset by a shift in the geographic mix of membership and selection
of lower premium plans by customers) partially offset by lower membership.

The Commercial HMO medical cost ratio was 91.3% and 90.6% for the three and six
months ended June 30, 2001, respectively, compared to 86.8% and 85.3% for the
corresponding periods in 2000. The increases in 2001 were the result of
significantly increased per member medical costs outpacing per member premium
increases. Higher per member medical costs were primarily due to higher
utilization. Higher per member medical costs also reflect the impact of certain
unit cost increases. While the specific factors vary in importance by local
market, the major drivers of the increase in utilization include an increase in
specialist costs, outpatient services (primarily radiology and other outpatient
surgeries), inpatient services and pharmacy. The Company believes that
demographic changes in the mix of age and gender of membership also has
contributed to the increase in per member medical costs.


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

HEALTH CARE (CONTINUED)

Medicare HMO
------------

Medicare HMO premiums decreased by $533 million and $1.1 billion for the three
and six months ended June 30, 2001, respectively, when compared to the
corresponding periods in 2000. These decreases were due to the Company exiting a
number of Medicare service areas on January 1, 2001, which represented
approximately 47 percent of the Company's total Medicare membership at December
31, 2000. These decreases were partially offset by increases in supplemental
premiums and rate increases by the Centers for Medicare and Medicaid Services
("CMS"), the agency formerly known as the Health Care Financing Administration.

The Medicare HMO medical cost ratio for continuing markets (excluding premiums
and medical costs relating to Medicare service areas that the Company exited on
January 1, 2001) was 95.2% and 94.5% for the three and six months ended June 30,
2001, respectively, compared to 92.1% and 91.0% for the corresponding periods in
2000. These increases reflect increased per member medical costs which outpaced
the increases in supplemental premiums and CMS rate increases. The increases in
per member medical costs were primarily a result of increased utilization. The
Medicare HMO medical cost ratio (for continuing and exited markets) was 93.6%
and 98.8% for the three and six months ended June 30, 2001, compared to 97.3%
and 95.8% for the corresponding periods in 2000. Medical costs recorded in the
six month period ended June 30, 2001 that relate to services performed in prior
periods (costs in excess of related medical cost reserves established at
December 31, 2000) totaled approximately $45 million pretax, which relate almost
entirely to Medicare service areas that the Company exited on January 1, 2001.

PHC Reinsurance Agreement
-------------------------

Effective August 6, 1999, the Company and The Prudential Insurance Company of
America ("Prudential") entered into a reinsurance agreement for which the
Company paid a premium. Under the agreement, Prudential agreed to indemnify the
Company from certain health insurance risks that arose following the closing of
the Company's acquisition of the Prudential health care business ("PHC") by
reimbursing the Company for 75% of medical costs (as calculated under the
agreement) of PHC in excess of certain threshold medical cost ratio levels
through 2000 for substantially all the acquired medical and dental risk
business. The reinsurance agreement ended on December 31, 2000, except that the
agreement provides for a period of time during which medical cost reimbursements
(as calculated in accordance with the agreement) will be finalized, which is
expected to be completed by the end of the first quarter 2002. During the six
months ended June 30, 2001, reinsurance recoveries recorded under this agreement
were $2 million pretax. There were no reinsurance recoveries during the second
quarter of 2001. Results were positively impacted by $3 million pretax and $5
million pretax for the three and six months ended June 30, 2001, respectively,
relating to the amortization of the fair value adjustment of the unfavorable
component of the contracts underlying the acquired medical risk business. During
the three and six months ended June 30, 2000, reinsurance recoveries under this
agreement were $36 million pretax and $46 million pretax, respectively. Results
were also negatively impacted by $1 million pretax for the three months ended
June 30, 2000 and were positively impacted by $1 million pretax for the six
months ended June 30, 2000, relating to the net amortization of: the reinsurance
premium paid as part of the acquisition, the fair value adjustment of the
reinsurance agreement and the fair value adjustment of the unfavorable component
of the contracts underlying the acquired medical risk business recorded as part
of the acquisition. Such reinsurance recoveries and net amortization were
reflected in health care costs. Refer to Note 3 of Condensed Notes to
Consolidated Financial Statements for further discussion.


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

HEALTH CARE (CONTINUED)

Medicaid
--------

On August 1, 2001, the Company completed the sale of its New Jersey Medicaid and
New Jersey Family Care businesses to AmeriChoice. The agreement covers
approximately 118,000 New Jersey Medicaid beneficiaries and members of the New
Jersey Family Care program for uninsured children and adults. The sales price is
not material to the Company's financial position and the results of this
business were not material to the Company's results of operations.

ASC Products



                                                   Three Months Ended June 30,                Six Months Ended June 30,
                                                   ---------------------------                -------------------------
(Millions)                                      2001          2000       % Change        2001          2000          % Change
                                                ----          ----       --------        ----          ----          --------
                                                                                                   
Administrative services contract fees        $  457.7      $  477.8          (4.2)%    $  915.8      $  967.6            (5.4)%
Net investment income                             5.7           6.5         (12.3)         14.5          15.8            (8.2)
Other income                                      5.2           9.3         (44.1)          9.4          20.9           (55.0)
                                             --------      --------      --------      --------      --------        --------
         Total revenue                          468.6         493.6          (5.1)        939.7       1,004.3            (6.4)
Operating expenses (including
 salaries and related benefits)                 405.1         420.0          (3.5)        828.7         854.0            (3.0)
                                             --------      --------      --------      --------      --------        --------
Operating earnings before income
 taxes                                           63.5          73.6         (13.7)        111.0         150.3           (26.1)
Income taxes                                     20.6          24.8         (16.9)         36.3          50.9           (28.7)
                                             --------      --------      --------      --------      --------        --------
Operating earnings                           $   42.9      $   48.8         (12.1)%    $   74.7      $   99.4           (24.8)%
                                             ========      ========      ========      ========      ========        ========


For ASC Products, operating earnings decreased $6 million and $25 million for
the three and six months ended June 30, 2001, respectively, compared to the
corresponding periods in 2000. The decreases in each period primarily reflect a
decrease in ASC fees, resulting primarily from lower fees, including
supplemental fees, related to servicing the Prudential ASC business due to lower
PHC membership levels, partially offset by rate increases on renewing business.
Results for both periods also reflect decreases in allocated operating expenses,
including salaries and related benefits, resulting from expense reduction
initiatives related, in part, to the lower membership levels.

PHC Administrative Services Agreement
-------------------------------------

Effective August 6, 1999, the Company also agreed to service Prudential's ASC
business following the closing of the Company's acquisition of PHC. In exchange
for servicing the ASC business, Prudential remitted fees received from its ASC
members to the Company, as well as paid certain supplemental fees. The
supplemental fees were fixed in amount and declined over a period, which ended
in February 2001. During the three and six months ended June 30, 2001, the
Company recorded total fees for servicing the Prudential ASC business of
approximately $22 million pretax and $49 million pretax, respectively, including
supplemental fees of approximately $1 million pretax for the six months ended
June 30, 2001 (there were no supplemental fees in the second quarter of 2001).
Included in these supplemental fees is amortization related to the above-market
compensation component of the ASC supplemental fee arrangement of $7 million
pretax for the six months ended June 30, 2001 (there was no amortization related
to the supplemental fee arrangement in the second quarter of 2001). During the
three and six months ended June 30, 2000, the Company recorded total fees for
servicing the Prudential ASC business of approximately $98 million pretax and
$204 million pretax, respectively, including supplemental fees of approximately
$36 million pretax and $84 million pretax, respectively. Included in these
supplemental fees is amortization of $4 million pretax and $11 million pretax
for the three and six months ended June 30, 2000, respectively, in connection
with the above-market compensation component of the ASC supplemental fee
arrangement. Refer to Note 3 of Condensed Notes to Consolidated Financial
Statements for further discussion.


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

HEALTH CARE (CONTINUED)

Membership

Health Care's membership was as follows:



                                                June 30, 2001                           June 30, 2000 (1)
                                      ---------------------------------         --------------------------------
(Thousands)                           Risk         ASC (2)        Total         Risk         ASC (2)       Total
-----------                           ----         -------        -----         ----         -------       -----
                                                                                         
Commercial
 HMO (3)                              7,296         1,058         8,354         7,883           855         8,738
 POS                                    196         2,915         3,111           352         3,435         3,787
 PPO                                    936         3,188         4,124           835         3,031         3,866
 Indemnity                              220         1,752         1,972           265         1,963         2,228
                                     ------        ------        ------        ------        ------        ------
  Total Commercial Membership         8,648         8,913        17,561         9,335         9,284        18,619
Medicare HMO (4)                        279            --           279           648            --           648
Medicaid HMO                            140           104           244           124            77           201
                                     ------        ------        ------        ------        ------        ------
 Total Health Membership              9,067         9,017        18,084        10,107         9,361        19,468
                                     ======        ======        ======        ======        ======        ======

Dental                                6,060         7,866        13,926         6,213         8,047        14,260
                                     ------        ------        ------        ------        ------        ------


(1)      Membership at June 30, 2000 has been restated to include Aetna Global
         Benefits (which was previously part of former Aetna's international
         business) and certain reclassifications have been made to conform to
         the 2001 presentation.

(2)      Health membership in thousands includes Prudential ASC members that
         Health Care agreed to service of 121 at June 30, 2001 and 967 at June
         30, 2000.

(3)      Commercial HMO in thousands includes POS members who access primary
         care physicians and referred care through an HMO network of 1,737 at
         June 30, 2001 and 1,958 at June 30, 2000.

(4)      Membership in thousands at June 30, 2000 includes approximately 347
         Medicare members affected by the Company's exit of a number of Medicare
         service areas, effective January 1, 2001.

Total Health membership as of June 30, 2001 decreased by approximately 1.4
million members, compared to June 30, 2000, due to attrition in PHC membership,
including Prudential ASC members that the Company agreed to service, and the
exit of a number of Medicare service areas on January 1, 2001.

Outlook

The Company experienced higher HMO medical costs in the second quarter of 2001
compared to the corresponding period in 2000 and the first quarter of 2001.
Premiums for Risk Products are generally fixed for one-year periods and cost
levels in excess of those projected when establishing prices for the Company's
products, such as those experienced in the first six months of 2001, cannot be
recovered in the contract term through higher premiums. As a result, Health Care
Risk Products' results for the remainder of 2001 are expected to continue to be
materially adversely affected by medical costs higher than the cost levels
reflected in the Company's pricing.

As previously discussed, the Company is continuing to implement its strategic
and operational initiatives with the goal of improving the performance of its
business. After considering this and other pricing and membership actions taken
or to be taken this year, the Company expects an overall Health membership
decline of up to 10% by the end of 2001 compared to year end 2000 membership.
These initiatives could also result in further membership declines in 2002. The
Company also is continuing to implement its previously announced actions to
reduce work force by approximately 5,000 positions, as well as other cost
savings initiatives.

The future performance of the Company in 2002 and beyond will depend in large
part on its ability to design and implement its strategic and operational
initiatives. If these initiatives do not achieve their objectives, or result in
continued increases in medical costs or other adverse affects, the Company's
results could be adversely affected.


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

HEALTH CARE (CONTINUED)

Refer to "Health Care-Outlook" and "Forward- Looking Information/Risk Factors"
in Aetna Inc.'s 2000 Annual Report on Form 10-K for information regarding other
important factors that are expected to affect the Company's 2001 financial
performance.

GROUP INSURANCE

Operating Summary



                                                Three Months Ended June 30,                 Six Months Ended June 30,
                                                ---------------------------                 -------------------------
(Millions)                                   2001           2000         % Change        2001          2000          % Change
----------                                   ----           ----         --------        ----          ----          --------
                                                                                                   
Premiums:
 Life                                       $258.6         $256.1            1.0%       $522.2        $524.0            (.3)%
 Disability                                   70.0           58.9           18.8         135.6         115.6           17.3
 Long-term care                               14.9           10.4           43.3          29.1          21.1           37.9
                                            ------         ------         ------        ------        ------         ------
Total premiums                               343.5          325.4            5.6         686.9         660.7            4.0
Administrative services contract
 fees                                          8.2            9.1           (9.9)         16.7          18.3           (8.7)
Net investment income                         69.7           72.9           (4.4)        156.3         151.7            3.0
Other income                                   1.0            1.1           (9.1)          2.0           2.1           (4.8)
Net realized capital gains (losses)           (7.9)          (4.7)          68.1           4.5         (12.0)            --
                                            ------         ------         ------        ------        ------         ------
         Total revenue                       414.5          403.8            2.6         866.4         820.8            5.6
                                            ------         ------         ------        ------        ------         ------
Current and future benefits                  320.5          297.5            7.7         649.8         614.2            5.8
Salaries and related benefits                 21.3           18.8           13.3          44.1          39.3           12.2
Other operating expenses                      24.0           19.2           25.0          43.5          36.6           18.9
                                            ------         ------         ------        ------        ------         ------
         Total benefits and expenses         365.8          335.5            9.0         737.4         690.1            6.9
                                            ------         ------         ------        ------        ------         ------
Income before income taxes                    48.7           68.3          (28.7)        129.0         130.7           (1.3)
Income taxes                                  16.4           23.2          (29.3)         43.3          44.1           (1.8)
                                            ------         ------         ------        ------        ------         ------
Net income                                  $ 32.3         $ 45.1          (28.4)%      $ 85.7        $ 86.6           (1.0)%
                                            ======         ======         ======        ======        ======         ======
Net realized capital gains
 (losses), net of tax
 (included above)                           $ (5.3)        $ (3.1)          71.0%       $  2.9        $ (7.8)            --%
                                            ======         ======         ======        ======        ======         ======


Results

Net income for Group Insurance for the three and six months ended June 30, 2001
decreased $13 million and $1 million, respectively, compared to the
corresponding periods in 2000. Excluding net realized capital gains or losses,
results for the three and six months ended June 30, 2001 decreased $11 million
and $12 million, respectively, compared to the corresponding periods in 2000.
The decreases are due primarily to increases in operating expenses and the
benefit cost ratios (current and future benefits divided by premiums) for each
period. The benefit cost ratios were 93.3% and 94.6% for the three and six
months ended June 30, 2001, respectively, compared to 91.4% and 93.0% for the
corresponding periods in 2000.

The increase in the net realized capital gains for the six months ended June 30,
2001 compared to the net realized capital losses for the corresponding period in
2000 primarily reflects collections of previously charged-off mortgage loans, as
well as bond losses resulting from the net effect of the Company rebalancing its
investment portfolio and the write-down of certain bonds.


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

GROUP INSURANCE (CONTINUED)

To provide a comparison that management believes is more reflective of Group
Insurance's performance, the operating earnings discussion, including the
information presented in the table that follows, excludes net realized capital
gains or losses.



                                                          Three Months Ended June 30,         Six Months Ended June 30,
                                                          ---------------------------         -------------------------
(Millions)                                                 2001                 2000           2001                2000
----------                                                 ----                 ----           ----                ----
                                                                                                     
Operating earnings:
 Life products                                            $29.1               $ 34.2          $61.2              $ 64.7
 Disability and Long-term care products                     8.5                 14.0           21.6                29.7
                                                          -----               ------          -----              ------
Total Group Insurance                                     $37.6               $ 48.2          $82.8              $ 94.4
                                                          =====               ======          =====              ======


Life Products

Life products include Basic Term Group Life Insurance, Group Universal Life,
Supplemental or Voluntary programs and Accidental Death and Dismemberment
coverage. Operating earnings for Life products decreased for the three and six
months ended June 30, 2001 compared to the corresponding periods in 2000,
primarily due to increases in operating expenses resulting from an increase in
sales incentive compensation as well as decreases in net investment income,
partially offset by slight decreases in the benefit cost ratios compared to the
corresponding periods of 2000.

Disability and Long-term care Products

Disability and Long-term care products consist primarily of short-term and
long-term disability insurance (and products which combine both), as well as
long-term care products which provide benefits offered to cover the costs of
care in private home settings, adult day care, assisted living or nursing
facilities. Operating earnings for the three and six months ended June 30, 2001
decreased primarily due to increases in the benefit cost ratios for Disability
products and, to a lesser extent, increases in operating expenses. This was
partially offset by an increase in net investment income, primarily resulting
from an increase in mortgage loan prepayment fees during the first quarter of
2001. The increases in the Disability benefit cost ratios reflect increases in
current and future benefits resulting from less favorable reserve developments
than those in 2000, partially offset by selective premium rate increases on
renewing business. Premiums also increased for Disability products resulting
from increased reinsurance activity. Operating earnings for Long-term care
products increased slightly for the three and six months ended June 30, 2001
compared to the corresponding periods of 2000. The increase in premiums for
Long-term care products reflects increased enrollment for several large
customers.

Membership

Group Insurance's membership was as follows:



(Thousands)                           June 30, 2001                June 30, 2000
-----------                           -------------                -------------
                                                             
Life products                                 9,339                        9,155
Disability products                           2,231                        2,241
Long-term care products                         127                          112
                                             ------                       ------
Total                                        11,697                       11,508
                                             ======                       ======


Total Group Insurance membership as of June 30, 2001 increased slightly when
compared to June 30, 2000. Group Insurance sales increased 496,000 members for
the six months ended June 30, 2001, compared to sales in the corresponding
period in 2000. Lapses decreased 123,000 members for the six months ended June
30, 2001, compared to lapses in the corresponding period in 2000.


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

GROUP INSURANCE (CONTINUED)

Outlook

The Company projects earnings in 2001 from Group Insurance products to be in the
range of $160 million to $170 million due to lower net investment income and
lower Disability results. Group Insurance earnings were $193 million in 2000.
The Company also expects membership for Group Insurance to remain flat to
slightly higher in 2001 compared to year end 2000.

Refer to "Forward-Looking Information/Risk Factors" in Aetna Inc.'s 2000 Annual
Report on Form 10-K for information regarding important factors that may
materially affect the Company.

LARGE CASE PENSIONS

Operating Summary



                                                       Three Months Ended June 30,                  Six Months Ended June 30,
                                                       ---------------------------                  -------------------------
(Millions)                                       2001             2000          % Change        2001          2000        % Change
----------                                       ----             ----          --------        ----          ----        --------
                                                                                                       
Premiums                                      $   250.0        $    36.9              --%    $   341.3     $    77.6            --%
Net investment income                             192.2            216.2           (11.1)        408.6         460.7         (11.3)
Other income                                        3.6              6.0           (40.0)         10.6          12.6         (15.9)
Net realized capital gains (losses)                  --              6.6          (100.0)         (1.2)          7.2            --
                                              ---------        ---------       ---------     ---------     ---------     ---------
            Total revenue                         445.8            265.7            67.8         759.3         558.1          36.1
                                              ---------        ---------       ---------     ---------     ---------     ---------
Current and future benefits                       423.9            229.9            84.4         715.9         487.6          46.8
Salaries and related benefits                       4.1              4.3            (4.7)          8.7           8.8          (1.1)
Other operating expenses                            1.8              2.0           (10.0)          3.6           4.0         (10.0)
Reduction of reserve for loss
 on discontinued products                         (94.5)          (146.0)          (35.3)        (94.5)       (146.0)        (35.3)
                                              ---------        ---------       ---------     ---------     ---------     ---------
      Total benefits and expenses                 335.3             90.2              --         633.7         354.4          78.8
                                              ---------        ---------       ---------     ---------     ---------     ---------
Income before income taxes                        110.5            175.5           (37.0)        125.6         203.7         (38.3)
Income taxes                                       39.0             61.8           (36.9)         44.3          72.6         (39.0)
                                              ---------        ---------       ---------     ---------     ---------     ---------
Net income                                    $    71.5        $   113.7           (37.1)%   $    81.3     $   131.1         (38.0)%
                                              =========        =========       =========     =========     =========     =========
Net realized capital gains (losses),
 net of tax (included above)                  $      --        $     4.4            -- %     $     (.8)    $     5.2          -- %
                                              =========        =========       =========     =========     =========     =========
Deposits (not included in premiums
 above):
 Fully guaranteed discontinued products       $     2.0        $     2.1            (4.8)%   $     4.5     $     3.8          18.4%
 Experience-rated                                  12.7             13.3            (4.5)         22.5          40.2         (44.0)
 Nonguaranteed                                    100.8            148.7           (32.2)        208.5         283.3         (26.4)
                                              ---------        ---------       ---------     ---------     ---------     ---------
          Total deposits                      $   115.5        $   164.1           (29.6)%   $   235.5     $   327.3         (28.0)%
                                              =========        =========       =========     =========     =========     =========
Assets under management: (1)
 Fully guaranteed discontinued products                                                      $ 5,424.7     $ 5,787.4          (6.3)%
 Experience-rated                                                                              6,397.2       7,419.0         (13.8)
 Nonguaranteed                                                                                10,308.8      12,037.4         (14.4)
                                                                                             ---------     ---------     ---------
           Total assets under management                                                     $22,130.7     $25,243.8         (12.3)%
                                                                                             =========     =========     =========


(1)      Excludes net unrealized capital gains of $110.0 million at June 30,
         2001 and net unrealized capital losses of $223.1 million at June 30,
         2000.


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

LARGE CASE PENSIONS (CONTINUED)

Results

Large Case Pensions' net income for the three months ended June 30, 2001
decreased $42 million compared with the corresponding period in 2000. Results
include a reduction of the reserve for loss on discontinued products for Large
Case Pensions of $61 million for the three months ended June 30, 2001 primarily
as a result of favorable investment performance that included equity gains and
mortgage loan prepayment penalty income, as well as favorable mortality and
retirement experience. Results for the three months ended June 30, 2000 include
a reduction of the reserve for loss on discontinued products of $95 million
primarily as a result of favorable investment performance that included equity
gains, as well as favorable mortality and retirement experience. Excluding the
discontinued products reserve releases and net realized capital gains and
losses, results for the three months ended June 30, 2001 decreased $4 million
compared to the corresponding period in 2000.

Net income for the six months ended June 30, 2001 decreased by $50 million
compared with the corresponding period in 2000. Excluding the discontinued
products reserve releases and net realized capital gains and losses, results for
the six months ended June 30, 2001 decreased $10 million compared to the
corresponding period in 2000.

The decrease in results for the three and six month periods ended June 30, 2001
continues to reflect the run off of underlying liabilities and related assets.
Premiums, along with current and future benefits, increased during the three and
six months ended June 30, 2001 due to the funding of an early retirement program
by an existing customer, and a transfer of cash from separate accounts to the
general account to purchase annuities for another large customer.

Assets under management at June 30, 2001 decreased compared to the corresponding
period in 2000, reflecting the continuing run off of liabilities underlying the
business. With respect to nonguaranteed assets under management, certain
separate account contractholders transferred assets to other funding vehicles
during 2001 given the sale of former Aetna's financial services business.

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



                                                           Three Months Ended June 30,        Six Months Ended June 30,
                                                           ---------------------------        -------------------------
(Millions)                                                     2001          2000                 2001          2000
----------                                                     ----          ----                 ----          ----
                                                                                                  
Scheduled contract maturities and benefit payments (1)       $ 235.8       $ 226.0              $ 508.2       $ 451.9
Contractholder withdrawals other than scheduled
 contract maturities and benefit payments                       29.4          48.4                102.5         103.4
Participant-directed withdrawals                                 5.7          14.9                 11.0          25.7
                                                             -------       -------              -------       -------


(1)      Includes payments made upon contract maturity and other amounts
         distributed in accordance with contract schedules.

Outlook

Large Case Pensions earnings are projected to be in the range of $30 million to
$35 million for 2001. Large Case Pensions assets under management are projected
to continue to decline in 2001 as a result of the continuing run off of
underlying liabilities. In addition, nonguaranteed assets under management are
expected to decrease during the remainder of 2001 primarily as a result of
certain separate account contractholders, which will be transferring assets to
other funding vehicles given the sale of former Aetna's financial services
business.

Refer to "Forward-Looking Information/Risk Factors" in Aetna Inc.'s 2000 Annual
Report on Form 10-K for information regarding important factors that may
materially affect the Company.


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

LARGE CASE PENSIONS (CONTINUED)

Discontinued Products

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

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

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

The results of discontinued products were as follows:



                                                        Three Months Ended June 30,     Six Months Ended June 30,
                                                        ---------------------------     -------------------------
(Millions)                                                 2001            2000            2001           2000
----------                                                 ----            ----            ----           ----
                                                                                            
Interest margin (deficit) (1)                            $  (4.7)        $  (7.4)        $   1.5        $  (3.8)
Net realized capital gains                                  12.1              --            18.4            1.9
Interest earned on receivable from continuing
 products                                                    4.7             5.3             9.3           10.6
Other, net                                                   3.3             1.2             7.9            7.5
                                                         -------         -------         -------        -------
Results of discontinued products, after tax              $  15.4         $   (.9)        $  37.1        $  16.2
                                                         =======         =======         =======        =======
Results of discontinued products, pretax                 $  23.0         $  (1.2)        $  55.0        $  22.0
                                                         =======         =======         =======        =======
Net realized capital gains (losses) from sales of
 bonds, after tax (included above)                       $  10.1         $ (15.3)        $  19.4        $ (35.5)
                                                         =======         =======         =======        =======


(1)      The interest margin (deficit) is the difference between earnings on
         invested assets and interest credited to contractholders.

Net realized capital gains for the three and six months ended June 30, 2001
increased, compared to the corresponding periods of 2000, primarily due to gains
on bonds resulting from the lower interest rate environment.

At the time of discontinuance, a receivable from Large Case Pensions' continuing
products equivalent to the net present value of the anticipated cash flow
shortfalls was established for the discontinued products. Interest on the
receivable is accrued at the discount rate that was used to calculate the
reserve. Total assets supporting discontinued products and the reserve include a
receivable from continuing products of $337 million at June 30, 2001 and $389
million at December 31, 2000, net of related deferred taxes payable.

The reserve for anticipated future losses on discontinued products represents
the present value (at the risk-free rate at the time of discontinuance,
consistent with the duration of the liabilities) of the difference between the
expected cash flows from the assets supporting discontinued products and the
cash flows expected to be required to meet the obligations of the outstanding
contracts. Calculation of the reserve for anticipated future losses requires
projection of both the amount and the timing of cash flows over approximately
the next 30 years, including consideration of, among other things, future
investment results, participant withdrawal and mortality rates, as well as the
cost of asset management and customer service. Since 1993, there have been no
significant changes to the assumptions underlying the calculation of the reserve
related to the projection of the amount and timing of cash flows.


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

LARGE CASE PENSIONS (CONTINUED)

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

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

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

The activity in the reserve for anticipated future losses on discontinued
products for the six months ended June 30, 2001 was as follows (pretax):



(Millions)
----------
                                             
Reserve at December 31, 2000                    $999.4
Operating income                                  17.7
Net realized capital gains                        26.4
Mortality and other                               10.9
Reserve reduction                                (94.5)
                                                ------
Reserve at June 30, 2001                        $959.9
                                                ======


Management reviews the adequacy of the discontinued products reserve quarterly
and, as a result, $61 million ($95 million pretax) of the reserve was released
in the second quarter of 2001 primarily due to favorable investment performance
that included equity gains and mortgage loan prepayment penalty income, as well
as favorable mortality and retirement experience. The current reserve reflects
management's best estimate of anticipated future losses.

The discontinued products investment portfolio is as follows:



(Millions)                                      June 30, 2001               December 31, 2000
----------                                      -------------               -----------------
Class                                      Amount          Percent       Amount          Percent
-----                                      ------          -------       ------          -------
                                                                            
Debt securities available for sale        $3,845.4            69.8%     $3,898.0            69.8%
Loaned securities                             85.5             1.6         121.1             2.2
                                          --------        --------      --------        --------
Total debt securities                      3,930.9            71.4       4,019.1            72.0
Mortgage loans                               769.8            14.0         784.1            14.0
Investment real estate                       132.4             2.4         129.2             2.3
Equity securities                            184.5             3.3         205.5             3.7
Other (1)                                    488.8             8.9         445.5             8.0
                                          --------        --------      --------        --------
Total                                     $5,506.4           100.0%     $5,583.4           100.0%
                                          ========        ========      ========        ========


(1)      Amount includes restricted debt securities on deposit as required by
         regulatory authorities of $56.6 million at June 30, 2001 and $55.9
         million at December 31, 2000 included in long-term investments on the
         Consolidated Balance Sheets.


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

LARGE CASE PENSIONS (CONTINUED)

Distributions on discontinued products were as follows:



                                      Three Months Ended June 30,         Six Months Ended June 30,
                                      ---------------------------         -------------------------
(Millions)                                2001           2000                 2001           2000
----------                                ----           ----                 ----           ----
                                                                               
Scheduled contract maturities,
  settlements and benefit payments      $ 293.7        $ 248.1              $ 474.5        $ 499.3
Participant-directed withdrawals            1.8            2.3                  3.7            5.0
                                        -------        -------              -------        -------


Cash required to fund these distributions was provided by earnings as well as
maturities and sales of invested assets.

Refer to Note 10 of Condensed Notes to Consolidated Financial Statements and
"Total Investments" for additional information.

CORPORATE INTEREST

Effective for 2001, overhead costs previously included in Corporate have been
integrated into the business segments and reported in operating expenses,
including salaries and related benefits. Corresponding information for 2000 has
been restated and reflects this change. Corporate interest expense represents
interest incurred on the Company's long- and short-term debt and is not recorded
in the Company's business segments.

After-tax interest expense was $22 million and $42 million for the three and six
months ended June 30, 2001, respectively, and $37 million and $81 million for
the corresponding periods in the prior year. The decrease in interest expense is
primarily a result of lower levels of debt as a result of the ING transaction as
well as lower short-term rates during 2001, compared to the corresponding period
in 2000. Refer to "Liquidity and Capital Resources" for further information
regarding the Company's expected debt levels for the remainder of 2001 and
recent ratings actions.

Outlook

Interest expense is expected to continue to decrease for 2001, compared to 2000,
due to lower levels of debt expected to be outstanding in 2001, compared to
2000. The Company projects interest expense for 2001 to be in the range of $95
million to $100 million after tax.

Refer to "Forward-Looking Information/Risk Factors" in Aetna Inc.'s 2000 Annual
Report on Form 10-K for information regarding important factors that may
materially affect the Company.

SEVERANCE AND FACILITIES CHARGE

In December 2000, the Company recorded a severance and facilities charge of $93
million after tax ($143 million pretax) in connection with the implementation of
certain strategic initiatives intended to strengthen the Company's
competitiveness, improve its profitability and concentrate its resources on its
core mission as a health care and related benefits company (the "Plan"). This
charge included $80 million after tax ($123 million pretax) for severance
activities relating to the elimination of approximately 2,400 employee positions
(primarily regional sales personnel, customer service, information technology
and other staff-area personnel) and $13 million after tax ($20 million pretax)
representing the present value of the difference between rent required to be
paid by the Company and future sublease rentals expected to be received by the
Company relating to certain leased facilities, or portions of such facilities,
which will be vacated, primarily related to the continued integration of the PHC
business. Implementation of the Plan began in December 2000 and will be
completed by December 31, 2001. Refer to MD&A contained in the Company's 2000
Annual Report on Form 10-K for a complete discussion of the strategic
initiatives associated with the Plan, as well as the future impact on earnings
and cash flows.


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

SEVERANCE AND FACILITIES CHARGE (CONTINUED)

The Company eliminated 1,537 positions in the first six months of 2001,
resulting in a reduction of the severance and facilities reserve of
approximately $93 million pretax. Refer to Note 9 of Condensed Notes to
Consolidated Financial Statements for more details on the severance and
facilities reserve.

TOTAL INVESTMENTS

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

Total investments were as follows:



(Millions)                            June 30, 2001          December 31, 2000
----------                            -------------          -----------------
                                                       
Debt securities available for sale        $13,844.3                  $13,869.9
Loaned securities                             500.9                      584.1
                                          ---------                  ---------
Total debt securities                      14,345.2                   14,454.0
Mortgage loans                              2,032.3                    2,201.2
Equity securities                             220.9                      240.1
Other investment securities                   423.4                      322.4
Investment real estate                        339.7                      319.2
Other (1)                                   1,499.9                    1,220.7
                                          ---------                  ---------
Total investments                         $18,861.4                  $18,757.6
                                          =========                  =========


(1)      Amount includes restricted debt securities on deposit as required by
         regulatory authorities of $706.5 million at June 30, 2001 and $667.2
         million at December 31, 2000 included in long-term investments on the
         Consolidated Balance Sheets.

Debt Securities

Debt securities represented 76% at June 30, 2001 and 77% at December 31, 2000 of
the Company's total general account invested assets and supported the following
types of products:



(Millions)                              June 30, 2001       December 31, 2000
----------                              -------------       -----------------
                                                      
Supporting discontinued products            $ 3,930.9               $ 4,019.1
Supporting experience-rated products          2,258.3                 2,344.4
Supporting remaining products                 8,156.0                 8,090.5
                                            ---------               ---------
Total debt securities (1)                   $14,345.2               $14,454.0
                                            =========               =========


(1)      Total debt securities include "Below Investment Grade" Securities of
         $1.1 billion both at June 30, 2001 and December 31, 2000, of which 19%
         at June 30, 2001 and 20% at December 31, 2000 supported discontinued
         and experience-rated products.

Debt securities reflect net unrealized capital gains of $120 million at June 30,
2001 and $80 million at December 31, 2000. Of the net unrealized capital gains
at June 30, 2001, $85 million relate to assets supporting discontinued products
and $30 million relate to experience-rated products.

Mortgage Loans

The Company's mortgage loan investments, net of impairment reserves, supported
the following types of products:



(Millions)                                June 30, 2001        December 31, 2000
----------                                -------------        -----------------
                                                         
Supporting discontinued products               $  769.8                 $  784.1
Supporting experience-rated products              581.8                    660.4
Supporting remaining products                     680.7                    756.7
                                               --------                 --------
Total mortgage loans                           $2,032.3                 $2,201.2
                                               ========                 ========



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

TOTAL INVESTMENTS (CONTINUED)

During the first six months of 2001, the Company managed its mortgage loan
portfolio to maintain the balance, relative to invested assets, by selectively
pursuing refinance and new loan opportunities. The mortgage loan portfolio
balance represented 11% at June 30, 2001 and 12% at December 31, 2000 of the
Company's total invested assets.

Problem, restructured and potential problem loans included in mortgage loans
were $189 million at June 30, 2001 and $194 million at December 31, 2000, of
which 84% supported discontinued and experience-rated products for each period.
Specific impairment reserves on these loans were $21 million at June 30, 2001
and $30 million at December 31, 2000. Refer to Note 5 of Condensed Notes to
Consolidated Financial Statements for additional information.

Risk Management and Market-Sensitive Instruments

The Company manages interest rate risk by seeking to maintain a tight duration
band where appropriate, while credit risk is managed by seeking to maintain high
average quality ratings and diversified sector exposure within the debt
securities portfolio. In connection with its investment and risk management
objectives, the Company also uses financial instruments that derive their value,
at least in part by, among other things, levels of or changes in interest rates
(short-term or long-term), duration, prepayment rates, equity markets or credit
ratings/spreads. The Company's use of derivatives is generally limited to
managing interest rate and price risk (collectively, market risk). By using
derivatives to manage market risk, the Company exposes itself to credit risk and
additional market risk. However, when used for hedging, the expectation is that
these instruments would reduce this risk. Refer to Note 7 of Condensed Notes to
Consolidated Financial Statements for additional information.

The Company regularly evaluates the risk of market-sensitive instruments by
examining, among other things, levels of or changes in interest rates
(short-term or long-term), duration, prepayment rates, equity markets or credit
ratings/spreads. The Company also regularly evaluates the appropriateness of
investments relative to its management-approved investment guidelines (and
operates within those guidelines) and the business objective of the portfolios.

The risks associated with investments supporting experience-rated pension,
annuity and life products in the Large Case Pensions business are assumed by
those contractholders and not by the Company (subject to, among other things,
certain minimum guarantees). Anticipated future losses associated with
investments supporting discontinued fully guaranteed large case pension products
are provided for in the reserve for anticipated future losses (refer to "Large
Case Pensions - Discontinued Products").

Management also reviews, on a quarterly basis, the impact of hypothetical net
losses in the Company's consolidated near-term financial position, results of
operations and cash flows assuming certain reasonably possible changes in market
rates and prices were to occur. Based on the Company's overall exposure to
interest rate risk and equity price risk, the Company believes that these
changes in market rates and prices would not materially affect the consolidated
near-term financial position, results of operations or cash flows of the Company
as of June 30, 2001. Refer to Aetna Inc.'s 2000 Annual Report on Form 10-K for a
more complete discussion of "Risk Management and Market-Sensitive Instruments".


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

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Generally, the Company meets its operating requirements by maintaining
appropriate levels of liquidity in its investment portfolio and using overall
cash flows from premiums, deposits and income received on investments. The
Company monitors the duration of its debt securities portfolio (which is highly
marketable) and mortgage loans, and executes its purchases and sales of these
investments with the objective of having adequate funds available to satisfy the
Company's maturing liabilities. Overall cash flows are used primarily for claim
and benefit payments, contract withdrawals and operating expenses.

Cash flows used by operating activities were approximately $130 million for the
six months ended June 30, 2001. Excluding the impact of changes in insurance
reserves related to the Large Case Pensions business segment, cash flows used by
operating activities were approximately $150 million. Uses of cash reflect
approximately $130 million for the funding of expenses accrued at year end 2000
related to discontinued operations and change-in-control related amounts as a
result of the sale of the financial services business in late 2000, as well as
income tax payments made, offset in part by net reductions in receivables for
premiums and pharmacy-related amounts. Refer to the "Consolidated Statements of
Cash Flows" for additional information.

Dividends

The Company intends to pay an annual dividend of $.04 per common share, payable
in the fourth quarter beginning in 2001. The Board of Directors (the "Board")
will review the Company's common stock dividend annually. Among the factors to
be considered by the Board in determining the amount of each dividend are the
Company's results of operations and the capital requirements, growth and other
characteristics of its businesses.

Financings, Financing Capacity and Capitalization

On February 14, 2001, the Company filed a shelf registration statement with the
Securities and Exchange Commission to sell debt securities, from time to time,
up to a total of $2 billion, with the amount, price and terms to be determined
at the time of the sale. On March 2, 2001, the Company issued $900 million of
debt securities under this shelf registration statement consisting of $450
million of 7.375% bonds due in 2006 and $450 million of 7.875% bonds due in
2011. On June 18, 2001, the Company issued, under this shelf registration
statement, an additional $700 million of 8.5% bonds due in 2041. Net proceeds
from these issuances totaled approximately $1.6 billion and are being used to
reduce outstanding commercial paper borrowings.


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

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

The Company has significant short-term liquidity supporting its businesses. The
Company uses short-term borrowings from time to time to address timing
differences between cash receipts and disbursements. The Company's short-term
borrowings consist of a commercial paper program that relies on backup revolving
credit facilities, which together provide for an aggregate borrowing capacity of
$1 billion. $500 million of the credit facilities terminate in December 2001,
and the Company will seek to either extend or replace all or a portion of this
facility. Refer to Note 11 of Condensed Notes to Consolidated Financial
Statements for additional information. The maximum amount of domestic short-term
borrowings outstanding during the first six months of 2001 was $1.9 billion (the
Company had an aggregate borrowing capacity under its credit facilities of up to
$2.5 billion during this period which it reduced in connection with its recent
bond offerings and reduction of short-term borrowings). At June 30, 2001, the
Company's borrowings were $2.1 billion, consisting of $1.6 billion of bonds
referred to above and approximately $500 million of commercial paper.
Approximately $300 million of proceeds from its recent bond offering, reflected
in total borrowings at June 30, 2001, are being used subsequent to June 30, 2001
to repay commercial paper as it matures. The Company's total debt to capital
ratio (total debt divided by total debt and shareholders' equity, adjusted for
unrealized gains or losses on available-for-sale investment securities) was
17.2% at June 30, 2001. Refer to "Goodwill and Other Acquired Intangible Assets"
for additional information relating to a new accounting standard issued by the
Financial Accounting Standards Board, which could have a future impact on the
Company's debt to capital ratio.

On August 7, 2001, the Company's Long-term senior debt ratings were BBB+ from
Fitch, Baa2 from Moody's Investor's Service and BBB from Standard & Poor's. On
May 11, 2001, Fitch downgraded the Company's senior debt rating to BBB+ and
ALIC's financial strength rating to A+. On June 4, 2001, Moody's Investor
Service affirmed the Company's senior debt and ALIC's financial strength
ratings, but revised the outlook of both these ratings to negative. On June 6,
2001, Standard & Poor's downgraded the Company's senior debt rating to BBB,
downgraded ALIC's financial strength rating to A-, and removed these ratings
from CreditWatch status, while revising its outlook from negative to stable. On
August 3, 2001, A.M. Best downgraded ALIC's financial strength rating to A- and
removed it from under review with negative implications. The Company's
commercial paper ratings are currently F2 from Fitch, P2 from Moody's Investors
Service and A2 from Standard & Poor's. Refer to "Other Information - Ratings"
for more information on ratings for the Company and Aetna Life Insurance
Company.

Common Stock Transactions

The Company's Board has authorized the repurchase of up to 5 million shares of
common stock (not to exceed an aggregate purchase price of $200 million),
subject to periodic reauthorization by the Board. The Company repurchased
2,600,000 shares of common stock at a cost of approximately $96 million during
the first quarter of 2001 pursuant to this authorization. The Company
repurchased these shares in the open market, primarily to seek to mitigate any
dilution resulting from employee option exercises and funded these repurchases
by using net proceeds available from the option exercises. The Company ceased
share repurchases at the end of the first quarter. Refer to Note 12 of
Condensed Notes to Consolidated Financial Statements for further discussion
related to the Company's common stock.

GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

At June 30, 2001, goodwill was $6.7 billion and other acquired intangible assets
were $.8 billion or approximately 66% and 8%, respectively, of consolidated
shareholders' equity. For the six months ended June 30, 2001, goodwill
amortization was $98 million after-tax and the amortization of other acquired
intangible assets was $75 million after-tax. Refer to Note 2 of Notes to
Consolidated Financial Statements in Aetna Inc.'s 2000 Annual Report on Form
10-K for more information on goodwill and other acquired intangible assets,
including the Company's current accounting policies related to these assets.



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

GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS (CONTINUED)

In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statement on Financial Accounting Standards No. 142 ("FAS 142"), Goodwill and
Other Intangible Assets. This standard, which becomes effective for the Company
on January 1, 2002, eliminates goodwill amortization from the income statement
and requires an evaluation of goodwill impairment upon adoption of this standard
as well as subsequent evaluations on an annual basis, and more frequently if
circumstances indicate a possible impairment (however, this standard is
effective for all goodwill and intangible assets acquired after June 30, 2001).
The Company anticipates that these evaluations will be calculated based on an
implied fair value approach, which utilizes a discounted cash flow analysis.
Impairment, if any, resulting from the initial application of the new standard
will be classified as a cumulative effect of a change in accounting principle.
Subsequent impairments, if any, would be classified as an operating expense.
Also, intangible assets that meet certain criteria will qualify for recording on
the balance sheet and will continue to be amortized in the income statement.

The Company is currently evaluating the impact of adoption of this standard on
its recorded amount of goodwill and intangible assets. The Company cannot
currently predict whether an impairment of goodwill will result from the
adoption of this standard, although it is reasonably possible. The Company also
cannot currently predict any corresponding effect upon its ratio of debt to
total capitalization, debt ratings or other matters. Although this standard will
increase the Company's results of operations in the future due to the
elimination of goodwill amortization from the Company's income statement, any
impairment would result in a charge, as discussed above. The Company's cash flow
from operating activities would not be affected directly by this new standard.

NEW ACCOUNTING STANDARDS

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

REGULATORY ENVIRONMENT

The "Regulatory Environment" portion of Aetna Inc.'s 2000 Annual Report on Form
10-K contains a discussion of important regulatory issues related to the
Company's businesses.

As described in Aetna Inc.'s 2000 Annual Report on Form 10-K, additional
legislation or regulation related to our businesses has been enacted or is being
considered by the federal government and many states, and this could adversely
impact our businesses. It is uncertain whether we can recoup, through higher
premiums or other measures, the increased costs that we expect to result from
these types of legislation.

For example, versions of Patients' Bill of Rights legislation ("PBOR") passed
the United States Senate and House of Representatives in July and August 2001,
respectively. Either version could expand the Company's potential exposure to
lawsuits. Final legislation could expose the Company to unlimited economic
damages, and certain punitive damages, for making a determination denying
benefits or for delaying members' receipt of benefits as a result of so-called
"medical necessity" and other coverage determinations. Congress may convene a
conference committee later this year to attempt to resolve differences between
the Senate and House bills, including such matters as the amount of allowable
damages, whether cases would be governed by federal or state law, and whether
such actions would be brought in federal or state courts. The Company cannot
predict whether a PBOR will be enacted into law or what form any such law might
take.

Additionally, there recently have been state legislative attempts to limit
ERISA's preemptive effect on state laws. If adopted, such limitations could
increase our liability exposure and could permit greater state regulation of our
operations.



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

FORWARD-LOOKING INFORMATION/RISK FACTORS

The "Forward-Looking Information/Risk Factors" portion of Aetna Inc.'s 2000
Annual Report on Form 10-K contains a discussion of important risk factors
related to the Company's business.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

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

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.

Shareholder Litigation

Four purported shareholder class action complaints were filed in the Superior
Court of Connecticut, Hartford County, alleging in substance that former Aetna
and its directors breached fiduciary duties to shareholders in responding to a
February 24, 2000 letter from WellPoint Health Networks, Inc. and ING America
Insurance Holdings, Inc. which had invited discussions concerning a possible
transaction. These actions were filed on behalf of George Schore, Michael
Demetrio and Gersh Korsinsky on March 3, 2000, The Rainbow Fund on March 7,
2000, Eleanor Werbowsky on March 7, 2000, and Catherine M. Friend on March 23,
2000. On July 26, 2000, the Connecticut court ordered consolidation of the four
Connecticut actions. On October 12, 2000, the plaintiffs in the four Connecticut
actions withdrew their complaints. A fifth, substantially similar complaint was
filed by Barnett Stepak on behalf of a purported class of former Aetna
shareholders on March 28, 2000 in the Supreme Court of New York, New York
County. The complaint in the New York action seeks various forms of relief,
including unspecified damages and equitable remedies. On June 21, 2001, the
court dismissed that complaint. The plaintiff has not appealed the dismissal,
and the time period for taking such appeal has expired.

Managed Care Class Action Litigation

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

On October 23, 2000, the Judicial Panel on Multidistrict Litigation transferred
a number of these actions to the United States District Court for the Southern
District of Florida (the "Florida Federal Court") for consolidated pretrial
proceedings. The actions so consolidated by this and subsequent orders,
including actions originally filed in the Florida District Court, include the
following actions brought by the named individuals on the indicated dates:

-        Anthony Conte (October 4, 1999)

-        Jo Ann O'Neill (October 7, 1999; by amendment dated November 9, 1999,
         Lydia K. Rouse and Danny E. Waldrop joined as additional plaintiffs)

-        Jeanne E. Curtright (October 28, 1999)

-        Raymond D. Williamson, III (November 22, 1999, and a second case was
         filed in the Florida Federal Court on June 23, 2000)

-        Michael V. Amorosi (December 3, 1999)

-        Eugene Mangieri, M.D. (January 19, 2000)

-        H. Robert Harrison, M.D., Martin Moran, M.D., Lance R. Goodman, M.D.,
         Sandy Springs Pediatrics & Adolescent Medicine, P.C., Pediatric
         Infectious Disease Associates, LLC, American Medical Association, and
         Medical Association of Georgia (February 16, 2000 naming Company
         defendants, and April 18, 2000 naming Prudential defendants)

-        Jennifer McCarron and Ira S. Schwartz (April 11, 2000)

-        John Romero and Catherine Romero (May 22, 2000)

-        Jo Ann O'Neill, Lydia K. Rouse and Danny E. Waldrop (June 23, 2000)


                                    Page 48
   49
Item 1.  Legal Proceedings. (Continued)

-        Glenn O'Brien and Christopher Gallagher (August 7, 2000)

-        Charles B. Shane, M.D., Edward L. Davis, D.O., Jeffrey Book, D.O.,
         Manual Porth, M.D., Dennis Breen, M.D., Glenn L. Kelly, M.D. and
         Michael Burgess, M.D. (August 11, 2000); Charles B. Shane, M.D., H.
         Robert Harrison, M.D., Eugene Mangieri, M.D., Jeffrey Book, D.O.,
         Dennis Breen, M.D., Edward L. Davis, D.O., Lance R. Goodman, M.D.,
         Glenn L. Kelly, M.D., Leonard J. Klay, M.D., Kevin Molk, M.D., Martin
         Moran, M.D., Manuel Porth, M.D., Thomas Backer, M.D., David Boxstein,
         M.D., Navid Ghalambor, M.D., Susan Hansen, M.D., Andres Taleisnik,
         M.D., Julio Taleisnik, M.D., Roger Wilson, M.D., California Medical
         Association, Denton County Medical Association, Denton County (March
         26, 2001) (Shane Amended Complaint)

-        Douglas Chapman (September 7, 2000)

The plaintiffs in the Conte, O'Neill, Williamson, Amorosi, McCarron, Romero,
O'Brien and Chapman cases (together with Curtright, the "Subscriber Cases") seek
to represent purported nationwide classes of current and former members of the
Company's health plans. The Subscriber Cases collectively seek various forms of
relief, including unspecified damages, treble damages, injunctive relief and
restitutionary relief for unjust enrichment, for alleged violations of the
Racketeering Influenced and Corrupt Organizations Act ("RICO") and ERISA, and
seek similar relief under common law theories. In addition, the action by Jeanne
E. Curtright seeks similar relief on behalf of a class of California health plan
members and members of the California public for alleged violations of
California Business and Professions Code Sections 17200 and 17500 and under
common law theories. Each of former Aetna, Aetna Inc., Richard L. Huber and
certain health maintenance organizations that Aetna Inc. acquired from The
Prudential Insurance Company of America are named as defendants in one or more
of these actions. The complaints allege generally that defendants failed to
adequately inform members about defendants' managed care practices, including
capitated payments to providers and utilization management practices. In
addition, the Chapman complaint relates to the disclosure and determination of
usual, customary and reasonable charges for claims and alleges an undisclosed
policy of discounting procedures in order to reduce reimbursements to ERISA plan
members.

On August 11, 2000, Aetna Inc. and former Aetna moved to dismiss the June 22,
2000 O'Neill Complaint. On June 12, 2001, the Florida Federal Court granted that
motion in part and denied it in part. It permitted plaintiffs to file an amended
complaint, which they did on June 29, 2001. The Company's response is due on
August 13, 2001. On September 29, 2000, plaintiffs moved for class
certification. The motion has been fully briefed, and the Florida Federal Court
heard argument on that motion on July 24, 2001.

The Curtright Subscriber Case was originally filed in the Superior Court of
California, County of Contra Costa. Defendants removed the action to the United
States District Court for the Northern District of California. Plaintiff moved
to remand the action to state court. Aetna Inc. moved to dismiss the action for
failure to state a claim upon which relief can be granted. The motions to remand
and dismiss were pending when the Curtright Subscriber Case was transferred to
the Florida Federal Court, which has not ruled on these motions.

The Shane, Mangieri and Harrison cases together comprise the "Provider Cases."
The amended Shane action is brought against Aetna Inc. and a number of other
managed care companies. The Mangieri action is brought against Aetna Inc. and
two other managed care companies. The Harrison actions are brought against Aetna
Inc., Prudential and a number of other managed care companies.

The Provider Cases collectively allege that Aetna Inc. and each other defendant
managed care organization improperly denied claims in whole or in part, did not
pay claims timely, and employed coercive economic power to force physicians to
enter into economically unfavorable contracts. The Shane Provider Case further
charges that Aetna Inc. and the other defendant managed care organizations
conspired and aided and abetted one another in the alleged wrongdoing. The
Provider Cases seek various forms of relief, including unspecified damages,
treble damages, punitive damages and injunctive relief, for alleged violations
of RICO, ERISA, state unfair trade statutes and state laws regarding the timely
payment of claims, and seek similar relief under common law theories.



                                    Page 49
   50
Item 1.  Legal Proceedings. (Continued)

The Provider Cases seek to represent purported nationwide classes of physicians
and other providers who currently or formerly provided services to members of
the Company and/or Prudential. In addition, the Harrison actions seek to
represent a class of Georgia physicians. The Shane plaintiffs seek to represent
a purported national subclass of physicians to the extent that each such
physician has a claim against each respective defendant which claim that
physician is not bound to arbitrate as to various state law claims. The Shane
plaintiffs also seek to represent a similar subclass of California physicians
with respect to claims asserted under California's unfair trade practices
statute.

On September 22, 2000, Aetna Inc. and the other defendants moved to dismiss the
August 11, 2000 Shane complaint. On March 2, 2001, the Florida Federal Court
granted that motion in part and permitted plaintiffs to file an amended
complaint. An amended complaint was filed on March 26, 2001 by the individuals
listed above, including the Harrison and Mangieri plaintiffs and others.

On April 30, 2001, Aetna Inc. and the other defendants moved to dismiss the
March 26, 2001 Shane complaint. On May 1, 2001, Aetna Inc. moved to compel
arbitration of all claims asserted against it by several of the named
plaintiffs, moved to compel arbitration and/or stay claims against Aetna Inc.
for its alleged participation in purported RICO violations by other defendants
and moved to compel arbitration and/or stay claims against other defendants for
their alleged participation in purported RICO violations by Aetna Inc.

On October 20, 2000, the Shane plaintiffs moved for class certification. The
parties fully briefed that motion based on the allegations of the August 11,
2000 Shane complaint. On May 7, 2001, the Florida Federal Court heard oral
argument.

On June 25, 2001, the United States Court of Appeals for the Eleventh Circuit
(the "Appeals Court") issued an order staying the Provider Cases pending before
the Florida Federal Court while the Appeals Court considers an appeal taken by
other defendants of an order of the Florida Federal Court concerning the effect
of arbitration clauses contained in contracts between certain individual
plaintiffs and the appellants.

Various motions to stay and dismiss have been filed and remain pending in the
other Subscriber Cases. They remain in the preliminary stages. The Company
intends to continue to defend the Subscriber Cases and the Provider Cases
vigorously.

In addition, a complaint was filed in the Superior Court of the State of
California, County of San Diego (the "California Superior Court") on November 5,
1999 by Linda Ross and The Stephen Andrew Olsen Coalition for Patients Rights,
purportedly on behalf of the general public of the State of California (the
"Ross Complaint"). The Ross Complaint, as amended, seeks injunctive relief
against former Aetna, Aetna Inc., Aetna U.S. Healthcare of California Inc. and
additional unnamed "John Doe" defendants for alleged violations of California
Business and Professions Code Sections 17200 and 17500. The Ross Complaint
alleges that defendants are liable for alleged misrepresentations and omissions
relating to advertising, marketing and member materials directed to the
Company's HMO members and the general public and for alleged unfair practices
relating to contracting of doctors. Trial is scheduled for June 7, 2002.
Defendants intend to continue to defend this action vigorously.


                                    Page 50
   51
Item 1.  Legal Proceedings. (Continued)

On February 15, 2001, two complaints were filed in the Superior Court for New
Haven County, Connecticut against Aetna Health Plans of Southern New England,
Inc., an indirect subsidiary of Aetna Inc. One complaint was filed by the
Connecticut State Medical Society on behalf of its members. The other complaint
was filed by Sue McIntosh, M.D., J. Kevin Lynch, M.D., Karen Laugel, M.D. and
Stephen R. Levinson, M.D. on behalf of a purported class of Connecticut State
Medical Society members who provided services to the Company's members on or
after July 19, 1996. Each complaint alleges in substance that the Company
engages in unfair and deceptive acts and practices intended to delay and reduce
reimbursement to physicians, and that the Company has been able to force
physicians to enter into one-sided contracts that infringe upon the
doctor-patient relationship. The Connecticut State Medical Society complaint
seeks injunctive relief and attorneys' fees under the Connecticut Unfair Trade
Practices Act ("CUTPA"). The McIntosh complaint asserts claims under CUTPA and
various common law doctrines and seeks similar injunctive relief, along with
unspecified monetary damages, punitive damages and attorneys' fees. The Company
removed both cases to the United States District Court for the District of
Connecticut, and has requested that the Judicial Panel on Multidistrict
Litigation transfer these cases to the Florida Federal Court for consolidated
pretrial proceedings with the Provider Cases. Each of these actions is in the
preliminary stages, and the Company intends to continue to defend each action
vigorously.

NYLCare Texas Sale

On March 30, 2001, Health Care Service Corporation ("HCSC") provided the Company
with a letter demanding arbitration of claims arising out of its purchase from
Aetna Inc. of the NYLCare Texas HMOs. HCSC seeks damages in excess of $100
million, and punitive damages, for alleged contract breaches and fraud by Aetna
Inc. HCSC claims in substance that Aetna Inc. failed to calculate premium
deficiency and medical claim reserves for the sold companies in accordance with
applicable statutory accounting principles and practices and commonly accepted
actuarial standards and failed to disclose certain litigation claims. Aetna Inc.
believes it established these reserves appropriately and complied with the terms
and conditions of the Stock Purchase Agreement, and on April 19, 2001
transmitted an answer denying the material allegations. The parties have
selected arbitrators, and discovery has begun. Aetna Inc. intends to continue to
defend this matter vigorously.

Other Litigation and Regulatory Proceedings

The Company is involved in numerous other lawsuits arising, for the most part,
in the ordinary course of its business operations, including claims of bad
faith, medical malpractice, non-compliance with state regulatory regimes,
marketing misconduct, failure to timely pay medical claims and other litigation
in its health care business. Some of these other lawsuits are purported to be
class actions.

In addition, the Company's business practices are subject to review by various
state insurance and health care regulatory authorities and federal regulatory
authorities. Recently, there has been heightened review by these regulators of
the managed health care industry's business practices, including utilization
management and claim payment practices. As the largest national managed care
organization, the Company regularly is the subject of such reviews and several
such reviews currently are pending, some of which may be resolved during 2001.
These reviews may result in changes to or clarifications of the Company's
business practices, and may result in fines, penalties or other sanctions.

While the ultimate outcome of this other litigation and these regulatory
proceedings cannot be determined at this time, after consideration of the
defenses available to the Company, applicable insurance coverage 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.


                                    Page 51
   52
Item 4.  Submission of Matters to a Vote of Security Holders.

At the Annual Meeting of Shareholders held April 27, 2001, three matters were
submitted to a vote: the election of four directors for a three-year term ending
in 2004; approval of the appointment of KPMG LLP as independent auditors for the
current calendar year and a shareholder proposal to request the Aetna Inc. Board
of Directors to implement cumulative voting in the election of directors. Each
of the director candidates was elected and the appointment of KPMG was approved.
The shareholder proposal was not approved. The detailed results of voting on
these matters follow:

Election of Directors:



                                   Votes              Votes
                                    For              Withheld
                                    ---              --------
                                               
Barbara Hackman Franklin        115,207,242          6,260,166
Earl G. Graves                  115,192,127          6,275,282
Gerald Greenwald                115,212,602          6,254,807
Michael H. Jordan               115,206,279          6,261,130


Other matters voted upon:



                                                         Votes               Votes                               Broker
                                                          For               Against          Abstentions        Non-Votes
                                                          ---               -------          -----------        ---------
                                                                                                    
Approval of Independent
   Auditors                                           119,631,486          1,285,556            550,366                 --

Shareholder Proposal to Request Implementation
   of Cumulative Voting in Election of
   Directors                                           47,549,988         57,280,536          3,772,199         12,864,686


Item 5.  Other Information.

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

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



                                                 Six Months Ended
                                                     June 30,                           Years Ended December 31,
                                                     --------         ------------------------------------------------------------
Aetna Inc.                                             2001           2000          1999          1998          1997          1996
----------                                             ----           ----          ----          ----          ----          ----
                                                                                                            
Ratio of Earnings to Fixed Charges                     0.96           0.89          3.31          3.89          4.41          0.86
Ratio of Earnings to Combined Fixed
  Charges and Preferred Stock Dividends (1)            0.96           0.89          2.81          2.87          3.24          0.68
                                                       ----           ----          ----          ----          ----          ----


(1)      Although the Company did not pay preferred stock dividends, preferred
         stock dividends paid by former Aetna have been included for purposes of
         this calculation for the years ending December 31, 1996, 1997, 1998 and
         1999 (through the redemption date of July 19, 1999), as the preferred
         stock of former Aetna was issued in connection with the acquisition of
         U.S. Healthcare Inc. in 1996.

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 (loss) from continuing operations
before income taxes (benefits), cumulative effect adjustments and extraordinary
items plus fixed charges. "Fixed charges" consists of interest expense (and the
portion of rental expense deemed representative of the interest factor).


                                    Page 52
   53
Item 5.  Other Information. (Continued)

Additional pretax income from continuing operations necessary to achieve both a
ratio of earnings to fixed charges and a ratio of earnings to combined fixed
charges and preferred stock dividends of 1.0, was approximately $5 million for
the six months ended June 30, 2001.

Pretax loss from continuing operations used in calculating the ratio for the
year ended December 31, 2000 reflects a goodwill write-off of $310 million, a
severance and facilities charge of $143 million and $58 million of change-in
control related payments and other costs required to effect the spin-off of the
Company from former Aetna. Additional pretax income from continuing operations
necessary to achieve both a ratio of earnings to fixed charges and a ratio of
earnings to combined fixed charges and preferred stock dividends of 1.0, was
approximately $39 million in 2000.

Pretax loss from continuing operations used in calculating the ratio for the
year ended December 31, 1996 reflects a severance and facilities charge of $802
million. Additional pretax income from continuing operations necessary to
achieve a ratio of earnings to fixed charges of 1.0 was approximately $30
million in 1996. Additional pretax income from continuing operations necessary
to achieve a ratio of earnings to combined fixed charges and preferred stock
dividends of 1.0 was approximately $81 million.

(b)      Ratings

The ratings of Aetna Inc. and Aetna Life Insurance Company follow:



                                                                                       Rating Agencies
                                                                      --------------------------------------------------
                                                                                                  Moody's
                                                                                                  Investors     Standard
                                                                      A.M. Best      Fitch**      Service       & Poor's
                                                                      ---------      -------      -------       --------
                                                                                                    
Aetna Inc. (senior debt)
May 9, 2001                                                              *             A-           Baa2          BBB+
August 7, 2001 (1)                                                       *            BBB+          Baa2          BBB

Aetna Inc. (commercial paper)
May 9, 2001                                                              *             F2            P2            A2
August 7, 2001                                                           *             F2            P2            A2

Aetna Life Insurance Company (claims paying/financial strength)
May 9, 2001                                                              A             AA-           A2            A
August 7, 2001 (1)                                                       A-            A+            A2            A-
                                                                      ---------      -------      -------       --------


*        Nonrated by the agency.

**       Formerly known as Duff & Phelps.

(1)      Fitch and Moody's have the Aetna Inc. senior debt and ALIC ratings on
         outlook-negative. Standard and Poor's has the Aetna Inc. senior debt
         and ALIC ratings on outlook-stable.

(c)      Other Matters

In May 2001, Jerome S. Goodman retired from the Aetna Inc. Board of Directors.


                                    Page 53
   54
Item 6.  Exhibits and Reports on Form 8-K.



(a)     Exhibits
               
        (10)         Material Contracts.

        10.1         Letter Agreement, dated April 6, 2001, by and between the
                     Company and Alan J. Weber. *

        10.2         Letter dated as of June 7, 2001, Re: Notice of Commitment
                     Reduction to the Bridge Credit Agreement among Aetna Inc.,
                     the Banks listed on the signature pages thereto, and Morgan
                     Guaranty Trust Company of New York, as Administrative
                     Agent.

        10.3         Letter dated as of June 18, 2001, Re: Notice of Termination
                     of Commitments and Credit Agreement and Commitment
                     Reduction Event to the Bridge Credit Agreement among Aetna
                     Inc., the Banks listed on the signature pages thereto, and
                     Morgan Guaranty Trust Company of New York, as
                     Administrative Agent.

        (12)         Statement Re: Computation of Ratios

                     Statement re: computation of ratio of earnings to fixed
                     charges and ratio of earnings to combined fixed charges and
                     preferred stock dividends for the six months ended June 30,
                     2001 and for the years ended December 31, 2000, 1999, 1998,
                     1997 and 1996 for Aetna Inc.

        (15)         Letter Re: Unaudited Interim Financial Information.

                     Letter from KPMG LLP acknowledging awareness of the use of
                     a report on unaudited interim financial information, dated
                     August 7, 2001.


                     * Management contract or compensatory plan arrangement.


(b)      Reports on Form 8-K.

         The registrant filed a report on Form 8-K on April 10, 2001 concerning
         higher-than-anticipated medical costs.

         The registrant filed a report on Form 8-K on June 7, 2001 announcing
         recent actions taken by certain rating agencies on Aetna Inc.'s senior
         debt.


                                    Page 54
   55
                                   SIGNATURES





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


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




Date:  August 8, 2001                           By  /s/ Alan M. Bennett
                                                    ----------------------------

                                                Alan M. Bennett
                                                Vice President
                                                and Corporate Controller
                                                (Chief Accounting Officer and
                                                Interim Chief Financial Officer)









                                    Page 55
   56


                                Exhibit Index

       Exhibit
         No.                           Description
       -------                         -----------

        (10)         Material Contracts.

        10.1         Letter Agreement, dated April 6, 2001, by and between the
                     Company and Alan J. Weber. *

        10.2         Letter dated as of June 7, 2001, Re: Notice of Commitment
                     Reduction to the Bridge Credit Agreement among Aetna Inc.,
                     the Banks listed on the signature pages thereto, and Morgan
                     Guaranty Trust Company of New York, as Administrative
                     Agent.

        10.3         Letter dated as of June 18, 2001, Re: Notice of Termination
                     of Commitments and Credit Agreement and Commitment
                     Reduction Event to the Bridge Credit Agreement among Aetna
                     Inc., the Banks listed on the signature pages thereto, and
                     Morgan Guaranty Trust Company of New York, as
                     Administrative Agent.

        (12)         Statement Re: Computation of Ratios

                     Statement re: computation of ratio of earnings to fixed
                     charges and ratio of earnings to combined fixed charges and
                     preferred stock dividends for the six months ended June 30,
                     2001 and for the years ended December 31, 2000, 1999, 1998,
                     1997 and 1996 for Aetna Inc.

        (15)         Letter Re: Unaudited Interim Financial Information.

                     Letter from KPMG LLP acknowledging awareness of the use of
                     a report on unaudited interim financial information, dated
                     August 7, 2001.


                     * Management contract or compensatory plan arrangement.