VARIABLE ANNUITY ACCT C OF AETNA LIFE INSURANCE & ANNUITY CO, 497, 1996-05-07

VARIABLE ANNUITY ACCT C OF AETNA LIFE INSURANCE & ANNUITY CO
497, 1996-05-07

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<PAGE>

VARIABLE ANNUITY ACCOUNT C
Prospectus Dated:

MAY 1, 1996

GROUP VARIABLE RETIREMENT ANNUITY CONTRACTS FOR TAX-DEFERRED ANNUITY PLANS
(SECTION 403(b)), QUALIFIED 401 PLANS, AND HR 10 PLANS

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

This Prospectus describes group installment and single purchase payment variable
annuity contracts (the "Contracts") issued by Aetna Life Insurance and Annuity
Company (the "Company"). The Contract is designed to fund plans ("Plans") which
provide for retirement income and which may allow contributions entitled to tax-
deferred treatment under certain sections of the Internal Revenue Code of 1986,
as amended (the "Code").

The Contract allows values to accumulate under a credited interest option or
variable options through Variable Annuity Account C (the "Separate Account") or
in a combination of credited interest and variable options. It also provides
for the payment of annuity benefits on a fixed or variable basis, or a
combination thereof.

The variable funding options currently available through the Separate Account
under the Contract described in this Prospectus are as follows:

- Aetna Variable Fund
- Aetna Income Shares
- Aetna Variable Encore Fund
- Aetna Investment Advisers Fund, Inc.
- TCI Growth (a Twentieth Century fund)

The credited interest options available for the accumulation of values are
the Guaranteed Accumulation Account and the Fixed Account. The Guaranteed
Accumulation Account and the Fixed Account are offered only in those states
in which they are approved. Except as specifically mentioned, this Prospectus
describes only the variable options of the Contract. Information concerning
the credited interest options is found in Appendix I and Appendix II,
respectively.

This Prospectus sets forth concisely the information about the Separate Account
that a prospective investor should know before investing. Additional
information about the Separate Account is contained in a Statement of Additional
Information ("SAI") dated May 1, 1996, which has been filed with the Securities
and Exchange Commission and is incorporated herein by reference. The Table of
Contents for the SAI is printed in this Prospectus. An SAI may be obtained
without charge by indicating the request on the enrollment form or by calling
1-800-232-5422.

THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
AETNA VARIABLE FUND, AETNA INCOME SHARES, AETNA VARIABLE ENCORE FUND, AETNA
INVESTMENT ADVISERS FUND, INC., TCI GROWTH AND THE GUARANTEED ACCUMULATION
ACCOUNT. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

NO PERSON IS AUTHORIZED BY THE COMPANY TO GIVE INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.

<PAGE>

TABLE OF CONTENTS

PAGE
----

DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
FEE TABLE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
CONDENSED FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 10
THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
VARIABLE ANNUITY ACCOUNT C . . . . . . . . . . . . . . . . . . . . . . . . 12
THE FUNDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Fund Investment Advisers . . . . . . . . . . . . . . . . . . . . . . . . 13
Mixed and Shared Funding . . . . . . . . . . . . . . . . . . . . . . . . 13
Fund Additions, Limitations and Substitutions. . . . . . . . . . . . . . 13
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
THE CONTRACT
Contract Purchase. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Net Purchase Payments. . . . . . . . . . . . . . . . . . . . . . . . . . 15
Accumulation Units . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Net Investment Factor. . . . . . . . . . . . . . . . . . . . . . . . . . 15
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
RIGHT TO CANCEL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
CHARGES AND DEDUCTIONS
Mortality and Expense Risk Charges . . . . . . . . . . . . . . . . . . . 16
Fund Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Allocation and Transfer Fees . . . . . . . . . . . . . . . . . . . . . . 17
Insurance Rider. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Sales and Administrative Expense Charge. . . . . . . . . . . . . . . . . 17
Termination Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Premium Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
GENERAL DESCRIPTION OF VARIABLE ANNUITY CONTRACTS
Rights Under the Contract. . . . . . . . . . . . . . . . . . . . . . . . 19
Modification of the Contract . . . . . . . . . . . . . . . . . . . . . . 19
Contract Owner Inquiries . . . . . . . . . . . . . . . . . . . . . . . . 19
Telephone Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Transfer of Ownership; Assignment. . . . . . . . . . . . . . . . . . . . 20
WITHDRAWALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
REINVESTMENT PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ADDITIONAL WITHDRAWAL OPTIONS
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Estate Conservation Option . . . . . . . . . . . . . . . . . . . . . . . 22
Systematic Withdrawal Option . . . . . . . . . . . . . . . . . . . . . . 22
ANNUITY PERIOD
Annuity Period Elections . . . . . . . . . . . . . . . . . . . . . . . . 23
403(B) Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
401 and HR 10 Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Annuity Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
DEATH BENEFIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Accumulation Period. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
403(b) Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

<PAGE>

401 and HR 10 Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Annuity Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
403(b) Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
401 and HR 10 Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
TAX STATUS
Federal Tax Status of the Company. . . . . . . . . . . . . . . . . . . . 27
Use of the Contract. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Tax Status of Amounts Distributed Under the Contract . . . . . . . . . . 27
MISCELLANEOUS
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
STATEMENT OF ADDITIONAL INFORMATION--TABLE OF CONTENTS . . . . . . . . . . 29
APPENDIX I-GUARANTEED ACCUMULATION ACCOUNT . . . . . . . . . . . . . . . . 30
APPENDIX II-FIXED ACCOUNT. . . . . . . . . . . . . . . . . . . . . . . . . 32

<PAGE>

DEFINITIONS

As used in this Prospectus, the following terms have the meanings shown:

ACCOUNT VALUE: The dollar value of amounts held in an Account as of any
Valuation Period, including the value of the Accumulation Units in the Funds,
the amounts held in GAA, and any amounts invested in the Fixed Account, plus
interest earned on those amounts, less any maintenance fees due, but
excluding amounts used for Annuity Options.

ACCUMULATION PERIOD: The period during which Purchase Payment(s) credited to an
Account are invested to fund future annuity payments.

ACCUMULATION UNIT: A measure of the value of the Separate Account assets
attributable to each Fund used as a variable funding option.

AGGREGATE PURCHASE PAYMENT(S): The sum of all Purchase Payment(s) made under a
Contract.

ANNUITANT: A natural person on whose life an Annuity payment is based.

ANNUITY: A series of payments for life, for a definite period, or combination
of the two.

ANNUITY PERIOD: The period during which Annuity payments are made.

ANNUITY UNIT: A unit of measure used to calculate the amount of each variable
annuity payment.

CODE: Internal Revenue Code of 1986, as amended.

COMPANY: Aetna Life Insurance and Annuity Company, sometimes referred to as
"we" or "us."

CONTRACT: The group installment and single Purchase Payment variable annuity
contracts offered by this Prospectus.

CONTRACT OWNER: The entity to which the Contract is issued. The Contract Owner
is usually the employer sponsoring a non-trusteed Plan or the trustee of a
trusteed Plan.

CONTRACT YEAR: The period of 12 months measured from the Contract's effective
date or from any anniversary of such effective date.

DISTRIBUTOR(S): The registered broker-dealer(s) which have entered into selling
agreements with the Company to offer and sell the Contracts. The Company may
also serve as a Distributor.

EFFECTIVE DATE: The date on which the Company accepts and approves the Contract
application.

ERISA: Employee Retirement Income Security Act of 1974, as amended.

FUNDS: An open-end registered management investment company whose shares are
purchased by the Separate Account to fund the benefits provided by the
Contract.

GAA: Guaranteed Accumulation Account, one of the credited interest options
available in most jurisdictions for deposits under the Contract.

HOME OFFICE: The Company's principal executive offices located at 151
Farmington Avenue, Hartford, Connecticut 06156.

INDIVIDUAL ACCOUNT: A record established for each Participant to identify
Account Values accumulated on the Participant's behalf during the
Accumulation Period.

INDIVIDUAL OR PLAN ACCOUNT YEAR: The period of 12 months measured from the date
an Individual or Plan Account is established or from any anniversary of such
date.

MARKET VALUE ADJUSTMENT: An amount deducted or added to amounts withdrawn early
from the Guaranteed Accumulation Account to reflect changes in the market
value of the investment since the date of deposit. See

<PAGE>

Appendix I and the prospectus for the Guaranteed Accumulation Account for a
discussion of how the market value adjustment is actually calculated.

NET PURCHASE PAYMENTS(S): The Purchase Payment(s) less all applicable
deductions.

PARTICIPANT: An eligible person participating in a Plan.

PLAN(S): Qualified tax-deferred retirement plans (a) adopted by public school
systems and certain tax-exempt organizations (Section 501(c)(3)
organizations) for their employees under Section 403(b) of the Code, (b)
established by employees for their employees under Section 401, and (c)
established by self-employed individuals. 401 Plans may be trusteed or non-
trusteed.

PLAN ACCOUNT: The record established for a Contract Owner of the Net Purchase
Payment(s) accumulated under a Contract where Individual Accounts are not
maintained.

PURCHASE PAYMENT(S): The gross payment(s) made to the Company under a Contract.

SEC: Securities and Exchange Commission.

SEPARATE ACCOUNT: Variable Annuity Account C, an account whose assets are
segregated from other assets of the Company and which holds shares of the
Funds acquired for the Contracts. The Company holds title to the assets held
in the Separate Account.

UNDERWRITER: The registered broker-dealer which contracts with other registered
broker-dealers on behalf of the Separate Account to offer and sell the
Contracts.

VALUATION PERIOD: The period of time from when a Fund determines its net asset
value until the next time it determines its net asset value, usually from the
close of business of the New York Stock Exchange on any normal business day,
Monday through Friday, that the New York Stock Exchange is open until the
close of business the next such business day.

VALUATION RESERVE: A reserve established pursuant to the insurance laws of
Connecticut to measure voting rights during the Annuity Period and the value
of a commutation right available under the "Payments for a Specified Period"
nonlifetime Annuity option when elected on a variable basis under the
Contract.

VARIABLE ANNUITY CONTRACT: An Annuity Contract providing for the accumulation
of values and for Annuity payments which vary in dollar amount with
investment results.

<PAGE>

PROSPECTUS SUMMARY

THE CONTRACT

The Contract offered is designed to provide retirement benefits to Participants
under Plans (a) adopted by public school systems and certain tax-exempt
organizations (Section 501(c)(3) organizations) for their employees under
Section 403(b) ("403(b)"), (b) established by employers for their employees
under Section 401 ("401"), and (c) established by self-employed individuals ("HR
10"). 401 Plans may be trusteed or non-trusteed.

REGISTRATION

Variable Annuity Account C is a separate account established by the Company and
is registered as a unit investment trust under the Investment Company Act of
1940. Assets of the Separate Account attributable to the Contract are invested
in shares of one or more of the Funds. (See "The Company," "Variable Annuity
Account C" and "The Funds.")

PURCHASE

The Contract may be purchased by completing the proper application form and
submitting it to the Company with the initial Purchase Payment. "The Contract -
Contract Purchase" outlines the complete process of purchasing a Variable
Annuity Contract.

SALES AND ADMINISTRATIVE EXPENSES

During the Accumulation Period, deductions are made from each installment
Purchase Payment made on behalf of a Participant for sales and administrative
expenses. For 403(b) Plans, the deduction is 6%; for HR 10 Plans, the deduction
is 6.75%; and for 401 Plans, the deduction is 7%. For 403(b) Plans, the total
deduction amounts to 6.4% of the Net Purchase Payment. The maximum total
deduction, expressed as a percentage of the Net Purchase Payment, is 7.2% for an
installment Purchase Payment HR 10 Plan. For 401 Plans, the total deduction
amounts to 7.5% of the Net Purchase Payment. Termination fees may also be
assessed upon withdrawal to reimburse the Company for administrative expenses in
handling withdrawals. (See "Charges and Deductions--Sales and Administrative
Expense Charge" and "Termination Fee.")

WITHDRAWALS; TAX STATUS

The Contract Owner may withdraw all or a portion of the Contract or an
Individual Account value during the Accumulation Period by properly completing
and submitting to the Company a disbursement form provided by the Company.
Certain charges and deductions may be assessed upon withdrawal. (See "Charges
and Deductions.") The Code restricts full and partial withdrawals under 403(b)
plans in certain circumstances. These restrictions may be found under
"Withdrawals." A 10% federal penalty tax may also be imposed on a distribution
paid to a Participant. (See "Tax Status--Tax Status of Amounts Distributed
Under the Contract.")

OTHER CHARGES

Certain other charges are associated with this Contract such as the mortality
and expense risk charges, fund expenses, allocation and transfer fees, insurance
rider premiums, and premium tax. (See "Charges and Deductions" for a complete
explanation of these charges.)

FREE LOOK PROVISION

The Participant under a 403(b) Plan or a Contract Owner under a 401 or HR 10
Plan may cancel the Contract no later than ten days after receiving the
Contractor Certificate (or as otherwise allowed by state law) by returning it
along with a written notice of cancellation to the Company. Unless state law
requires otherwise, the amount received on cancellation under this provision
may reflect the investment performance of the Purchase Payments deposited in
the Separate Account while invested. In certain cases, this may be less than
the amount of Purchase Payments. (See "Right to Cancel.")

<PAGE>

FEE TABLE
(Based on year ended December 31, 1995)

THE PURPOSE OF THE FEE TABLE IS TO ASSIST CONTRACT OWNERS IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT WILL BE BORNE, DIRECTLY OR INDIRECTLY, UNDER THE
CONTRACT. THE INFORMATION LISTED REFLECTS THE CHARGES DUE UNDER THE CONTRACT AS
WELL AS THE FEES AND EXPENSES DEDUCTED FROM THE FUNDS. ADDITIONAL INFORMATION
REGARDING THE CHARGES AND DEDUCTIONS ASSESSED UNDER THE CONTRACT CAN BE FOUND
UNDER "CHARGES AND DEDUCTIONS" IN THIS PROSPECTUS. CHARGES AND EXPENSES SHOWN
DO NOT TAKE INTO ACCOUNT PREMIUM TAXES THAT MAY BE APPLICABLE.

CONTRACT OWNER TRANSACTION EXPENSES

<TABLE>

<S> <C>
Sales and Administrative Expense Charge
(as a percentage of Purchase Payments)
403(b) Plans 6.00%
401 Plans 7.00%
HR 10 Plans 6.75%
Termination Fee
(as a percentage of amount withdrawn)
403(b) Plans 2% (first 5 Contract Years)
HR 10 Plans 2% (first 5 Contract Years)

</TABLE>

401 Plans Completed
Contract Years Deduction
-------------- ---------
<S> <C>
1 5%
2 4%
3 3%
4 2%
5 1%
5 or more 0%

Allocation and Transfer Fees(1) $0.00

</TABLE>

SEPARATE ACCOUNT ANNUAL EXPENSES
(Daily deductions, equal to the percentage shown on an annual basis, made from
amounts allocated to the variable options)

403(b) 401 HR 10
----- ----- -----
<S> <C> <C> <C>
Mortality and Expense Risk Fees 1.25% 1.19% 1.25%
----- ----- -----
Total Separate Account Annual Expenses 1.25% 1.19% 1.25%
----- ----- -----
----- ----- -----

</TABLE>

(1) The Company currently allows an unlimited number of transfers or allocation
changes without charge. However, the Company reserves the right to impose
a transfer fee of $10.00 for each transfer or allocation charge in excess
of 12 during each Contract Year. (See "Transfers and Allocation Changes.")

<PAGE>

ANNUAL EXPENSES OF THE FUNDS
(Except as noted, the following figures are a percentage of average net assets
and, except where otherwise indicated, are based on figures for the year ended
December 31, 1995)

INVESTMENT
ADVISORY OTHER TOTAL
FEES(1) EXPENSES(2) FUND
(AFTER EXPENSE (AFTER EXPENSE ANNUAL
REIMBURSEMENT) REIMBURSEMENT) EXPENSES
-------------- -------------- --------
<S> <C> <C> <C>
Aetna Variable Fund(3) 0.25% 0.06% 0.31%
Aetna Income Shares(3) 0.25% 0.08% 0.33%
Aetna Variable Encore Fund(3) 0.25% 0.10% 0.35%
Aetna Investment Advisers Fund, Inc. (3) 0.25% 0.08% 0.33%
TCI Growth(4) 1.00% 0.00% 1.00%

</TABLE>

(1) Certain of the unaffiliated Fund managers reimburse the Company for
administrative costs incurred in connection with administering the Fund as
a variable funding option under the Contract. These reimbursements are
paid out of the managers' investment advisory fees and are not charged to
investors.

(2) A mutual fund's "Other Expenses" include operating costs of the Fund. The
expenses are factored into the Fund's net asset value and are not deducted
from the Contract Owner's or Participant's Account Value.

(3) As of May 1, 1996, the Company will provide administrative services to the
Fund and will assume the Fund's ordinary recurring direct costs under an
Administrative Services Agreement. The "Other Expenses" shown are not
based on figures for the year ended December 31, 1995, but reflect the fee
payable under this Agreement.

(4) The Portfolio's investment adviser pays all expenses of the Portfolio
except brokerage commissions, taxes, interest fees, and expenses of the
non-interested directors (including counsel fees) and extraordinary
expenses. These expenses have historically represented a very small
percentage (less than 0.01%) of total net assets in a fiscal year.

HYPOTHETICAL ILLUSTRATION (EXAMPLE)
THIS EXAMPLE IS PURELY HYPOTHETICAL. IT SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OF FUTURE EXPENSES OR EXPECTED RETURN. ACTUAL EXPENSES
AND/OR RETURN MAY BE MORE OR LESS THAN THOSE SHOWN BELOW.

Assuming a 5% annual return on assets, you would have paid the following
expenses on a $1,000 investment:

403(b) PLANS
------------

If you make a complete withdrawal of If you do NOT make a complete withdrawal
your contract at the end of the of your contract or if you annuitize:
applicable time period:

1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund $94 $127 $162 $235 $75 $106 $140 $235
Aetna Income Shares $95 $128 $163 $237 $75 $107 $141 $237
Aetna Variable Encore Fund $95 $128 $164 $239 $75 $107 $142 $239
Aetna Investment Advisers Fund, Inc. $95 $128 $163 $237 $75 $107 $141 $237
TCI Growth $101 $147 $195 $303 $81 $126 $173 $303

</TABLE>

8
<PAGE>

401 PLANS
---------

If you make a complete withdrawal of If you do NOT make a complete withdrawal
your contract at the end of the of your contract or if you annuitize:
applicable time period:

1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund $132 $145 $157 $237 $84 $114 $146 $237
Aetna Income Shares $132 $146 $158 $239 $84 $115 $147 $239
Aetna Variable Encore Fund $133 $146 $159 $241 $85 $115 $148 $241
Aetna Investment Advisers Fund, Inc. $132 $146 $158 $239 $84 $115 $147 $239
TCI Growth $138 $164 $190 $305 $91 $134 $179 $305

</TABLE>

HR 10 PLANS
-----------

If you make a complete withdrawal of If you do NOT make a complete withdrawal
your contract at the end of the of your contract or if you annuitize:
applicable time period:

1 YEAR 3 YEARS 5 YEARS 10 YEARS 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- -------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aetna Variable Fund $102 $134 $169 $241 $82 $113 $147 $241
Aetna Income Shares $102 $135 $170 $243 $82 $114 $148 $243
Aetna Variable Encore Fund $102 $135 $171 $245 $83 $115 $149 $245
Aetna Investment Advisers Fund, Inc. $102 $135 $170 $243 $82 $114 $148 $243
TCI Growth $108 $153 $201 $309 $89 $133 $180 $309

</TABLE>

<PAGE>

CONDENSED FINANCIAL INFORMATION
THIS FINANCIAL INFORMATION IS PROVIDED FOR USE BY 403(b) AND HR 10 PLANS

(Selected data for accumulation units outstanding throughout each period)

THE CONDENSED FINANCIAL INFORMATION PRESENTED BELOW FOR EACH OF THE YEARS IN THE
TEN-YEAR PERIOD ENDED DECEMBER 31, 1995 (AS APPLICABLE), IS DERIVED FROM THE
FINANCIAL STATEMENTS OF THE SEPARATE ACCOUNT, WHICH FINANCIAL STATEMENTS HAVE
BEEN AUDITED BY KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS. THE FINANCIAL
STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE INDEPENDENT
AUDITORS' REPORT THEREON, ARE INCLUDED IN THE STATEMENT OF ADDITIONAL
INFORMATION.

1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
AETNA VARIABLE FUND
Value at beginning of period $105.558 $107.925 $102.383 $97.165 $77.845 $76.311 $59.871
Value at end of period $137.869 $105.558 $107.925 $102.383 $97.165 $77.845 $76.311
Increase(decrease) in value of
accumulation unit(1) 30.61% (2.19)% 5.41% 5.37% 24.82% 2.01% 27.46%
Number of accumulation units
outstanding at end of period 6,364,000 13,966,072 21,148,863 24,201,565 20,948,226 18,362,906 17,142,820
AETNA INCOME SHARES
Value at beginning of period $40.173 $42.283 $39.038 $36.789 $31.192 $28.943 $25.574
Value at end of period $46.913 $40.173 $42.283 $39.038 $36.789 $31.192 $28.943
Increase(decrease) in value of
accumulation unit(1) 16.78% (4.99)% 8.31% 6.11% 17.94% 7.77% 13.17%
Number of accumulation units
outstanding at end of period 2,377,622 5,108,720 8,210,666 8,507,292 7,844,412 6,984,793 6,202,834
AETNA VARIABLE ENCORE FUND
Value at beginning of period $36.271 $35.282 $34.619 $33.812 $32.138 $30.012 $27.783
Value at end of period $37.988 $36.271 $35.282 $34.619 $33.812 $32.138 $30.012
Increase(decrease) in value of
accumulation unit(1) 4.73% 2.80% 1.92% 2.39% 5.21% 7.08% 8.02%
Number of accumulation units
outstanding at end of period 1,836,260 3,679,802 5,086,515 7,534,662 8,430,082 10,220,110 8,286,033
AETNA INVESTMENT ADVISERS FUND, INC.
Value at beginning of period $14.270 $14.519 $13.379 $12.736 $10.896 $10.437 $10.000(2)
Value at end of period $17.954 $14.270 $14.519 $13.379 $12.736 $10.896 $10.437
Increase(decrease) in value of
accumulation unit(1) 25.82% (1.71)% 8.52% 5.05% 16.89% 4.40% 4.37%
Number of accumulation units
outstanding at end of period 9,193,181 21,990,186 30,784,750 34,802,433 22,898,099 17,078,985 9,535,986
TCI GROWTH
Value at beginning of period $10.213 $10.463 $10.000(3)
Value at end of period $13.224 $10.213 $10.463
Increase(decrease) in value of
accumulation unit(1) 29.47% (2.39)% 4.63%
Number of accumulation units
outstanding at end of period 4,184,701 12,096,731 12,272,152
---------
---------

1988 1987 1986
---- ---- ----
<S> <C> <C> <C>
AETNA VARIABLE FUND
Value at beginning of period $52.885 $50.760 $43.205
Value at end of period $59.871 $52.885 $50.760
Increase(decrease) in value of
accumulation unit(1) 13.21% 4.19% 17.49%
Number of accumulation units
outstanding at end of period 16,455,396 16,497,406 16,578,251
AETNA INCOME SHARES
Value at beginning of period $24.061 $23.308 $20.703
Value at end of period $25.574 $24.061 $23.308
Increase(decrease) in value of
accumulation unit(1) 6.29% 3.23% 12.58%
Number of accumulation units
outstanding at end of period 5,955,293 5,372,271 6,188,470
AETNA VARIABLE ENCORE FUND
Value at beginning of period $26.171 $24.812 $23.504
Value at end of period $27.783 $26.171 $24.812
Increase(decrease) in value of
accumulation unit(1) 6.16% 5.48% 5.57%
Number of accumulation units
outstanding at end of period 8,154,644 7,326,151 6,692,947

</TABLE>

(1) The above figures are calculated by subtracting the beginning Accumulation
Unit value from the ending Accumulation Unit value during a calendar year,
and dividing the result by the beginning Accumulation Unit value. These
figures do not reflect the deductions from Purchase Payments for sales
load. Inclusion of these charges would reduce the investment results
shown.

(2) The initial Accumulation Unit value was established at $10.000 on June 23,
1989, the date on which the Fund commenced operations.

(3) The initial Accumulation Unit value was established at $10.000 on
February 1, 1993, the date on which the Portfolio became available under
the Contract.

<PAGE>

CONDENSED FINANCIAL INFORMATION
THIS FINANCIAL INFORMATION IS PROVIDED FOR USE BY 401 PLANS

(Selected data for accumulation units outstanding throughout each period)

1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
AETNA VARIABLE FUND
Value at beginning of period $138.406 $141.424 $134.081 $127.171 $101.824 $99.758 $78.220
Value at end of period $180.879 $138.406 $141.424 $134.080 $127.171 $101.824 $99.758
Increase(decrease) in value of
accumulation unit(1) 30.69% (2.13)% 5.48% 5.43% 24.89% 2.07% 27.54%
Number of accumulation units
outstanding at end of period 549,056 1,258,166 1,616,018 1,829,160 1,956,479 2,169,721 2,496,795
AETNA INCOME SHARES
Value at beginning of period $40.570 $42.675 $39.376 $37.086 $31.424 $29.142 $25.734
Value at end of period $47.405 $40.570 $42.675 $39.376 $37.086 $31.424 $29.142
Increase(decrease) in value of
accumulation unit(1) 16.85% (4.93)% 8.38% 6.17% 18.02% 7.83% 13.24%
Number of accumulation units
outstanding at end of period 72,902 181,535 241,551 263,105 283,119 251,861 248,678
AETNA VARIABLE ENCORE FUND
Value at beginning of period $36.723 $35.701 $35.009 $34.172 $32.460 $30.295 $28.028
Value at end of period $38.485 $36.723 $35.701 $35.009 $34.172 $32.460 $30.295
Increase(decrease) in value of
accumulation unit(1) 4.80% 2.88% 1.98% 2.45% 5.27% 7.15% 8.09%
Number of accumulation units
outstanding at end of period 150,480 241,159 312,350 471,585 470,248 624,613 542,581
AETNA INVESTMENT ADVISERS FUND, INC.
Value at beginning of period $14.317 $14.558 $13.407 $12.755 $10.906 $10.440 $10.000(2)
Value at end of period $18.024 $14.317 $14.558 $13.407 $12.755 $10.906 $10.440
Increase(decrease) in value of
accumulation unit(1) 25.89% (1.66)% 8.59% 5.11% 16.86% 4.46% 4.40%
Number of accumulation units
outstanding at end of period 393,613 756,261 1,142,268 1,129,453 725,598 619,748 470,302
TCI GROWTH
Value at beginning of period $10.213 $10.469 $10.000(3)
Value at end of period $13.224 $10.213 $10.463
Increase(decrease) in value of
accumulation unit(1) 29.47% (2.39)% 4.63%
Number of accumulation units
outstanding at end of period 4,184,701 12,096,731 12,272,152
---------
---------

1988 1987 1986
---- ---- ----
<S> <C> <C> <C>
AETNA VARIABLE FUND
Value at beginning of period $69.051 $66.237 $56.345
Value at end of period $78.220 $69.051 $66.237
Increase(decrease) in value of
accumulation unit(1) 13.28% 4.25% 17.56%
Number of accumulation units
outstanding at end of period 3,030,548 3,740,739 4,835,791
AETNA INCOME SHARES
Value at beginning of period $24.197 $23.426 $20.795
Value at end of period $25.734 $24.197 $23.426
Increase(decrease) in value of
accumulation unit(1) 6.35% 9.29% 12.65%
Number of accumulation units
outstanding at end of period 284,650 251,513 348,406
AETNA VARIABLE ENCORE FUND
Value at beginning of period $26.387 $25.001 $23.889
Value at end of period $28.028 $26.387 $25.001
Increase(decrease) in value of
accumulation unit(1) 6.22% 5.54% 5.63%
Number of accumulation units
outstanding at end of period 637,833 627,039 651,678

</TABLE>

(2) The initial Accumulation Unit value was established at $10.000 on June 23,
1989, the date on which the Fund commenced operations.

(3) The initial Accumulation Unit value was established at $10.000 on
February 1, 1993, the date on which the Portfolio became available under
the Contract.

<PAGE>

THE COMPANY

Aetna Life Insurance and Annuity Company (the "Company") is the issuer of the
Contract, and as such, it is responsible for providing the insurance and annuity
benefits under the Contract. The Company is a stock life insurance company
organized under the insurance laws of the State of Connecticut in 1976. Through
a merger, it succeeded to the business of Aetna Variable Annuity Life Insurance
Company (formerly Participating Annuity Life Insurance Company, an Arkansas life
insurance company organized in 1954). The Company is engaged in the business of
issuing life insurance policies and variable annuity contracts in all states of
the United States. The Company's principal executive offices are located at 151
Farmington Avenue, Hartford, Connecticut 06156.

The Company is a wholly owned subsidiary of Aetna Retirement Holdings, Inc.,
which is in turn a wholly owned subsidiary of Aetna Retirement Services, Inc.
and an indirect wholly owned subsidiary of Aetna Life and Casualty Company.

VARIABLE ANNUITY ACCOUNT C

Variable Annuity Account C is a Separate Account established by the Company in
1976 pursuant to the insurance laws of the State of Connecticut. The Separate
Account was formed for the purpose of segregating assets attributable to the
variable portions of Contracts from other assets of the Company. The Separate
Account is registered as a unit investment trust under the Investment Company
Act of 1940, and meets the definition of "separate account" under the federal
securities laws.

Although the Company holds title to the assets of the Separate Account, such
assets are not chargeable with liabilities arising out of any other business the
Company may conduct. Income, gains or losses of the Separate Account are
credited to or charged against all assets of the Separate Account without regard
to other income, gains or losses of the Company. All obligations arising under
the Contracts are general corporate obligations of the Company.

THE FUNDS

The Contract Owner will designate some or all of the Funds described below as
variable funding options under the Contract. The Contract Owner, or the
Participant, if allowed by the Contract Owner may select one or more of the
Funds for investment of the Purchase Payments made on their behalf. All of the
Funds are diversified as defined in the Investment Company Act of 1940.

- AETNA VARIABLE FUND seeks to maximize total return through investments
in a diversified portfolio of common stocks and securities convertible
into common stock.

- AETNA INCOME SHARES seeks to maximize total return, consistent with
reasonable risk, through investments in a diversified portfolio
consisting primarily of debt securities.

- AETNA VARIABLE ENCORE FUND seeks to provide high current return,
consistent with preservation of capital and liquidity, through
investment in high-quality money market instruments. An investment in
the Fund is neither insured nor guaranteed by the U.S. Government.

- AETNA INVESTMENT ADVISERS FUND, INC. is a managed mutual fund which
seeks to maximize investment return consistent with reasonable safety
of principal by investing in one or more of the following asset
classes: stocks, bonds and cash equivalents based on the Company's
judgment of which of those sectors or mix thereof offers the best
investment prospects.

- TCI PORTFOLIOS, INC.--TCI GROWTH (a Twentieth Century Fund) seeks
capital growth by investing in common stocks (including securities
convertible into common stocks) and other securities that meet certain
fundamental and technical standards of selection and, in the opinion
of TCI Growth's management, have better than average potential for
appreciation. TCI Growth tries to stay fully invested in such
securities, regardless of the movement of prices generally. The
Fund may invest in

<PAGE>

foreign securities. Foreign investing involves risks that differ from
those involved in domestic investing. See the Fund's prospectus for a
discussion of these risks.

There is no assurance that the Funds will achieve their investment objectives.
Contract Owners bear the full investment risk of investment in the Funds
selected.

Some of the above Funds may use instruments known as derivatives as part of
their investment strategies as described in their respective prospectuses. The
use of certain derivatives such as inverse floaters and principal only debt
instruments may involve higher risk of volatility to a Fund. The use of
leverage in connection with derivatives can also increase risk of losses. See
the prospectus for the Funds for a discussion of the risks associated with an
investment in those Funds. More comprehensive information, including a
discussion of potential risks, is found in the current prospectus for each Fund
which is distributed with and must accompany this Prospectus. Contract Owners
and Participants should read the accompanying prospectuses carefully before
investing. Additional prospectuses and Statements of Additional Information for
this Prospectus and each of the Funds can be obtained from the Company's Home
Office at the address and telephone number listed on the cover of this
Prospectus.

FUND INVESTMENT ADVISERS

The following identifies the investment adviser for each Fund.

FUND INVESTMENT ADVISER
---- ------------------
<S> <C>
Aetna Variable Fund Aetna Life Insurance and Annuity Company (ALIAC)
Aetna Income Shares ALIAC
Aetna Variable Encore Fund ALIAC
Aetna Investment Advisers Fund, Inc. ALIAC
TCI Growth Investors Research Corporation

</TABLE>

MIXED AND SHARED FUNDING

Shares of the Funds are sold to the Company for funding variable annuities. The
Funds may be sold to other companies for the same purpose. This is referred to
as "shared funding." Shares of the Funds may also be used for funding variable
life insurance policies through variable life separate accounts sponsored by
the Company or by third parties. This is referred to as "mixed funding."

It is conceivable that, in the future, it may be disadvantageous for variable
annuity separate accounts and variable life separate accounts to invest in these
Funds simultaneously, since the interests of the Contract Owners or policy
owners may differ. Each Fund's Board of Trustees or Directors has agreed to
monitor events in order to identify any material irreconcilable conflicts that
may possibly arise and to determine what action, if any, should be taken in
response thereto. If such a conflict were to occur, one of the separate
accounts might withdraw its investment in a Fund. This might force that Fund to
sell portfolio securities at disadvantageous prices.

FUND ADDITIONS, LIMITATIONS AND SUBSTITUTIONS

We may, from time to time, add additional Funds as eligible variable funding
options under the Contracts. In such event, the Contract Owner or you, if
permitted by the Contract Owner, be permitted to select from these other Funds,
subject to any conditions that may be imposed in connection with those options.

The Company's current policy is to allow only Aetna Variable Fund, Aetna Income
Shares and Aetna Investment Advisers Fund, Inc. to be used as variable
investment options during the Annuity Period. (See "Annuity Period Elections.")

The Contract Owner may decide to offer only a select number of Funds as funding
options under its Plan, or may decide to substitute shares of one Fund for
shares of another Fund currently held by the Separate Account.

<PAGE>

VOTING RIGHTS

Each Contract Owner may direct the Company in the voting of shares at meetings
of shareholders of the appropriate Fund(s). The number of votes to which each
Contract Owner may give direction will be determined as of the record date.

The number of votes each Contract Owner is entitled to direct with respect to a
particular Fund during the Accumulation Period is equal to the portion of the
current value of the Contract attributable to that Fund divided by the net asset
value of one share of that Fund. During the Annuity Period, the number of votes
is equal to the Valuation Reserve applicable to the portion of the Contract
attributable to that Fund, divided by the net asset value of one share of the
Fund. In determining the number of votes, fractional votes will be recognized.
Where the value of the Contract or Valuation Reserve relates to more than one
Fund, the calculation of votes will be performed separately for each Fund.

Unless otherwise provided by the Plan, Participants and Annuitants of 403(b)
Plans have a fully vested (100%) interest in the benefits provided under the
Contract. Therefore, such Participants and Annuitants may instruct the Contract
Owner how to direct the Company to cast the votes for the portion of the
Contract value or Valuation Reserve attributable to their Individual Accounts.
Votes attributable to those Participants and Annuitants who do not instruct the
Contract Owner will be cast by the Company in the same proportion as votes for
which instructions have been received by the Contract Owner. Votes attributable
to Contract Owners who do not direct the Company will be cast by the Company in
the same proportion as the votes for which directions have been received by the
Company.

Contract Owners, or Participants and Annuitants entitled to instruct the casting
of votes, will receive a notice of each meeting of shareholders, together with
any proxy solicitation materials, and a statement of the number of votes
attributable to their participation under the Contract and stating the right to
instruct the Contract Owner how such votes shall be cast.

THE CONTRACT

CONTRACT PURCHASE

An organization eligible to establish retirement annuity contracts under
Sections 403(b), 401 and HR 10 of the Code may acquire one or both group
Contracts for its Plan by filling out the appropriate master application forms
and returning them to the Company or to a Distributor for delivery to the
Company. Once we approve the application, a group Contract (or Contracts) is
issued to the organization as Contract Owner. The Contract Owner exercises
all rights under the Contracts. (See "Rights Under the Contract.") A Single
Purchase Payment Contract will be issued for lump-sum transfers of amounts
accumulated under a preexisting Plan. An installment Purchase Payment Contract
will be issued for continuing, periodic payments.

Employees of the Contract Owner may fill out an enrollment form or forms and
return them to the Company or to a Distributor for delivery to the Company for
review, acceptance or rejection. The Company must accept or reject an
application within two business days of its receipt. If the application is
incomplete, the Company may hold it and any accompanying Purchase Payment for
five days.

Purchase Payments may be held for longer periods only with the consent of the
Contract Owner or Participant pending acceptance of the application. If the
application is accepted, a Contract will be issued to the Contract Owner or the
Purchase Payment will be accepted. Any Purchase Payment accompanying the
application or received prior to acceptance of the application, will be invested
as of the date of acceptance. If the application is rejected, the application
and any Purchase Payments will be returned to the Contract Owner.

A single master group Contract is issued to cover all present and future
Participants. Contracts may be issued in either allocated or unallocated form.
An allocated Contract provides for the establishment of individual Accounts, but
all Purchase Payments are applied to a single Plan Account.

<PAGE>

Purchase Payments under an HR 10 Plan will be those required to fulfill the
terms of the Plan but annual Aggregate Purchase Payments must be at least
$4,000. Purchase Payments under a 401 Plan will be those required to fulfill
the terms of the Plan. The Code imposes a maximum limit on annual Purchase
Payments which may be excluded from a Participant's gross income. For 403(b)
Plan Participants, such limit must be calculated in accordance with Sections
403(b), 415 and 402(g) of the Code. In addition, Purchase Payments will be
excluded from a Participant's gross income only if the 403(b) Plan meets certain
Code non-discrimination requirements. For HR 10 Plans, the Purchase Payments
made on behalf of a Participant in a defined contribution Plan are determined by
the Plan contribution formula. Generally, Code Section 415 imposes an annual
limit of the lesser of $30,000 or 25% of includible compensation for each
Participant. Purchase Payments for a defined benefit Plan are determined on an
actuarial basis to provide Plan benefits for all Participants. These Purchase
Payments are held in a single Plan Account. Under Code Section 415, a Plan can
provide annual benefits of the lesser of $120,000 (for 1996) or 100% of
includible compensation for each Participant.

NET PURCHASE PAYMENTS

Each Purchase Payment is forwarded to the Company through a Distributor. After
the deductions from a Purchase Payment are made, the Net Purchase Payment, to
the extent it is to be accumulated on a variable basis, is placed in the
Separate Account and credited to the Contract.

The Contract Owner or, if permitted by a Plan, the Participant may elect to have
the Net Purchase Payment(s) accumulate (a) on a variable basis by allocation to
one of more of the available Funds; (b) on a fixed basis under one or more of
the available credited interest options; or (c) in a combination of any of the
available investment options. The Net Purchase Payment(s) must be allocated to
the respective options in increments of whole percentage amounts.

The Contract Owner or, if permitted by a Plan, the Participant may elect to
change the allocation of future Net Purchase Payments to any investment option
described above.

ACCUMULATION UNITS

Each Net Purchase Payment allocated to one or more of the available Funds is
credited to the Contract in the form of Accumulation Units. The number of
Accumulation Units credited is determined by dividing the applicable portion of
the Net Purchase Payment by that Contract's Accumulation Unit value of the
appropriate Fund. The Accumulation Unit value used is computed for the
Valuation Period in which the Purchase Payment and a completed application are
received at the Home Office and accepted by the Company. Accumulation Units
will be credited within two business days of receipt of the initial application.
Subsequent Purchase Payments, if any, will be credited at the Accumulation Unit
value next determined following receipt of the payment. Shares in the Funds are
purchased by the Separate Account at the net asset value next determined by the
Fund following receipt of Net Purchase Payments by the Separate Account. The
value of Accumulation Units attributable to the Funds will be affected by the
investment performance, expenses and charges of those Funds. Generally, if the
net asset value of the Fund increases, so does the Accumulation Unit value;
however, performance of the Separate Account is reduced by charges and
deductions under the Contract.

Accumulation Units are valued separately for each Fund. Therefore, a Contact
Owner or, if permitted by a Plan, a Participant who has elected to have the Net
Purchase Payment(s) invested in a combination of Funds will have Accumulation
Units credited from more than one source. The value of the Contract or
Individual Account is determined by adding the value of any Accumulation Units
attributable to the Fund(s) to the value of any amount attributable to a
credited interest option.

NET INVESTMENT FACTOR

The value of an Accumulation Unit for any Valuation period is calculated by
multiplying the Accumulation Unit value for the immediately preceding Valuation
period by the net investment factor of the appropriate investment option for the
current period.

<PAGE>

The net investment factor is calculated separately for each Fund in which assets
of the Separate Account are invested.

The net investment rate equals (a) the net assets of the Fund held by the
Separate Account at the end of Valuation Period, minus (b) the net assets of the
Fund held by the Separate Account at the beginning of a Valuation Period, plus
or minus (c) taxes or provision for taxes, if any, attributable to the operation
of the Separate Account, divided by (d) the value of the Fund's Accumulation and
Annuity Units held by the Separate Account at the beginning of the Valuation
Period, minus (e) the applicable daily charge for the Annuity mortality and
expense risks. The net investment rate may be more or less than zero.

The net investment rate is then added to 1.0000000 to arrive at the net
investment factor.

DISTRIBUTION

The Company will serve as Underwriter for the securities sold by this
Prospectus. The Company is registered as a broker-dealer with the Securities
and Exchange Commission and is a member of the National Association of
Securities Dealers, Inc. (NASD). As Underwriter, the Company will contract with
one or more registered broker dealers ("Distributors"), including at least one
affiliate of the Company, to offer and sell the Contracts. All persons offering
and selling the Contracts must be registered representatives of the Distributors
and must also be licensed as insurance agents to sell Variable Annuity
Contracts. These registered representatives may also provide service to
Participants in connection with establishing their Accounts under the Contract.

Persons offering and selling the Contracts may receive commissions in connection
with the sale of the Contracts. The maximum percentage amount that the Company
ever paid as commission with respect to any given Purchase Payment is with
respect to those made during the first year of Purchase Payments under a
Contract. That percentage amount will range from 2% to 6% of those Purchase
Payments. The Company may also pay renewal commissions on Purchase Payments
made after the first year and asset-based service fees. In limited
circumstances we also pay certain of these professionals profit-sharing and
other compensation, overrides or reimbursement for expenses. The average of all
payments made by the Company is estimated to equal approximately 3% of the total
Purchase Payments made over the estimated life of an average Contract. The
Company may also reimburse the Distributor for certain expenses. The name of
the Distributor and the registered representative responsible for your Account
are set forth on your enrollment form.

RIGHT TO CANCEL

A Participant under a 403(b) Plan or a Contract Holder under a 401 or HR 10
Plan may cancel his or her participation under the Contract by returning the
certificate no later than ten days after receiving it (or as otherwise
allowed by state law) along with a written notice of cancellation to the
Company. The Company will produce a refund not later than seven days after
it receives the Contract or certificate and the written notice at its Home
Office. Unless the applicable state law requires a refund of Purchase
Payment(s), the Company will refund the Purchase Payment(s) plus any increase
or minus any decrease in the value attributable to any Purchase Payments
allocated to the variable option(s).

CHARGES AND DEDUCTIONS

MORTALITY AND EXPENSE RISK CHARGES

During the Accumulation and Annuity Periods, the Company makes a daily deduction
from the variable portion of Contract values for mortality and expense risks.
The mortality risk charge is to compensate the Company for the risk it assumes
when it promises to continue making payments for the lives of individual
Annuitants according to Annuity rates specified in the Contact at issue. The
expense risk charge is to compensate us for the risk that actual expenses for
costs incurred under the Contract will exceed the maximum costs that can be
charged under the Contract.

<PAGE>

Under 401 Contracts, the daily deduction is equivalent to 1.19% per year. For
403(b) and HR 10 Plans, the daily deduction is equivalent to 1.25%. For the
year ended December 31, 1995, the Company received $71,090,542 for mortality and
expense risks from Contracts funded through the Separate Account.

FUND EXPENSES

Most expenses incurred in the operations of the Funds are borne by that Fund.
Each Fund has an investment adviser and pays an investment advisory fee, which
is deducted daily from each Fund's net assets. Fund advisers may reimburse the
Funds they advise for some or all of these expenses. For further details on
each Fund's expenses, you and the Contract Owner should read the accompanying
prospectus for each Fund and refer to the Fee Table in this Prospectus.

ALLOCATION AND TRANSFER FEES

The Company currently permits an unlimited number of allocation changes during
each calendar year, without charge. The Company reserves the right to change a
fee of not more than $10, deducted from the Individual or Plan Account value,
for each allocation change that exceeds 12 in a calendar year.

The Company also currently permits an unlimited number of free transfers per
calendar year of accumulated values in the Individual or Plan Account.
Transfers of not less than $500 may be made among the available Funds or from
any of the Funds to a credited interest option. The Company reserves the right
to charge a fee of not more than $10, deducted from the Individual or Plan
Account value, for each transfer that exceeds 12 in a calendar year. Any
transfer will be based on the Accumulation Unit value next determined after a
proper request is received by the Company at its Home Office.

INSURANCE RIDER

For 403(b) Plans, a minimum death benefit guarantee may be purchased in
connection with an Individual Account at the option of the Contract Owner or, if
permitted by a Plan, the Participant. This guarantee provides that if the
Participant dies before Annuity payments commence, the death benefit will never
be less than an amount equal to the Purchase Payments (less any partial
redemptions) made on behalf of the Participant, regardless of the value of the
Participant's Individual Account at the time of death. The premium for this
rider is 1% of each Purchase Payment made on behalf of a Participant for whom
the rider is elected.

Contracts issued to 401 Plans include the preretirement minimum death benefit
guarantee. This guarantee provides that should the Participant die before
Annuity payments commence, the Company will pay the beneficiary the greater of
(a) the value of the Participant's Individual Account, or (b) 100% of the
Purchase Payments (less any partial redemptions) made on behalf of the
Participant. The premium for this rider is included in the Contract sales and
administrative expense charge.

SALES AND ADMINISTRATIVE EXPENSE CHARGE

During the Accumulation Period, deductions are made from each installment
Purchase Payment made on behalf of a Participant for sales and administrative
expenses. This deduction is made from the balance of each Purchase Payment
after premium taxes and insurance rider premiums are deducted.

For 403(b) Plans, a percentage deduction of 6% will be deducted from the balance
of each installment Purchase Payment made on behalf of a Participant after the
deductions for premium tax and insurance rider premium, if applicable, are made.
Exclusive of any premium tax or premium for the insurance rider, the total
deduction amounts to 6.4% of the Net Purchase Payment.

After premium taxes, if applicable, are deducted, a sales and administrative
expense charge of 7% is deducted from the balance of each installment Purchase
Payment made on behalf of a Participant in a 401 Plan. Exclusive of any premium
tax, the total deduction amounts to 7.5% of the Net Purchase Payment.

<PAGE>

Under HR 10 Plans, the Company makes a deduction from the balance of installment
Purchase Payment Contracts after premium taxes, if applicable, are deducted as
follows:

ANNUAL AGGREGATE
PURCHASE PAYMENTS DEDUCTION
------------------- -----------
First $30,000 6.75%
Next $15,000 3.75%
Over $45,000 1.75%

The maximum total deduction, expressed as a percentage of the Net Purchase
Payment, is 7.2% for an installment Purchase Payment of $100.

TERMINATION FEE

A termination fee may be deducted to reimburse the Company for administrative
expenses in handling Contract withdrawals.

Under a 403(b) and 401 Plan, there is no fee for termination of an Individual
Account. Under an HR 10 Plan, there is no fee for termination of an Individual
Account due to the death of the Participant.

If an installment Purchase Payment Contract is terminated before five years'
Aggregate Purchase Payments have been made or before the tenth anniversary of
the Contract, a termination fee of 2% of the 403(b) or HR 10 Plan Contract value
will be deducted. For 401 Plans, the termination fee is a graded amount based
on the number of Contact years for which Aggregate Purchase Payments have been
received. The following table reflects this termination fee under 401 Plan
Contracts.

COMPLETED
CONTRACT YEARS DEDUCTION
-------------- ---------
1 5%
2 4%
3 3%
4 2%
5 1%
More than 5 0%

PREMIUM TAX

Several states and municipalities impose a premium tax on annuities. These
taxes currently range from 0% to 4%. The Company reserves the right to deduct
premium tax against Purchase Payments or Contract Values at any time but no
earlier than when we have a tax liability under state law. The Company's
current practice is to deduct for premium taxes at the time of complete
withdrawal or annuitization. In addition to the premium tax, the Company
reserves the right to assess a charge for any state or federal taxes due against
the Contract or the Separate Account assets. (See "Tax Status.")

Any municipal premium tax assessed at a rate in excess of 1% will be deducted
from the Purchase Payment(s) or from the amount applied to an Annuity Option
based upon our determination of when such tax is due. We will absorb any
municipal premium tax that is assessed at 1% or less. We reserve the right,
however, to reflect this added expense in our annuity purchase rates for
residents of such municipalities.

<PAGE>

GENERAL DESCRIPTION OF VARIABLE ANNUITY CONTRACTS

RIGHTS UNDER THE CONTRACT

All rights under the Contract rest with the Contract Owner, which is usually the
employer. In the case of a trusteed Plan, the Plan trustee will be the Contract
Owner. Benefits available to Participants are governed exclusively by the
provisions of the Plan. Some of the options and elections under the Contract
may not be available to Participants under the provisions of the Plan.
Generally, for 403(b) Plans, elections may be made by Participants; for 401 and
HR Plans, elections must be made by the Contract Owner.

MODIFICATION OF THE CONTRACT

The Company may modify the Contract when it deems an amendment appropriate,
subject to the limitations described below, by giving written notice to the
Contract Owner 30 days before the effective date of the change. The following
Contract provisions may be considered material by the Company and cannot be
changed without the approval of appropriate state or federal regulatory
authorities:

(a) transfers among investment options;

(b) notification to the Contract Owner;

(d) terms of Annuity options; and

(e) death benefit payments.

In addition the Company may not modify the Contract during the first year it is
in force, except with the approval of the Contact Owner. For 401 Plans, the
effective date of a modification will be the next Contract anniversary.
However, changes to items (a) through (f) listed below will apply only to new
Participants enrolled under a Contract after the effective date of the
modification:

(a) the Annuity Options;

(b) increasing the mortality and expense risk charges;

(d) increasing the termination fee (if applicable);

(e) the preretirement minimum death benefit (if applicable); and

(f) the maximum allocation and transfer fees.

Modification of items (b) though (f) above specifically require authorization by
the SEC to the extent that the proposed charges are not currently authorized by
existing orders issued to us by the SEC.

If the Contract Owner has not accepted the proposed change at the time of the
effective date, no new Participants may be enrolled under the Contract.
However, additional Purchase Payments may continue to be made on behalf of
Participants already enrolled under the Contract.

No modification may affect any Annuity commencing prior to the effective date of
such modification unless deemed necessary for the Plan or Contract to comply
with the requirements of the Code or other laws and regulations affecting the
Plan or Contract.

CONTRACT OWNER INQUIRIES

A Contract Owner may direct inquiries to a local representative of the
Distributor or may write directly to the Company at its Home Office.

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TELEPHONE TRANSFERS

The Participant automatically has the right to make transfers among Funds by
telephone. The Company has enacted procedures to prevent abuses of Individual
Account transactions via the 800 number. The procedures include requiring the
use of a personal identification number (PIN) to execute transactions. The
Participant is responsible for safeguarding his or her PIN, and for keeping
account information confidential. If the Company fails to follow its
procedures, it would be liable for any losses to the Participant's Individual
Account resulting from the failure. To ensure authenticity, the Company
records all calls on the 800 line. Note: all Individual Account information
and transactions permitted are subject to the terms of the Plan(s).

TRANSFER OF OWNERSHIP; ASSIGNMENT

Unless contrary to applicable law, assignment of the Contract or Individual or
Plan Account is prohibited.

WITHDRAWALS

The Participant of a 403(b) Plan or the Contract Owner of a 401 or HR 10 Plan
may withdraw all or a portion of the Individual or Plan Account value during the
Accumulation Period by properly completing and submitting to the Company's Home
Office a disbursement form provided by the Company. (If permitted by a Plan,
Participants may request to withdraw all or a portion of their Individual
Account.)

Effective January 1, 1989, the Code imposes restrictions on full or partial
withdrawals from 403(b) Individual Accounts attributable to Purchase Payments
made on or after January 1, 1989, under a salary reduction agreement, and to any
earnings on the entire 403(b) Individual Account credited on and after January
1, 1989. Withdrawals of these amounts are allowed only if the Participant (a)
has died; (b) has become disabled, as defined in the Code; (c) has attained age
59 1/2; or (d) has separated from service. Withdrawals are also allowed if the
Participant can show "hardship," as defined by the Internal Revenue Service
("IRS"), but the withdrawal is limited to the lesser of Purchase Payments made
on or after January 1, 1989, or the amount necessary to relieve the hardship.
Even if a withdrawal is permitted under these provisions, a 10% federal tax
penalty may be assessed on the withdrawn amount if it does not otherwise meet
the exceptions to the penalty tax provisions (see "Tax Status of Amounts
Distributed Under the Contract"). (A 20% income tax may be withheld from
amounts paid directly to a Participant. See "Tax Status of Amounts Distributed
Under the Contracts.")

Under the Code, a Participant may request a full or partial withdrawal of an
amount equal to the Individual Account value as of December 31, 1988 (the
"grandfathered" amount), subject to the terms of the 403(b) Plan. Although the
Code withdrawal restrictions do not apply to this amount, a 10% federal penalty
tax may be assessed on the withdrawn amount if it does not otherwise meet the
exceptions to the penalty tax provisions (see "Tax Status of Amounts Distributed
Under the Contract"). (A 20% income tax may be withheld from amounts paid
directly to a Participant. See "Tax Status of Amounts Distributed Under the
Contracts.")

The Company believes that the Code withdrawal restrictions do not apply to tax-
free transfers pursuant to Revenue Ruling 90-24. The Company further believes
that the withdrawal restrictions will not apply to any "grandfathered" amount
which is transferred pursuant to Revenue Ruling 90-24 into another 403(b)
Contract. Revenue Ruling 90-24 provides that a direct transfer from one 403(b)
investment to another 403(b) investment is not a distribution and is not taxable
if after the transfer, the transferred funds continue to be subject to the same
or more stringent distribution requirements.

The amount paid, in the case of a full withdrawal of the Contract, will be the
value of the Plan Account or all Individual Accounts, less the applicable
termination fee. The amount paid for any partial withdrawal, where a percentage
of the value of a Plan or Individual Account is requested, will be the
percentage requested less any applicable termination fee. For any partial
withdrawal where a specific dollar amount is requested, the amount paid will be
the amount requested; sufficient Accumulation Units will be cancelled to cover
both the specific withdrawal amount requested and any applicable termination
fee.

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The value of the Accumulation Units cancelled for a withdrawal will be
determined as of the end of the Valuation Period in which a disbursement form
properly completed by the Contract Owner or, if permitted, by a Plan, the
Participant is received at the Company's Home Office or on such later date as
the disbursement form may specify. Disbursement forms are available from the
Company and its local representatives.

For any partial withdrawal, unless requested otherwise by the Contract Owner or
Participant, the value of the Accumulation Units cancelled will be withdrawn
from the respective investment options in the same proportions as their
respective values to the total value of the Plan or Individual Account.

Payments for withdrawal requests will be made in accordance with SEC
requirements, but not normally later than seven calendar days after a properly
completed disbursement form is received at the Company's Home Office or within
seven calendar days of the date the disbursement form may specify. Payments may
be delayed for: (a) any period in which the New York Stock Exchange ("Exchange")
is closed (other than customary weekend and holiday closings) or in which
trading on the Exchange is restricted; (b) any period in which an emergency
exists where disposal of securities held by the Funds is not reasonably
practicable or it is not reasonably practicable for the value of the assets of
the Funds to be fairly determined; or (c) such other periods as the SEC may by
order permit for the protection of Contract Owners and Participants. The
conditions under which restricted trading or an emergency exists shall be
determined by the rules and regulations of the SEC.

REINVESTMENT PRIVILEGE

The Contract Owner or, if permitted by a Plan, a Participant may elect to
reinvest all or a portion of the proceeds received from the full withdrawal of a
Plan or Individual Account within 30 days after such withdrawal. Accumulation
Units will be credited to the Plan or Individual Account for the amount
reinvested, as well as for any applicable termination fee imposed at the time of
withdrawal. Such reinvested amounts will be reallocated to the applicable
investment options in the same proportion as they were allocated at the time of
the withdrawal.

The number of Accumulation Units credited will be based upon the Accumulation
Unit value(s) next computed following receipt at the Company's Home Office of
the reinvestment request along with the amount to be reinvested. The
reinvestment privilege may be used only once. A Contract Owner or Participant
contemplating reinvestment should seek competent advice regarding the tax
consequences associated with such a transaction.

ADDITIONAL WITHDRAWAL OPTIONS

GENERAL

The Company has certain distribution options available which are not considered
Annuity options. These options are the Estate Conservation Option ("ECO") and
the Systematic Withdrawal Option ("SWO"). These options are available to
Participants with Account Values of at least $25,000 at the time of election and
area available at certain ages as described below. Under SWO, the Participant
receives a series of partial withdrawals from the account based on the payment
method selected. It is designed for those who want a periodic income while
retaining investment flexibility for amounts accumulating under the Contract.
ECO offers the same investment flexibility as SWO, but is designed for those who
want to receive only the minimum distribution that the Code requires each year.
Under ECO, the Company calculates the minimum distribution amount required by
law and pays you that amount once a year.

Since ECO and SWO are not Annuity options, the Individual or Plan Account
remains in the Accumulation Period, retains all the rights and flexibility
described in this prospectus, and is subject to all other Contract charges. The
value of the Accumulation Units cancelled will be withdrawn from the respective
investment options in the same proportions as their respective values have to
the total value of the Individual or Participant's portion of the Plan Account.
The Company reserves the right to discontinue the availability of these options
and to change the terms for future elections.

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<PAGE>

Once elected, these options may be revoked by the 401 or HR 10 Plan Contract
Owner or Participant of a 403(b) Plan at any time, but only by submitting a
written request to the Company's Home Office. Any revocation will apply only to
the amounts not yet paid. Once ECO or SWO is revoked, it may not be elected
again.

SWO is different from ECO in the following ways: (1) SWO payments are made for
a fixed dollar amount or fixed time period, whereas ECO payments vary in dollar
amount and can continue indefinitely during the Contract Owner's or
Participant's lifetime and (2) generally, SWO payments will be higher than
expected ECO payments. Participants should carefully assess their future income
needs when considering the election of these distribution options.

Participants should determine the availability of ECO and SWO under their Plan
(by checking with the Contract Owner), and verify the terms and conditions that
may apply. Participants should also consult their tax advisor prior to
requesting the election of these options due to the potential for adverse tax
consequences.

In the event of the Participant's death, payments may be continued if allowed by
the Plan.

ESTATE CONSERVATION OPTION

The Company will calculate and distribute an annual amount using the method
contained in the Code's minimum distribution regulations. The annual
distribution is determined by dividing the value of the Individual or
Participant's portion of the Plan Account, by a life expectancy factor. The
factor will be based on either the Participant's life expectancy or the joint
life expectancies of the Participant and the Participant's designated
beneficiary, as directed by the Contract Owner, and based on tables in IRS
regulations. If ECO is based only on the Participant's life expectancy, the
full value of the Individual or Participant's portion of the Plan Account must
be distributed in the year following the Participant's death as required by
current IRS regulations. Factors will be calculated for each year's
distribution. The value of the Individual or Participant's portion of the Plan
Account to be used in this calculation is the value on the December 31st prior
to the year for which payment is being made. This calculation will be changed,
if necessary, to conform to changes in the Code or applicable regulations.

An exception is made for 403(b) Plans if the Company maintains a separate record
of a Participant's Individual Account or portion of the Plan Account value as of
December 31, 1986. In this instance payments made in or after the year age 70
1/2 is attained but before the year age 75 is attained will be calculated only
on amounts contributed after December 31, 1986, and any earnings after that
date. If age 70 1/2 was attained prior to 1988 or if the 403(b) Participant is
in a governmental or church plan, the 403(b) Participant must be retired in
order to qualify for this exception. This exception for 403(b) Plans will not
apply if the Participant has received any distribution from his or her Contract,
other than distribution amounts required under Code minimum distribution
requirements.

At the time of ECO election, the total aggregate value of all Individual
Accounts or portions of Plan Accounts to which ECO is applied must be $25,000 or
more. The first distribution must be made in the calendar year in which the
Participant attains the age 70 1/2.

SYSTEMATIC WITHDRAWAL OPTION

The Company will distribute a portion of the Contract, as directed by the
Contract Owner annually. The Company reserves the right to provide payments
more frequently. For 403(b) Participants, payments are also available monthly,
quarterly, or semi-annually. No election may be made that would result in a
payment of less than $250. For 403(b) Participants, the minimum payment amount
is $250.

At the time of SWO election, the total aggregate value of all Individual
Accounts or portions of Plan Accounts to which SWO is applied must be $25,000 or
more.

The annual minimum SWO distribution, or maximum SWO time period, will be
determined, as directed by the Contract Owner, by a life expectancy factor from
tables designated by the IRS. The factor will be based on

<PAGE>

either the Participant's life expectancy or the joint life expectancies of the
Participant and Participant's spouse. Factors will be reduced by 1 (one) for
each distribution year.

For 403(b) Participants, payment may not begin until the Participant attains age
59 1/2 (or age 55 if the Participant has separated from service with the
Contract Owner). For 401 or HR 10 Plans, payments may not begin until the
calendar year in which the Contract Owner attains age 70 1/2.

One of following distribution methods may be elected:

(a) SPECIFIED PAYMENT--Payments of a designated dollar amount. The annual
dollar amount chosen cannot be greater than 10% of the cash value applied
to SWO. The specified payment minimum distribution is determined by
dividing the value of the Individual Account by the life expectancy
factor. The value of the Individual Account to be used in this
calculation is the value on the December 31st prior to the year for which
the payment is being made. The specified payment amount will remain
constant unless a higher amount is required under Code distribution
requirements. If the dollar amount chosen is less than the Code's
minimum distribution, the Company will calculate and pay the minimum
distribution amount.

(b) SPECIFIED PERIOD--payments for a designated time period. The specified
period must be at least 10 years but no greater than the Participant's
life expectancy factor. Each annual distribution is determined by
dividing the Individual Account or total portions of the Plan Accounts
value by the number of years remaining in the elected period. The value
to be used in this calculation is the value on the December 31st prior to
the year for which the payment is being made. For payments made more
often than annually, the annual payment result (calculated above) is
divided by the number of payments due each year.

(c) SPECIFIED PERCENTAGE (403(b) Participants only)--payments of a designated
percentage. The specified percentage chosen cannot be greater than 10%
of the amount applied to SWO. The Participant may change the specified
percentage elected every six months. Each annual distribution is
determined by multiplying the Contract value by the percentage chosen.
The value to be used in this calculation is the value on the
December 31st prior to the year for which payment is being made. For
payments made more often than annually, the annual payment result
(calculated above) is divided by the number of payments due each year.
Payments will be made each year until the year the Participant attains
age 70 1/2.

ANNUITY PERIOD

ANNUITY PERIOD ELECTIONS

The Participant of a 403(b) Plan or the Contract Owner of a 401 or HR 10 Plan
must notify the Company in writing of the Annuity start date and Annuity Option
elected. Until a date and option are elected, the Individual or Plan Account
will continue in the Accumulation Period.

The Contract Owner or, if permitted by a Plan, the Participant may give written
notice to the Company at least 30 days prior to the start of Annuity payments
electing or changing (a) the date on which Annuity payments are to begin; (b)
the Annuity option; (c) whether the payments are to be made monthly, quarterly,
semiannually or annually; and (d) the investment option(s) used to provide
Annuity payments (i.e., a fixed annuity using the general account, Aetna
Variable Fund, Aetna Income Shares, Aetna Investment Advisers Fund, Inc., or any
combination thereof). Aetna Variable Encore Fund and TCI Growth cannot be used
as investment options during the Annuity Period. Once Annuity Payments begin,
the Annuity Option may not be changed, nor may transfers be made among funding
options.

If Annuity payments are to be made on a variable basis, the first and subsequent
payments will vary depending on the assumed net investment rate (3 1/2% per
annum, unless a 5% annual rate is elected). Selection of a 5% rate causes a
higher first payment, but Annuity payments will increase thereafter only to the
extent that the net investment rate exceeds by more than 5% on an annualized
basis. Annuity payments would decline if the rate

<PAGE>

failed to increase by 5%. Use of the 3 1/2% assumed rate causes a lower first
payment but subsequent payment would increase more rapidly or decline more
slowly as changes occur in the net investment rate.

No election may be made that would result in a first Annuity payment of less
than $20 or total yearly Annuity payments of less than $100. If the value of
the Individual or Plan Account is insufficient to elect an option for the
minimum amount specified, a lump-sum payment must be elected.

When payments start, the age of the Annuitant plus the number of years for which
payments are guaranteed must not exceed 95.

In determining the amount of benefit payments, the minimum distribution
incidental death benefit rule described in IRS regulations* must be satisfied.
This distribution rule does not apply to 401, HR 10, and certain 403(b) Plans if
any of the Annuity Options under (b) below are elected with the spouse as the
sole beneficiary. (See "Annuity Options.") Annuity payments may not extend
beyond (a) the life of the Annuitant, (b) the joint lives of the Annuitant and
beneficiary, (c) a period certain greater than the Annuitant's life expectancy,
or (d) a period certain greater than the joint life expectancies of the
Annuitant and beneficiary.

The Participant will be subject to a 50% federal penalty tax on the amount of
distribution required each year which is not distributed under the Code's
minimum distribution rules.

* This rule assures that any death benefits payable under the Plan are
incidental to the primary purpose of the Plan which is to provide retirement
benefits or deferred compensation to the Participant. The amount to be
distributed under this rule is determined based on the Participant's age and
tables contained in the IRS regulations.\

403(b) PLANS

Distributions of the Individual Account values as of December 31, 1986, must
generally begin by age 75. Distributions of the Individual Account value
attributable to contributions made on and after January 1, 1987, and any
earnings on the entire Individual Account after that date must begin by April 1
of the calendar year following the calendar year in which the Participant
attains age 70 1/2. This distribution date may be further deferred if allowed
under federal law or regulations.

401 AND HR 10 PLANS

The retirement date and the Annuity Options available to Participants are
normally established by the terms of the Plan, subject to applicable provisions
of the Code.

Generally, distributions for all Plan Participants must being no later than
April 1 of the calendar year following the calendar year in which the
Participant attains age 70 1/2 whether or not retired. This distribution date
may be further deferred if allowed under federal law or regulations.

ANNUITY OPTIONS

Lifetime:

(a) Life Annuity--an Annuity with payments guaranteed to the date of the
Annuitant's death. This option may be elected with payments guaranteed
for 5, 10, 15 or 20 years. Because it provides a specified minimum
number of Annuity payments, the election of a guaranteed payment period
results in somewhat lower payments.

(b) Life Income Based Upon the Lives of Two Payees--An Annuity will be paid
during the lives of the Annuitant and a second Annuitant. Payments will
continue until both Annuitants have died. When this option is chosen, a
choice must be made of:

(i) 100% of the payment to continue after the first death;
(ii) 66 2/3% of the payment to continue after the first death;

24
<PAGE>

(iii) 50% of the payment to continue after the first death;
(iv) Payments for a minimum of 120 months, with 100% of the payment
to continue after the first death; or
(v) 100% of the payment to continue at the death of the second
Annuitant and 50% of the payment to continue at the death of the
Annuitant.
Because (iv) provides a specified minimum number of Annuity payments,
the election of the guaranteed payment period results in somewhat
lower payments.

If a lifetime option is elected without a guaranteed minimum payment period, it
is possible that only one Annuity payment will be made if the Annuitant under
(a), or the surviving Annuitant under (b) (i), (ii), (iii) or (v) should die
prior to the due date of the second Annuity payment.

Payments under any lifetime Annuity Option will be determined without regard to
the sex of the Annuitant(s). Such Annuity payments will be based solely on the
age of the Annuitant(s)

Once lifetime annuity payments begin, neither the Contract Owner nor the
Annuitant can elect to receive a lump-sum settlement.

NONLIFETIME:

Payments for a Specified Period--an Annuity with payments to be made for one
to thirty years, as selected. If this option is elected on a variable basis,
the Contract Owner or the 403(b) Annuitant may request at any time during the
payment period that the present value of all or any portion of the remaining
variable payments be paid in one sum. This option is not available on a
variable basis under a Contract which provides for immediate Annuity
benefits.

The Company makes a daily deduction for mortality and expense risks from any
Contract values held on a variable basis (See "Mortality and Expense Risk
Charges.") Therefore, electing the nonlifetime option on a variable basis will
result in a deduction being made even though the Company assumes no mortality
risk.

The Company may make available to Contact Owners and other payees optional
methods of payment in addition to the Annuity Options described.

DEATH BENEFIT

ACCUMULATION PERIOD

A portion or all of any death proceeds may be (a) paid to the beneficiary in a
lump sum; (b) applied under any of the Annuity Options; (c) subject to
applicable provisions of the Code, left in the variable investment options; (d)
subject to applicable provisions of the Code, left on deposit in the Company's
general account with the beneficiary electing to receive monthly, quarterly,
semiannual or annual interest payments at the interest rate then currently being
credited on such deposits. (The balance on deposit can be withdrawn at any time
or applied under any "Annuity Option.") Any lump-sum payment paid during the
Accumulation Period will normally be made within seven calendar days after proof
of death acceptable to the Company and a request for payment are received at the
Company's Home Office.

Until the election of method of payment, amounts will remain invested as they
were before the death, and the beneficiary will assume all rights under the
Contract; however, the Code requires that distributions begin within a certain
time period, as described below. If no elections are made concerning
distribution, no distributions will be made. Failure to commence distribution
within the above time periods can result in tax penalties

<PAGE>

403(b)PLANS

If the beneficiary is the surviving spouse, the beneficiary has until the
Participant would have attained age 70 1/2 to begin Annuity payments, to receive
a lump-sum distribution, or to begin receiving distributions under ECO or SWO.

If the beneficiary is not the surviving spouse, either Annuity payments must
begin within one year of the Participant's death, or the entire value must be
distributed within five years of the Participant's death.

In no event may payments to any beneficiary extend beyond the life of the
beneficiary or any period certain greater than the beneficiary's life
expectancy.

401 AND HR 10 PLANS

If the Participant's beneficiary under the Plan is the surviving spouse, the
Code allows a Plan to give the Participant's beneficiary until the Participant
would have attained age 70 1/2 to begin Annuity payments or to receive a lump-
sum distribution.

If the Participant's beneficiary under the Plan is not the surviving spouse, the
Plan must provide that either Annuity payments begin within one year of the
Participant's year of death, or the entire value must be distributed within five
years of the Participant's year of death.

In no event may payments to any Participant's beneficiary extend beyond the life
of the Participant's beneficiary or any period certain greater than the
Participant's beneficiary's life expectancy.

If a lump-sum distribution is elected, the beneficiary will receive the value of
the Contract determined as of the Valuation Period in which proof of death
acceptable to us and a request for payment are received at the Home Office. If
an Annuity Option is elected, the value applied to the Annuity Options is
determined in the same manner as a lump-sum distribution; the amount of payout
will depend on the Annuity Option elected and the investment option(s) used to
provide such payments. (See "Annuity Period.") If amounts are left in the
variable investment options, the account value will continue to be affected by
the investment performance of the investment option(s) selected. If amounts are
left on deposit in the general account, the principal amount is guaranteed but
interest payments may vary. In general, regardless of the method of payment,
payments received by your beneficiaries after your death are taxed in the same
manner as if you had received those payments. (See "Tax Status.")

ANNUITY PERIOD

Should an Annuitant die after Annuity payments have begun, any death benefit
payable will depend upon the terms of the Contract and the Annuity option
selected.

If lifetime option (a) or (b) was elected without a guaranteed minimum payment
period under the Contract, Annuity payments will cease upon the death of the
Annuitant under a Life Annuity or the death of the surviving Annuitant under
options (b)(i),(ii), (iii), or (v).

Under the Contract, if lifetime option (a) or (b) was elected with a guaranteed
minimum payment period and the death of the Annuitant under option (a) or the
death of the surviving Annuitant under options (b)(iv) occurs prior to the end
of that period, the Company will pay to the designated beneficiary in lump sum,
unless otherwise requested, the present value of the guaranteed Annuity payments
remaining. Such value will be determined as of the Valuation Date on which
proof of death acceptable to the Company and a request for payment are received
at its Home Office. The value will be reduced by any payments made after the
date of death.

If the nonlifetime option was elected under the Contract and the Annuitant dies
before all payments are made, the value of any remaining payments may be paid in
a lump sum to the beneficiary. Such value will be determined as of the
Valuation Date on which proof of death acceptable to the Company and a request
for payment are received at the Home Office.

<PAGE>

403(b)PLANS

If the Annuitant dies after Annuity payments have commenced and if there is a
death benefit payable under the Annuity option elected, the remaining values
must be distributed to the beneficiary at least as rapidly as under the original
method of distribution.

401 AND HR 10 PLANS

Under the Code, if the Annuitant under a Plan dies after Annuity payments have
commenced and if there is a death benefit payable under the Annuity option
elected, the remaining values must be distributed to the Participant's
beneficiary under the Plan at least as rapidly as under the original method of
distribution.

TAX STATUS

FEDERAL TAX STATUS OF THE COMPANY

The Company is taxed as a life insurance company in accordance with the Code.
For federal income tax purposes, the operations of the Separate Account form a
part of the Company's total operations and are not taxed independently, although
operations of the Separate Account are treated separately for accounting and
financial statement purposes. Under the current provisions of the Code, the
investment income and realized capital gains of the Separate Account (i.e.,
income and capital gains distributed to the Separate Account by the Funds) will
not be taxable to the Company to the extent such amounts are credited to the
Contracts. Based on this, no charge is being made currently to the Separate
Account for federal income taxes. However, the Company reserves the right to
make a deduction for federal income taxes attributable to the Contracts should
such taxes be imposed in the future.

USE OF THE CONTRACT

The Contract is intended to provide retirement benefits to Participants under:
(1) Plans adopted by public school systems and certain tax-exempt
organizations (Section 501(c)(3) organizations) for their employees
under Section 403(b), and
(2) HR 10 Plans established by self-employed individuals, and
(3) Corporate 401 Plans established by employers to provide retirement
benefits to their employees.

Some of the options and elections under the Contract may not be available to
Participants under the provisions of the Plan.

TAX STATUS OF AMOUNTS DISTRIBUTED UNDER THE CONTRACT

The following description of the federal income tax status of amounts
distributed under the Contracts is not exhaustive and is not intended to cover
all situations. Contract Owners and Participants should seek advice from their
tax advisers as to the application of federal (and where applicable, state and
local) tax laws to amounts received by them and by their beneficiaries under the
Contracts.

The Code imposes a 10% penalty tax on the taxable portion of any distribution
unless made when (a) the Participant has attained age 59 1/2, (b) the
Participant has become disabled, (c) the Participant has died, (d) the
Participant has attained age 55 and has separated from service with the Plan
sponsor, (e) the distribution amount is rolled over into an Individual
Retirement Account ("IRA") in accordance with terms of the Code, or
alternatively, for 403(b) Plans, into either a 403(b) Plan or an IRA in
accordance with terms of the Code, or (f) the distribution amount is annuitized
over the life or life expectancy of the Participant or the joint lives or life
expectancies of the Participant and beneficiary, provided the Participant has
separated from service with the Plan sponsor. In addition, the penalty tax is
abated for the amount of a distribution equal to unreimbursed medical expenses
incurred by the Participant that qualify for deduction as specified in the Code.

<PAGE>

Whether the Participant elects a lump sum or Annuity payments, if a Participant
has made after-tax contributions to the Plan, the Participant will have a cost
basis (equal to such contributions) which can be recovered tax-free from
distributions from the Plan.

A 20% federal income tax may be withheld from any distributions paid directly to
a Participant, under a 403(b) Plan (see below); any state income taxes due will
also be withheld unless the Company is notified otherwise. The Company will
report to the IRS the taxable portion of all distributions whether or not income
taxes are withheld.

a. ACCUMULATION PERIOD

The Purchase Payments and investment results of the Separate Account
credited to the value of the Contract are not taxable to Participants until
distributed. Special provisions of the Code may afford more favorable tax
treatment for lump-sum distributions under 401 and HR 10 Plans.

Certain payees (a Participant, surviving spouse, and former spouse, if
entitled to benefits under certain divorce orders) entitled to a
distribution under this Contract on or after January 1, 1993, may elect a
direct rollover of an eligible rollover distribution. A direct rollover is
the payment by the Company to another eligible retirement plan. The
election of a direct rollover must be made in accordance with the Company's
procedures.

An eligible rollover distribution is a distribution of all or any portion
of an amount payable except for any distribution: (1) that is one of a
series of equal payments (made at least once a year) for the life/life
expectancy of the payee or payee and beneficiary, or for a period of ten
years or more; (2) that is a required minimum distribution under Code
Section 401(a)(9); and (3) any distribution or portion thereof that is not
taxable. For a Participant in a 403(b) plan, an eligible retirement plan
is another 403(b) plan or an individual retirement annuity/account. For a
surviving spouse, an eligible retirement plan is an individual retirement
annuity/account.

If a direct rollover of an eligible rollover distribution is made, the
Company must report the amount of the distribution to the IRS and the
Participant, but is not required to withhold any federal or state income
tax. If an eligible rollover distribution is paid to the payee (as defined
above), the Company must withhold 20% federal income tax and any required
state income tax. For taxable amounts that are not eligible rollover
distributions, if payable to the Participant, he or she has the right to
choose not to have federal income tax withheld.

If a Participant receives a payment prior to reaching age 59 1/2, and does
not roll the payment over, in addition to the tax withholding, a 10%
penalty tax on the taxable portion of the payment may apply (unless the
payment is subject to an exception listed above).

b. ANNUITY PERIOD

Annuity payments will generally be fully taxable to Participants as
ordinary income when received.

MISCELLANEOUS

LEGAL PROCEEDINGS

The Company knows of no material legal proceedings pending to which the Separate
Account is a party or which would materially affect the Separate Account.

LEGAL MATTERS

The validity of the securities offered by this Prospectus has been passed upon
by Susan E. Bryant, Esq., Counsel to the Company.

<PAGE>

CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION

The following items are the contents of the Statement of Additional Information:

General Information and History. . . . . . . . . . . . . . . . . . . . . . 2
Variable Annuity Account C . . . . . . . . . . . . . . . . . . . . . . . . 2
Offering and Purchase of Contracts . . . . . . . . . . . . . . . . . . . . 3
Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Sales Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Financial Statements of the Separate Account . . . . . . . . . . . . . . S-1
Financial Statements for Aetna Life Insurance and Annuity Company. . . . F-1

<PAGE>

APPENDIX I
GUARANTEED ACCUMULATION ACCOUNT

THE GUARANTEED ACCUMULATION ACCOUNT ("GAA") IS A CREDITED INTEREST OPTION
AVAILABLE DURING THE ACCUMULATION PERIOD UNDER THE CONTRACTS. CONTRACT OWNERS
SHOULD READ THE ACCOMPANYING GAA PROSPECTUS CAREFULLY BEFORE INVESTING. THIS
APPENDIX IS A SUMMARY OF GAA AND IS NOT INTENDED TO REPLACE THE GAA PROSPECTUS.
AMOUNTS ALLOCATED TO LONG-TERM CLASSIFICATIONS OF GAA ARE HELD IN A
NONINSULATED, NONUNITIZED SEPARATE ACCOUNT. AMOUNTS ALLOCATED TO SHORT-TERM
CLASSIFICATIONS OF GAA ARE HELD IN THE COMPANY'S GENERAL ACCOUNT.

GAA is a credited interest option in which the Company guarantees stipulated
rates of interest for stated periods of time on amounts directed to GAA. The
interest rate stipulated is an annual effective yield; that is, it reflects a
full year's interest. Interest is credited daily at a rate that will provide
the guaranteed annual effective yield over the period of one year. This option
guarantees the minimum interest rate specified in the Contract.

During a specified period of time, amounts may be applied to any or all of
available Guaranteed Terms within the Short-Term and Long-Term Classifications.
The Short-Term Classification consists of all Guaranteed Terms of 3 years or
less and the Long-Term Classification consists of all Guaranteed Terms of 10
years or less, but greater than 3 years.

Withdrawals or transfers from a Guaranteed Term prior to the end of that
Guaranteed Term may be subject to a Market Value Adjustment ("MVA"). An MVA
reflects the change in the value of the investment due to changes in interest
rates since the date of deposit. When interest rates increase after the date of
deposit, the value of the investment decreases, and the MVA is negative.
Conversely, when interest rates decrease after the date of deposit, the value of
the investment increases, and the MVA is positive. It is possible that a
negative MVA could result in the Contract Owner or, if applicable, the
Participant receiving an amount which is less than the amount paid into GAA.

MORTALITY AND EXPENSE RISK CHARGES

The Company makes no deductions from the credited interest rate for mortality
and expense risks; these risks are considered in determining the credited rate.

TRANSFERS

Amounts applied to a Guaranteed Term during a deposit period may not be
transferred to any other funding option or to another Guaranteed Term during
that deposit period or for 90 days after the close of that deposit period.
Transfers are permitted from Guaranteed Terms of one Classification to available
Guaranteed Terms of another Classification. The Company will apply an MVA to
GAA transfers made before the end of a Guaranteed Term.

Transfers of GAA values at a maturity are not counted as one of the 12 free
transfers of accumulated values in the Individual or Plan Account.

By giving notice to the Company at its Home Office at least 30 days before
Annuity payments begin, the Contract Owner or, if permitted by the plan, the
Participant may elect to have amounts which have been accumulating under GAA
transferred to Aetna Variable Fund, Aetna Income Shares, Aetna Investment
Advisers Fund, Inc., or any combination thereof, to provide variable Annuity
payments. GAA cannot be used as an investment option during the Annuity Period.

<PAGE>

REINVESTMENT PRIVILEGE

Any amounts reinvested in GAA will be applied to the current deposit period.
Amounts are proportionately reinvested to the Classifications in the same manner
as they were allocated prior to withdrawal. Any negative MVA amount applied to
a withdrawal is not included in the reinvestment.

<PAGE>

APPENDIX II
FIXED ACCOUNT

THE FIXED ACCOUNT IS AN INVESTMENT OPTION AVAILABLE DURING THE ACCUMULATION
PERIOD UNDER THE CONTRACTS. THE FOLLOWING SUMMARIZES MATERIAL INFORMATION
CONCERNING THE FIXED ACCOUNT THAT IS OFFERED AS AN OPTION UNDER THE CONTRACT.
ADDITIONAL INFORMATION MAY BE FOUND IN YOUR CONTRACT. AMOUNTS ALLOCATED TO THE
FIXED ACCOUNT ARE HELD IN THE COMPANY'S GENERAL ACCOUNT THAT SUPPORTS INSURANCE
AND ANNUITY OBLIGATIONS. INTERESTS IN THE FIXED ACCOUNT HAVE NOT BEEN
REGISTERED WITH THE SEC IN RELIANCE ON EXEMPTIONS UNDER THE SECURITIES ACT OF
1933, AS AMENDED. DISCLOSURE IN THIS PROSPECTUS REGARDING THE FIXED ACCOUNT,
HOWEVER, MAY BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE
FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF THE
STATEMENTS. DISCLOSURE IN THIS APPENDIX REGARDING THE FIXED ACCOUNT HAS NOT
BEEN REVIEWED BY THE SEC.

CREDITED INTEREST OPTION FIXED ACCOUNT

This option guarantees that amounts allocated to this option will earn the
minimum interest rates specified in the Contract. The Company may credit a
higher interest rate from time to time. The Company's determination of interest
rates reflects the investment income earned on invested assets and the
amortization of any capital gains and/or losses realized on the sale of invested
assets. Under this option, the Company assumes the risk of investment gain or
loss by guaranteeing Net Purchase Payment values and promising a minimum
interest rate and Annuity payment.

Amounts applied to the Fixed Account will earn the interest rate in effect when
actually applied to the Fixed Account.

MORTALITY AND EXPENSE RISK CHARGES

The Fixed Account will reflect a compound interest rate credited by the Company.
The interest rate quoted is an annual effective yield. The Company makes no
deductions from the credited interest rate for mortality and expense risks;
these risks are considered in determining the credited rate.

TRANSFERS AMONG INVESTMENT OPTIONS

Transfers from the Fixed Account to any other available investment option are
allowed in each calendar year during the Accumulation Period. The amount which
may be transferred may vary at the Company's discretion; however, it will never
be less than 10% of the amount held under the Fixed Account.

By giving notice to the Company at its Home Office at least 30 days before
Annuity payments begin, the Contract Owner or, if permitted by the Plan, the
Participant may elect to have amounts which have been accumulating under the
Fixed Account transferred to Aetna Variable Fund, Aetna Income Shares, Aetna
Investment Advisers Fund, Inc., or any combination thereof, to provide variable
Annuity payments.

<PAGE>

VARIABLE ANNUITY ACCOUNT C

PROSPECTUS
DATED MAY 1, 1996

GROUP 403(b), 401, AND HR 10 PLANS

AETNA LIFE INSURANCE AND ANNUITY COMPANY
Customer Service
151 Farmington Avenue
Hartford, Connecticut 06156-1268
Telephone: 1-800-232-5422

Form No. 75974-2 May 1996

<PAGE>

VARIABLE ANNUITY ACCOUNT C
OF
AETNA LIFE INSURANCE AND ANNUITY COMPANY

Statement of Additional Information dated May 1, 1996

Group Variable Retirement Annuity Contracts for Tax-Deferred Annuity Plans
(Section 403(b)), Qualified 401 Plans, and HR 10 Plans

This Statement of Additional Information is not a prospectus and should be read
in conjunction with the current prospectus for Variable Annuity Account C (the
"Separate Account") dated May 1, 1996.

A free prospectus is available upon request from the local Aetna Life Insurance
and Annuity Company office or by writing to or calling:

Aetna Life Insurance and Annuity Company
Customer Service
151 Farmington Avenue
Hartford, Connecticut 06156
1-800-531-4547

Read the prospectus before you invest. Terms used in this Statement of
Additional Information shall have the same meaning as in the prospectus.

TABLE OF CONTENTS

Page

General Information and History. . . . . . . . . . . . . . . . . . . . 2
Variable Annuity Account C . . . . . . . . . . . . . . . . . . . . . . 2
Offering and Purchase of Contracts . . . . . . . . . . . . . . . . . . 3
Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Sales Material . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . 4
Financial Statements of the Separate Account . . . . . . . . . . . . S-1
Financial Statements of Aetna Life Insurance and Annuity Company . . . F-1

<PAGE>

GENERAL INFORMATION AND HISTORY

Aetna Life Insurance and Annuity Company (the "Company") is a stock life
insurance company which was organized under the insurance laws of the State
of Connecticut in 1976. Through a merger, it succeeded to the business of
Aetna Variable Annuity Life Insurance Company (formerly Participating Annuity
Life Insurance Company organized in 1954). As of December 31, 1995, the
Company had assets of $27.1 billion (subject to $25.5 billion of customer and
other liabilities, $1.6 billion of shareholder equity) which includes $11
billion in assets held in the Company's separate accounts. The Company had
$22 billion in assets under management, including $8 billion in its mutual
funds. As of December 31, 1994, it ranked among the top 2% of all U.S. life
insurance companies by size. The Company is a wholly owned subsidiary of
Aetna Retirement Holdings, Inc., which is in turn a wholly owned subsidiary
of Aetna Retirement Services, Inc. and an indirect wholly owned subsidiary of
Aetna Life and Casualty Company. The Company is engaged in the business of
issuing life insurance policies and annuity contracts in all states of the
United States. The Company's Home Office is located at 151 Farmington
Avenue, Hartford, Connecticut 06156.

In addition to serving as the principal underwriter and the depositor for the
Separate Account, the Company is also a registered investment adviser under the
Investment Advisers Act of 1940, and a registered broker-dealer under the
Securities Exchange Act of 1934. The Company provides investment advice to
several of the registered management investment companies offered as variable
investment options under the Contracts funded by the Separate Account (see
"Variable Annuity Account C" below).

Other than the mortality and expense risk charges and administrative expense
charge described in the prospectus, all expenses incurred in the operations of
the Separate Account are borne by the Company. See "Charges and Deductions" in
the prospectus. The Company receives reimbursement for certain administrative
costs from some unaffiliated sponsors of the Funds used as funding options under
the Contract. These fees generally range up to 0.25%.

The assets of Separate Account are held by the Company. The Separate Account
has no custodian. However, the Funds in whose shares the assets of the Separate
Account are invested each have custodians, as discussed in their respective
prospectuses.

VARIABLE ANNUITY ACCOUNT C

Variable Annuity Account C (the "Separate Account") is a separate account
established by the Company for the purpose of funding variable annuity
contracts issued by the Company. The Separate Account is registered with the
Securities and Exchange Commission as a unit investment trust under the
Investment Company Act of 1940, as amended. The assets of each of the
variable investment options of the Separate Account will be invested
exclusively in shares of the mutual funds described in the Prospectus.
Purchase Payments made under the Contract may be allocated to one or more of
the variable investment options. The Company may make additions to or
deletions from available investment options as permitted by law. The
availability of the Funds is subject to applicable regulatory authorization.
Not all Funds are available in all jurisdictions or under all Contracts. The
Funds currently available under the Contract are as follows:

Aetna Income Shares
Aetna Investment Advisers Fund, Inc.
Aetna Variable Encore Fund
Aetna Variable Fund
TCI Growth

<PAGE>

Complete descriptions of each of the Funds, including their investment
objectives, policies, risks and fees and expenses, is contained in the
prospectuses and statements of additional information for each of the Funds.

OFFERING AND PURCHASE OF CONTRACTS

The Company is both the depositor and the principal underwriter for the
securities sold by the prospectus. The Company offers the Contracts through
life insurance agents licensed to sell variable annuities who are registered
representatives of the Company or of other registered broker-dealers who have
sales agreements with the Company. The offering of the Contracts is continuous.
A description of the manner in which Contracts are purchased may be found in the
prospectus under the section titled "The Contract."

ANNUITY PAYMENTS

When Annuity payments are to begin, the value of the Contract or Individual
Account is determined using Accumulation Unit values as of the tenth Valuation
Period before the first Annuity payment is due. Such value (less any applicable
premium tax) is applied to provide an Annuity in accordance with the Annuity and
investment options elected.

The Annuity option tables found in the Contract show, for each form of Annuity,
the amount of the first Annuity payment for each $1,000 of value applied.
Thereafter, variable Annuity payments fluctuate as the Annuity Unit value(s)
fluctuates with the investment experience of the selected investment option(s).
The first payment and subsequent payments also vary depending on the assumed net
investment rate selected (3.5% or 5% per annum). Selection of a 5% rate causes a
higher first payment, but Annuity payments will increase thereafter only to the
extent that the net investment rate increases by more than 5% on an annual
basis. Annuity payments would decline if the rate failed to increase by 5%. Use
of the 3.5% assumed rate causes a lower first payment, but subsequent payments
would increase more rapidly or decline more slowly as changes occur in the net
investment rate.

When the Annuity Period begins, the Annuitant is credited with a fixed number of
Annuity Units (which does not change thereafter) in each of the designated
investment options. This number is calculated by dividing (a) by (b), where (a)
is the amount of the first Annuity payment based on a particular investment
option, and (b) is the then current Annuity Unit value for that investment
option. As noted, Annuity Unit values fluctuate from one Valuation Period to the
next; such fluctuations reflect changes in the net investment factor for the
appropriate Fund(s) (with a ten Valuation Period lag which gives the Company
time to process Annuity payments) and a mathematical adjustment which offsets
the assumed net investment rate of 3.5% or 5% per annum.

The operation of all these factors can be illustrated by the following
hypothetical example. These procedures will be performed separately for the
investment options selected during the Annuity Period.

EXAMPLE:

Assume that, at the date Annuity payments are to commence, there are 3,000
Accumulation Units credited under a particular Contract or Individual Account
and that the value of an Accumulation Unit for the tenth Valuation Period prior
to retirement was $13.650000. This produces a total value of $40,950.

<PAGE>

Assume also that no premium tax is payable and that the Annuity table in the
Contract provides, for the option elected, a first monthly variable Annuity
payment of $6.68 per $1000 of value applied; the Annuitant's first monthly
payment would thus be 40.950 multiplied by $6.68, or $273.55.

Assume then that the value of an Annuity Unit for the Valuation Period in which
the first payment was due was $13.400000. When this value is divided into the
first monthly payment, the number of Annuity Units is determined to be 20.414.
The value of this number of Annuity Units will be paid in each subsequent month.

If the net investment factor with respect to the appropriate Fund is 1.0015000
as of the tenth Valuation Period preceding the due date of the second monthly
payment, multiplying this factor by .9999058* (to neutralize the assumed net
investment rate of 3.5% per annum built into the number of Annuity Units
determined above) produces a result of 1.0014057. This is then multiplied by the
Annuity Unit value for the prior Valuation Period (assume such value to be
$13.504376) to produce an Annuity Unit value of $13.523359 for the Valuation
Period in which the second payment is due.

The second monthly payment is then determined by multiplying the number of
Annuity Units by the current Annuity Unit value, or 20.414 times $13.523359,
which produces a payment of $276.07.

*If an assumed net investment rate of 5% is elected, the appropriate factor to
neutralize such assumed rate would be .9998663.

SALES MATERIAL

The Company may include hypothetical illustrations in its sales literature that
explain the mathematical principles of dollar cost averaging, compounded
interest, tax deferred accumulation, and the mechanics of variable annuity
contracts. The Company may also discuss the difference between variable annuity
contracts and other types of savings or investment products, including, but not
limited to, personal savings accounts and certificates of deposit.

INDEPENDENT AUDITORS

KPMG Peat Marwick LLP, CityPlace II, Hartford, Connecticut 06103-4103, are the
independent auditors for the Separate Account and for the Company. The services
provided to the Separate Account include primarily the examination of the
Separate Account's financial statements and the review of filings made with the
SEC.

<PAGE>

FINANCIAL STATEMENTS

VARIABLE ANNUITY ACCOUNT C

Index

Independent Auditors' Report . . . . . . . . . . . . . . . . . . . S-2
Statement of Assets and Liabilities. . . . . . . . . . . . . . . . S-3
Statement of Operations. . . . . . . . . . . . . . . . . . . . . . S-8
Statements of Changes in Net Assets. . . . . . . . . . . . . . . . S-9
Notes to Financial Statements . . . . . . . . . . . . . . . . . . S-10
Condensed Financial Information . . . . . . . . . . . . . . . . . S-12

S-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors of Aetna Life Insurance and Annuity Company and
Contract Owners of Variable Annuity Account C:

We have audited the accompanying statement of assets and liabilities of Aetna
Life Insurance and Annuity Company Variable Annuity Account C (the "Account")
as of December 31, 1995, and the related statement of operations for the year
then ended, statements of changes in net assets for each of the years in the
two-year period then ended and condensed financial information for the year
ended December 31, 1995. These financial statements and condensed financial
information are the responsibility of the Account's management. Our
responsibility is to express an opinion on these financial statements and
condensed financial information based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
condensed financial information are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1995, by correspondence
with the custodian. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial
position of the Aetna Life Insurance and Annuity Company Variable Annuity
Account C as of December 31, 1995, the results of its operations for the year
then ended, changes in its net assets for each of the years in the two-year
period then ended and condensed financial information for the year ended
December 31, 1995 in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Hartford, Connecticut
February 16, 1996

S-2

<PAGE>

VARIABLE ANNUITY ACCOUNT C

STATEMENT OF ASSETS AND LIABILITIES - December 31, 1995
<TABLE>
<CAPTION>

ASSETS:
<S> <C>
Investments, at net asset value: (Note 1)
Aetna Variable Fund; 135,944,293 shares at $29.06 per share (cost $3,682,373,523).................... $3,949,941,096
Aetna Income Shares; 29,688,857 shares at $13.00 per share (cost $382,776,733)....................... 386,007,595
Aetna Variable Encore Fund; 17,318,377 shares at $13.30 per share (cost $221,087,268) ............... 230,291,686
Aetna Investment Advisers Fund, Inc.; 49,855,715 shares at $14.50 per share
(cost $600,395,092) ............................................................................... 723,017,695
Aetna GET Fund, Series B; 5,897,397 shares at $12.40 per share (cost $59,712,454).................... 73,136,258
Aetna Ascent Variable Portfolio; 454,714 shares at $10.80 per share (cost $4,803,331)................ 4,908,736
Aetna Crossroads Variable Portfolio; 341,591 shares at $10.74 per share (cost $3,599,790)............ 3,668,757
Aetna Legacy Variable Portfolio; 180,468 shares at $10.64 per share (cost $1,883,466)................ 1,919,680
Alger American Funds:
Alger American Growth Portfolio; 1,234,082 shares at $31.16 per share (cost
$38,739,937)....................................................................................... 38,454,000
Alger American Small Capitalization Portfolio; 6,121,453 shares at $39.41 per share
(cost $203,207,523)................................................................................ 241,246,447
Calvert Responsibly Invested Balanced Portfolio; 16,846,014 shares at $1.70 per share
(cost $26,512,853)................................................................................ 28,688,761
Fidelity Investments Variable Insurance Products Funds:
Equity-Income Portfolio; 1,973,219 shares at $19.27 per share (cost $35,264,252)................... 38,023,939
Growth Portfolio; 949,237 shares at $29.20 per share (cost $27,212,340)............................ 27,717,728
Overseas Portfolio; 218,122 shares at $17.05 per share (cost $3,555,791)........................... 3,718,987
Fidelity Investments Variable Insurance Products Funds II -
Asset Manager Portfolio; 910,080 shares at $15.79 per share (cost $12,839,173)..................... 14,370,158
Contrafund Portfolio; 2,202,984 shares at $13.78 per share (cost $30,071,951) ..................... 30,357,117
Index 500 Portfolio; 45,055 shares at $75.71 per share (cost $3,187,279) .......................... 3,411,144
Franklin Government Securities Trust; 1,651,095 shares at $13.35 per share
(cost $21,210,874) .............................................................................. 22,042,115
Janus Aspen Series -
Aggressive Growth Portfolio; 5,116,845 shares at $17.08 per share (cost $74,304,318)............... 87,395,716
Balanced Portfolio; 115,516 shares at $13.03 per share (cost $1,444,640)........................... 1,505,170
Flexible Income Portfolio; 347,266 shares at $11.11 per share (cost $3,690,542).................... 3,858,123
Growth Portfolio; 376,690 shares at $13.45 per share (cost $4,920,509)............................. 5,066,487
Short-Term Bond Portfolio; 54,258 shares at $10.03 per share (cost $544,564)....................... 544,210
Worldwide Growth Portfolio; 1,048,130 shares at $15.31 per share (cost $15,260,366)................ 16,046,863
Lexington Emerging Markets Fund, Inc.; 329,323 shares at $9.38 per share (cost $3,135,164) .......... 3,089,046
Lexington Natural Resources Trust; 1,257,565 shares at $11.30 per share (cost $12,932,744) .......... 14,210,484
Neuberger & Berman Advisers Management Trust - Growth Portfolio; 3,460,773 shares
at $25.86 per share (cost $77,838,858)............................................................ 89,495,579
Scudder Variable Life Investment Fund - International Portfolio; 13,936,090 shares
at $11.82 per share (cost $151,941,144).................................. ........................ 164,724,583
TCI Portfolios, Inc. - TCI Growth; 35,261,982 shares at $12.06 per share (cost $333,587,996) ........ 425,259,499
NET ASSETS ............................................................................................ 6,632,117,659
--------------
--------------
</TABLE>
S-3
<PAGE>

Net assets represented by:

<TABLE>
<CAPTION>
Accumulation
Unit
Units Value
<S> <C> <C> <C>
Reserves for annuity contracts in accumulation and payment period:
AETNA VARIABLE FUND:
Qualified I ..................................................... 549,055.7 $180.879 $99,312,649
Qualified III ................................................... 6,364,000.3 137.869 877,395,210
Qualified IV .................................................... 269.0 83.646 22,498
Qualified V ..................................................... 121,691.2 14.113 1,717,411
Qualified VI .................................................... 188,964,022.4 14.077 2,660,123,261
Qualified VII ................................................... 9,779,134.6 13.247 129,544,460
Qualified VIII .................................................. 20,835.7 13.074 272,413
Qualified IX .................................................... 21,417.9 12.935 277,043
Qualified X (1.15)............................................... 273,578.4 14.108 3,859,670
Qualified X (1.25)............................................... 2,370,233.5 14.077 33,366,740
Reserves for annuity contracts in payment period (Note 1)........ 144,049,741
AETNA INCOME SHARES:
Qualified I ..................................................... 72,902.0 47.405 3,455,895
Qualified III ................................................... 2,377,621.8 46.913 111,541,104
Qualified V ..................................................... 20,427.2 12.283 250,918
Qualified VI .................................................... 21,379,975.5 12.098 258,665,226
Qualified VII ................................................... 185,030.5 11.176 2,067,926
Qualified VIII .................................................. 1,090.6 11.143 12,153
Qualified IX .................................................... 3,580.8 11.203 40,116
Qualified X (1.15)............................................... 50,261.1 12.125 609,409
Qualified X (1.25)............................................... 354,993.3 12.098 4,294,879
Reserves for annuity contracts in payment period (Note 1) ....... 5,069,969
AETNA VARIABLE ENCORE FUND:
Qualified I ..................................................... 150,480.4 38.485 5,791,253
Qualified III ................................................... 1,836,260.4 37.988 69,756,054
Qualified V ..................................................... 19,202.4 11.003 211,293
Qualified VI .................................................... 12,999,680.2 11.026 143,337,034
Qualified VII ................................................... 324,091.0 10.936 3,544,190
Qualified VIII .................................................. 656.2 10.620 6,969
Qualified IX .................................................... 3,050.3 10.857 33,118
Qualified X (1.15)............................................... 145,629.4 11.051 1,609,306
Qualified X (1.25)............................................... 544,382.5 11.026 6,002,469
AETNA INVESTMENT ADVISERS FUND, INC.:
Qualified I ..................................................... 393,612.5 18.024 7,094,461
Qualified III ................................................... 9,193,181.4 17.954 165,052,015
Qualified V ..................................................... 19,038.2 13.693 260,683
Qualified VI .................................................... 38,152,394.6 13.673 521,663,491
Qualified VII ................................................... 335,791.4 13.135 4,410,596
Qualified VIII .................................................. 1,055.3 12.695 13,397
Qualified IX .................................................... 3,961.7 12.613 49,969
Qualified X (1.15)............................................... 138,270.8 13.703 1,894,705
Qualified X (1.25)............................................... 940,932.7 13.673 12,865,516
Reserves for annuity contracts in payment period (Note 1) ....... 9,712,862
AETNA GET FUND, SERIES B:
Qualified III .................................................. 63,245.0 12.850 812,688

S-4
<PAGE>
<CAPTION>
Accumulation
Unit
Units Value
<S> <C> <C> <C>

Qualified VI..................................................... 5,279,157.0 12.850 67,836,249
Qualified X (1.25)............................................... 349,212.6 12.850 4,487,321
AETNA ASCENT VARIABLE PORTFOLIO:
Qualified III.................................................... 8.4 10.673 90
Qualified V...................................................... 202.1 10.666 2,156
Qualified VI..................................................... 393,052.6 10.673 4,195,040
Qualified VIII................................................... 7.7 10.673 82
Qualified X (1.15)............................................... 15,054.8 10.982 165,326
Qualified X (1.25)............................................... 49,748.1 10.976 546,042
AETNA CROSSROADS VARIABLE PORTFOLIO:
Qualified V...................................................... 243.2 10.605 2,579
Qualified VI..................................................... 294,673.3 10.612 3,126,954
Qualified VIII................................................... 43.8 10.611 464
Qualified X (1.15)............................................... 2,393.5 10.868 26,012
Qualified X (1.25)............................................... 47,204.4 10.862 512,748
AETNA LEGACY VARIABLE PORTFOLIO:
Qualified VI..................................................... 143,636.5 10.580 1,519,662
Qualified X (1.15)............................................... 17,106.0 10.631 181,853
Qualified X (1.25)............................................... 20,531.2 10.626 218,165
ALGER AMERICAN FUNDS:
ALGER AMERICAN GROWTH PORTFOLIO:
Qualified III ................................................... 530,262.6 11.715 6,211,911
Qualified V...................................................... 7,965.7 10.365 82,564
Qualified VI..................................................... 2,832,439.7 10.157 28,770,111
Qualified VIII................................................... 38.3 10.371 397
Qualified X (1.15)............................................... 12,858.7 11.385 146,392
Qualified X (1.25)............................................... 284,978.1 11.379 3,242,625
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO:
Qualified III ................................................... 1,714,187.0 13.558 23,241,019
Qualified V ..................................................... 31,527.5 13.463 424,453
Qualified VI .................................................... 15,036,764.7 13.450 202,245,073
Qualified VIII .................................................. 3,845.1 14.093 54,189
Qualified X (1.15)............................................... 54,683.5 13.481 737,179
Qualified X (1.25)............................................... 1,081,374.8 13.450 14,544,534
CALVERT RESPONSIBLY INVESTED BALANCED PORTFOLIO:
Qualified III ................................................... 856,360.5 17.951 15,372,772
Qualified V ..................................................... 14,656.3 13.870 203,278
Qualified VI .................................................... 966,097.9 13.527 13,068,322
Qualified VIII .................................................. 3,611.6 12.291 44,389
FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUNDS:
EQUITY-INCOME PORTFOLIO:
Qualified III ................................................... 628,581.6 11.617 7,301,978
Qualified V ..................................................... 1,107.9 11.047 12,239
Qualified VI .................................................... 1,660,304.1 11.092 18,415,763
Qualified VIII .................................................. 638.7 11.054 7,060
Qualified X (1.15)............................................... 118,679.1 13.902 1,649,878
Qualified X (1.25)............................................... 766,359.8 13.880 10,637,021
GROWTH PORTFOLIO:
Qualified III ................................................... 762.1 10.198 7,772
Qualified V ..................................................... 2,540.5 10.183 25,871
Qualified VI .................................................... 1,833,793.9 10.066 18,458,844

S-5
<PAGE>
<CAPTION>
Accumulation
Unit
Units Value
<S> <C> <C> <C>

Qualified VIII .................................................. 158.7 10.190 1,617
Qualified X (1.15)............................................... 45,764.6 14.023 641,737
Qualified X (1.25)............................................... 612,991.7 14.000 8,581,887
OVERSEAS PORTFOLIO:
Qualified III ................................................... 1,301.8 10.197 13,274
Qualified V ..................................................... 190.8 9.954 1,899
Qualified VI .................................................... 196,089.8 9.961 1,953,206
Qualified X (1.15)............................................... 4,284.4 10.278 44,037
Qualified X (1.25)............................................... 166,303.2 10.262 1,706,571
FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUNDS II:
ASSET MANAGER PORTFOLIO:
Qualified III.................................................... 1,316,915.5 10.912 14,370,158
CONTRAFUND PORTFOLIO:
Qualified III ................................................... 525,476.0 11.763 6,181,326
Qualified V ..................................................... 6,415.4 10.461 67,111
Qualified VI .................................................... 2,116,732.0 10.397 22,007,519
Qualified VIII .................................................. 173.7 10.467 1,818
Qualified X (1.15)............................................... 5,452.8 10.689 63,737
Qualified X (1.25)............................................... 174,259.3 10.681 2,035,606
INDEX 500 PORTFOLIO:
Qualified III ................................................... 290,546.8 11.740 3,411,144
FRANKLIN GOVERNMENT SECURITIES TRUST:
Qualified III ................................................... 809,413.7 16.495 13,351,329
Qualified V ..................................................... 16,226.2 11.946 193,844
Qualified VI .................................................... 717,760.0 11.762 8,442,415
Qualified VIII .................................................. 4,916.9 11.090 54,527
JANUS ASPEN SERIES:
AGGRESSIVE GROWTH PORTFOLIO:
Qualified III ................................................... 1,280,952.5 15.323 19,627,517
Qualified V.. ................................................... 15,482.4 13.296 205,852
Qualified VI. ................................................... 4,887,059.8 13.322 65,105,449
Qualified VIII .................................................. 1,021.7 13.321 13,610
Qualified X (1.15)............................................... 22,049.9 12.869 283,760
Qualified X (1.25)............................................... 167,919.9 12.861 2,159,528
BALANCED PORTFOLIO:
Qualified III ................................................... 161.4 10.853 1,751
Qualified V ..................................................... 160.2 10.843 1,737
Qualified VI .................................................... 93,303.8 10.850 1,012,385
Qualified X (1.15)............................................... 9,382.9 11.265 105,697
Qualified X (1.25)............................................... 34,071.6 11.259 383,600
FLEXIBLE INCOME PORTFOLIO:
Qualified III ................................................... 3,344.5 12.124 40,550
Qualified V ..................................................... 745.1 12.054 8,981
Qualified VI .................................................... 315,361.3 12.077 3,808,592
GROWTH PORTFOLIO:
Qualified III ................................................... 109,716.5 11.859 1,301,115
Qualified V. .................................................... 166.2 10.872 1,807
Qualified VI. ................................................... 259,195.5 10.870 2,817,612
Qualified X (1.15)............................................... 3,238.4 11.633 37,671
Qualified X (1.25)............................................... 78,126.0 11.626 908,282

S-6
<PAGE>
<CAPTION>
Accumulation
Unit
Units Value
<S> <C> <C> <C>

SHORT-TERM BOND PORTFOLIO:
Qualified III ................................................... 18,472.9 10.393 191,983
Qualified V ..................................................... 23.8 10.316 245
Qualified VI .................................................... 32,695.8 10.323 337,528
Qualified X (1.25)............................................... 1,405.3 10.285 14,454
WORLDWIDE GROWTH PORTFOLIO:
Qualified III ................................................... 314,652.7 12.158 3,825,607
Qualified V ..................................................... 11,127.9 10.952 121,875
Qualified VI .................................................... 1,036,039.6 10.877 11,268,519
Qualified VIII .................................................. 13.7 10.846 149
Qualified X (1.15)............................................... 2,616.9 12.223 31,987
Qualified X (1.25)............................................... 65,384.2 12.216 798,726
LEXINGTON EMERGING MARKETS FUND:
Qualified III ................................................... 371,155.8 8.323 3,089,046
LEXINGTON NATURAL RESOURCES TRUST:
Qualified III ................................................... 530,562.2 10.862 5,763,092
Qualified V ..................................................... 8,347.9 12.095 100,969
Qualified VI .................................................... 711,891.9 11.720 8,346,423
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST:
GROWTH PORTFOLIO:
Qualified III ................................................... 2,359,089.9 17.430 41,119,982
Qualified V ..................................................... 35,940.7 14.359 516,068
Qualified VI .................................................... 3,331,217.5 14.345 47,786,169
Qualified VIII .................................................. 5,947.6 12.334 73,360
SCUDDER VARIABLE LIFE INVESTMENT FUND:
INTERNATIONAL PORTFOLIO:
Qualified III ................................................... 3,823,292.2 14.515 55,495,694
Qualified V ..................................................... 38,067.4 13.799 525,305
Qualified VI .................................................... 7,323,208.0 13.923 101,958,550
Qualified VIII .................................................. 12,189.3 11.733 143,011
Qualified X (1.15)............................................... 41,921.0 13.952 584,886
Qualified X (1.25)............................................... 432,183.0 13.923 6,017,137
TCI PORTFOLIOS, INC.:
TCI GROWTH:
Qualified III *.................................................. 1,784,551.6 14.464 25,811,741
Qualified III .................................................. 4,184,701.2 13.224 55,336,455
Qualified V ..................................................... 24,825.6 15.176 376,753
Qualified VI .................................................... 21,986,645.3 15.253 335,360,124
Qualified VII ................................................... 63,035.5 12.840 809,380
Qualified VIII .................................................. 8,144.3 12.868 104,799
Qualified IX .................................................... 1,241.8 12.581 15,623
Qualified X (1.15)............................................... 13,306.7 15.285 203,397
Qualified X (1.25)............................................... 474,744.3 15.253 7,241,227
$6,632,117,659
--------------
--------------
</TABLE>

*Applies only to participants of the Opportunity Plus program and Multiple
Options Contracts.
See Notes to Financial Statements.

S-7
<PAGE>
VARIABLE ANNUITY ACCOUNT C

STATEMENT OF OPERATIONS - Year Ended December 31, 1995
<TABLE>
<CAPTION>

INVESTMENT INCOME:
<S> <C> <C>
Dividends: (Notes 1 and 3)
Aetna Variable Fund............................................................ $648,150,765
Aetna Income Shares............................................................ 23,872,308
Aetna Variable Encore Fund .................................................... 172,751
Aetna Investment Advisers Fund, Inc............................................ 47,274,300
Aetna GET Fund, Series B ...................................................... 1,878,972
Aetna Ascent Variable Portfolio ............................................... 110,626
Aetna Crossroads Variable Portfolio ........................................... 61,834
Aetna Legacy Variable Portfolio ............................................... 33,640
Calvert Responsibly Invested Balanced Portfolio .............................. 2,556,825
Fidelity Investments Variable Insurance Products Fund - Equity Income Portfolio 423,626
Fidelity Investments Variable Insurance Products Fund - Growth Portfolio ...... 10,256
Fidelity Investments Variable Insurance Products Fund - Overseas Portfolio .... 5,145
Fidelity Investments Variable Insurance Products Fund II - Asset Manager Portfolio 259,914
Fidelity Investments Variable Insurance Products Fund II - Contrafund Portfolio 379,043
Franklin Government Securities Trust .......................................... 1,061,449
Janus Aspen Series - Aggressive Growth Portfolio............................... 982,586
Janus Aspen Series - Balanced Portfolio........................................ 11,553
Janus Aspen Series - Flexible Income Portfolio................................. 151,761
Janus Aspen Series - Growth Portfolio.......................................... 91,472
Janus Aspen Series - Short-Term Bond Portfolio................................. 11,707
Janus Aspen Series - Worldwide Growth Portfolio................................ 50,858
Lexington Emerging Markets Fund................................................ 29,990
Lexington Natural Resources Trust.............................................. 59,767
Neuberger & Berman Advisers Management Trust - Growth Portfolio ............... 1,779,523
Scudder Variable Life Investment Fund - International Portfolio............... 670,720
TCI Portfolios, Inc. - TCI Growth.............................................. 339,221
--------------
Total investment income ..................................................... 730,430,612
Valuation period deductions (Note 2)............................................. (71,090,542)
--------------
Net investment income............................................................ 659,340,070
--------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1 and 4)
Proceeds from sales ........................................................... $570,154,582
Cost of investments sold ...................................................... 409,480,615
------------
Net realized gain ........................................................... 160,673,967
Net unrealized gain on investments:
Beginning of year ............................................................. 73,479,233
End of year ................................................................... 594,083,184
------------
Net unrealized gain ......................................................... 520,603,951
--------------
Net realized and unrealized gain on investments ................................. 681,277,918
--------------
Net increase in net assets resulting from operations ............................ $1,340,617,988
--------------
--------------
</TABLE>

See Notes to Financial Statements.

S-8
<PAGE>
VARIABLE ANNUITY ACCOUNT C

STATEMENTS OF CHANGES IN NET ASSETS

Year Ended December 31,
1995 1994
---- ----
<S> <C> <C>
FROM OPERATIONS:
Net investment income .......................................... $ 659,340,070 $ 476,196,420
Net realized and unrealized gain (loss) on investments .......... 681,277,918 (581,812,453)
Net increase (decrease) in net assets resulting from operations 1,340,617,988 (105,616,033)
FROM UNIT TRANSACTIONS:
Variable annuity contract purchase payments ..................... 771,594,245 711,565,372
Sales and administrative charges deducted by the Company ........ (98,694) (137,737)
Net variable annuity contract purchase payments ............... 771,495,551 711,427,635
Transfers from the Company for mortality guarantee adjustments .. 3,678,430 1,880,350
Transfers to the Company's fixed account options ................ (44,377,350) (56,920,532)
Transfers to other variable annuity accounts ........... 0 (23,284,415)
Redemptions by contract holders ................................. (287,945,984) (269,542,942)
Annuity payments ................................................ (14,807,537) (11,189,149)
Other ........................................................... 1,144,770 1,452,959
Net increase in net assets from unit transactions ............. 429,187,880 353,823,906
Change in net assets ............................................ 1,769,805,868 248,207,873
NET ASSETS:
Beginning of year ............................................... 4,862,311,791 4,614,103,918
End of year...................................................... $6,632,117,659 $4,862,311,791
-------------- --------------
-------------- --------------
</TABLE>

See Notes to Financial Statements.

S-9
<PAGE>
VARIABLE ANNUITY ACCOUNT C

NOTES TO FINANCIAL STATEMENTS - December 31, 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Variable Annuity Account C ("Account") is registered under the Investment
Company Act of 1940 as a unit investment trust. The Account is sold
exclusively for use with annuity contracts that are qualified under the
Internal Revenue Code of 1986, as amended.

The accompanying financial statements of the Account have been prepared in
accordance with generally accepted accounting principles.

a. VALUATION OF INVESTMENTS

Investments in the following Funds are stated at the closing net asset
value per share as determined by each Fund on December 31, 1995:

Aetna Variable Fund
Aetna Income Shares
Aetna Variable Encore Fund
Aetna Investment Advisers Fund, Inc.
Aetna GET Fund, Series B
Aetna Ascent Variable Portfolio
Aetna Crossroads Variable Portfolio
Aetna Legacy Variable Portfolio
Alger American Fund:
- Alger American Growth Portfolio
- Alger American Small Capitalization Portfolio
Calvert Responsibly Invested Balanced Portfolio
Fidelity Investments Variable Insurance Products Fund:
- Equity-Income Portfolio
- Growth Portfolio
- Overseas Portfolio
Fidelity Investments Variable Insurance Products Fund II:
- Asset Manager Portfolio
- Contrafund Portfolio
- Index 500 Portfolio

Franklin Government Securities Trust
Janus Aspen Series:
- Aggressive Growth Portfolio
- Balanced Portfolio
- Flexible Income Portfolio
- Growth Portfolio
- Short-Term Bond Portfolio
- Worldwide Growth Portfolio
Lexington Emerging Markets Fund
Lexington Natural Resources Trust
Neuberger & Berman Advisers Management Trust:
- Growth Portfolio
Scudder Variable Life Investment Fund:
- International Portfolio
TCI Portfolios, Inc.:
- TCI Growth

b. OTHER
Investment transactions are accounted for on a trade date basis and
dividend income is recorded on the ex-dividend date. The cost of
investments sold is determined by specific identification.

c. FEDERAL INCOME TAXES
The operations of Variable Annuity Account C form a part of, and are taxed
with, the total operations of Aetna Life Insurance and Annuity Company
("Company") which is taxed as a life insurance company under the Internal
Revenue Code of 1986, as amended.

d. ANNUITY RESERVES
Annuity reserves are computed for currently payable contracts according
to the Progressive Annuity, Individual Annuity Mortality, and Group
Annuity Mortality tables using various assumed interest rates not to
exceed seven percent. Mortality experience is monitored by the Company.

S-10

<PAGE>

VARIABLE ANNUITY ACCOUNT C

NOTES TO FINANCIAL STATEMENTS - December 31, 1995 (continued)

Charges to annuity reserves for mortality and expense risk experience are
reimbursed to the Company if the reserves required are less than originally
estimated. If additional reserves are required, the Company reimburses the
Account.

2. VALUATION PERIOD DEDUCTIONS
Deductions by the Account for mortality and expense risk charges are made
in accordance with the terms of the contracts and are paid to the Company.

3. DIVIDEND INCOME
On an annual basis the Funds distribute substantially all of their taxable
income and realized capital gains to their shareholders. Distributions to
the Account are automatically reinvested in shares of the Funds. The
Account's proportionate share of each Fund's undistributed net investment
income and accumulated net realized gain on investments is included in net
unrealized gain in the Statement of Operations.

4. PURCHASES AND SALES OF INVESTMENTS

The cost of purchases and proceeds from sales of investments other than
short-term investments for the year ended December 31, 1995 aggregated
$1,658,682,532 and $570,154,582, respectively.

5. ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported therein. Although actual results
could differ from these estimates, any such differences are expected to be
immaterial to the net assets of the Account.

S-11

<PAGE>

VARIABLE ANNUITY ACCOUNT C

CONDENSED FINANCIAL INFORMATION

CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Increase
Value at Value at in Value of
Beginning End of Accumulation
of Year Year Unit
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AETNA VARIABLE FUND:
Qualified I ............................................................. $138.406 $180.879 30.69%
Qualified III ........................................................... 105.558 137.869 30.61%
Qualified IV ............................................................ 63.884 83.646 30.93%
Qualified V ............................................................. 10.823 14.113 30.40%
Qualified VI ............................................................ 10.778 14.077 30.61%
Qualified VII ........................................................... 10.136 13.247 30.69%
Qualified VIII .......................................................... 10.011 13.074 30.60%
Qualified IX ............................................................ 9.879 12.935 30.93%
Qualified X (1.15) ...................................................... 10.791 14.108 30.74%
Qualified X (1.25) ...................................................... 10.778 14.077 30.61%
- -------------------------------------------------------------------------------------------------------------------------
AETNA INCOME SHARES:
Qualified I ............................................................. $ 40.570 $ 47.405 16.85%
Qualified III ........................................................... 40.173 46.913 16.78%
Qualified V ............................................................. 10.536 12.283 16.59%
Qualified VI ............................................................ 10.360 12.098 16.78%
Qualified VII ........................................................... 9.565 11.176 16.85%
Qualified VIII .......................................................... 9.543 11.143 16.77%
Qualified IX ............................................................ 9.570 11.203 17.07%
Qualified X (1.15) ...................................................... 10.373 12.125 16.89%
Qualified X (1.25) ...................................................... 10.360 12.098 16.78%
- -------------------------------------------------------------------------------------------------------------------------
AETNA VARIABLE ENCORE FUND:
Qualified I ............................................................. $ 36.723 $ 38.485 4.80%
Qualified III ........................................................... 36.271 37.988 4.73%
Qualified V ............................................................. 10.523 11.003 4.57%
Qualified VI ............................................................ 10.528 11.026 4.73%
Qualified VII ........................................................... 10.435 10.936 4.80%
Qualified VIII .......................................................... 10.141 10.620 4.73%
Qualified IX ............................................................ 10.341 10.857 5.00%
Qualified X (1.15) ...................................................... 10.541 11.051 4.84%
Qualified X (1.25) ...................................................... 10.528 11.026 4.73%
- -------------------------------------------------------------------------------------------------------------------------
AETNA INVESTMENT ADVISERS FUND, INC.:
Qualified I ............................................................. $ 14.317 $ 18.024 25.89%
Qualified III ........................................................... 14.270 17.954 25.82%
Qualified V ............................................................. 10.900 13.693 25.62%
Qualified VI ............................................................ 10.868 13.673 25.81%
Qualified VII ........................................................... 10.434 13.135 25.89%
Qualified VIII .......................................................... 10.091 12.695 25.81%
Qualified IX ............................................................ 10.000 12.613 26.13%
Qualified X (1.15) ...................................................... 10.880 13.703 25.95%
Qualified X (1.25) ...................................................... 10.868 13.673 25.81%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

S-12
<PAGE>

VARIABLE ANNUITY ACCOUNT C

CONDENSED FINANCIAL INFORMATION

CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995
(continued)

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

Increase
Value at Value at in Value of
Beginning End of Accumulation
of Year Year Unit
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AETNA GET FUND, SERIES B:
Qualified III ........................................................... $ 10.160 $ 12.850 26.48%
Qualified VI ............................................................ 10.160 12.850 26.48%
Qualified X (1.25) ...................................................... 10.160 12.850 26.48%
- -------------------------------------------------------------------------------------------------------------------------
AETNA ASCENT VARIABLE PORTFOLIO:
Qualified III ........................................................... $ 10.000 $ 10.673 6.73% (4)
Qualified V ............................................................. 10.000 10.666 6.66% (5)
Qualified VI ............................................................ 10.000 10.673 6.73% (5)
Qualified VIII .......................................................... 10.000 10.673 6.73% (5)
Qualified X (1.15) ...................................................... 10.000 10.982 9.82% (3)
Qualified X (1.25) ...................................................... 10.000 10.976 9.76% (3)
- -------------------------------------------------------------------------------------------------------------------------
AETNA CROSSROADS VARIABLE PORTFOLIO:
Qualified V ............................................................. $ 10.000 $ 10.605 6.05% (5)
Qualified VI ............................................................ 10.000 10.612 6.12% (5)
Qualified VIII .......................................................... 10.000 10.611 6.11% (5)
Qualified X (1.15) ...................................................... 10.000 10.868 8.68% (3)
Qualified X (1.25) ...................................................... 10.000 10.862 8.62% (3)
- -------------------------------------------------------------------------------------------------------------------------
AETNA LEGACY VARIABLE PORTFOLIO:
Qualified VI ............................................................ $ 10.000 $ 10.580 5.80% (5)
Qualified X (1.15) ...................................................... 10.000 10.631 6.31% (4)
Qualified X (1.25) ...................................................... 10.000 10.626 6.26% (4)
- -------------------------------------------------------------------------------------------------------------------------
ALGER AMERICAN FUNDS:
ALGER AMERICAN GROWTH PORTFOLIO:
Qualified III ........................................................... $ 10.000 $ 11.715 17.15% (4)
Qualified V ............................................................. 10.000 10.365 3.65% (5)
Qualified VI ............................................................ 10.000 10.157 1.57% (5)
Qualified VIII .......................................................... 10.000 10.371 3.71% (5)
Qualified X (1.15) ...................................................... 10.000 11.385 13.85% (3)
Qualified X (1.25) ...................................................... 10.000 11.379 13.79% (3)
- -------------------------------------------------------------------------------------------------------------------------
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO:
Qualified III ........................................................... $ 9.513 $ 13.558 42.52%
Qualified V ............................................................. 9.461 13.463 42.29%
Qualified VI ............................................................ 9.437 13.450 42.52%
Qualified VIII .......................................................... 9.889 14.093 42.51%
Qualified X (1.15) ...................................................... 9.450 13.481 42.66%
Qualified X (1.25) ...................................................... 9.437 13.450 42.52%
- -------------------------------------------------------------------------------------------------------------------------
CALVERT RESPONSIBLY INVESTED BALANCED PORTFOLIO:
Qualified III ........................................................... $ 13.990 $ 17.951 28.31%
Qualified V ............................................................. 10.839 13.870 27.96%
Qualified VI ............................................................ 10.554 13.527 28.17%
Qualified VIII .......................................................... 9.590 12.291 28.16%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

S-13
<PAGE>

VARIABLE ANNUITY ACCOUNT C

CONDENSED FINANCIAL INFORMATION

CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995
(continued)

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Increase
(Decrease)
Value at Value at in Value of
Beginning End of Accumulation
of Year Year Unit
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUNDS:
EQUITY - INCOME PORTFOLIO:
Qualified III ........................................................... $ 10.000 $ 11.617 16.17% (2)
Qualified V ............................................................. 10.000 11.047 10.47% (5)
Qualified VI ............................................................ 10.000 11.092 10.92% (5)
Qualified VIII .......................................................... 10.000 11.054 10.54% (5)
Qualified X (1.15) ...................................................... 10.409 13.902 33.55%
Qualified X (1.25) ...................................................... 10.403 13.880 33.42%
- -------------------------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO:
Qualified III ........................................................... $ 10.000 $ 10.198 1.98% (4)
Qualified V ............................................................. 10.000 10.183 1.83% (5)
Qualified VI ............................................................ 10.000 10.066 0.66% (5)
Qualified VIII .......................................................... 10.000 10.190 1.90% (5)
Qualified X (1.15) ...................................................... 10.479 14.023 33.82%
Qualified X (1.25) ...................................................... 10.472 14.000 33.69%
- -------------------------------------------------------------------------------------------------------------------------
OVERSEAS PORTFOLIO:
Qualified III ........................................................... $ 10.000 $ 10.197 1.97% (4)
Qualified V ............................................................. 10.000 9.954 (0.46%) (5)
Qualified VI ............................................................ 10.000 9.961 (0.39%) (5)
Qualified X (1.15) ...................................................... 9.480 10.278 8.43%
Qualified X (1.25) ...................................................... 9.474 10.262 8.32%
- -------------------------------------------------------------------------------------------------------------------------
FIDELITY INVESTMENTS VARIABLE INSURANCE PRODUCTS FUNDS II:
ASSET MANAGER PORTFOLIO:
Qualified III ........................................................... $ 9.447 $ 10.912 15.51%
- -------------------------------------------------------------------------------------------------------------------------
CONTRAFUND PORTFOLIO:
Qualified III ........................................................... $ 10.000 $ 11.763 17.63% (2)
Qualified V ............................................................. 10.000 10.461 4.61% (5)
Qualified VI ............................................................ 10.000 10.397 3.97% (5)
Qualified VIII .......................................................... 10.000 10.467 4.67% (5)
Qualified X (1.15) ...................................................... 10.000 10.689 6.89% (2)
Qualified X (1.25) ...................................................... 10.000 10.681 6.81% (2)
- -------------------------------------------------------------------------------------------------------------------------
INDEX 500 PORTFOLIO:
Qualified III ........................................................... $ 10.000 $ 11.740 17.40% (2)
- -------------------------------------------------------------------------------------------------------------------------
FRANKLIN GOVERNMENT SECURITIES TRUST:
Qualified III ........................................................... $ 14.190 $ 16.495 16.24%
Qualified V ............................................................. 10.294 11.946 16.06%
Qualified VI ............................................................ 10.119 11.762 16.24%
Qualified VIII .......................................................... 9.541 11.090 16.23%
- -------------------------------------------------------------------------------------------------------------------------
JANUS ASPEN SERIES:
AGGRESSIVE GROWTH PORTFOLIO:
Qualified III ........................................................... $ 12.169 $ 15.323 25.91%
Qualified V ............................................................. 10.577 13.296 25.71%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

S-14
<PAGE>

VARIABLE ANNUITY ACCOUNT C

CONDENSED FINANCIAL INFORMATION

CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995
(continued)

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Increase
(Decrease)
Value at Value at in Value of
Beginning End of Accumulation
of Year Year Unit
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JANUS ASPEN SERIES:
AGGRESSIVE GROWTH PORTFOLIO (continued):
Qualified VI ............................................................ $ 10.581 $ 13.322 25.91%
Qualified VIII .......................................................... 10.581 13.321 25.90%
Qualified X (1.15) ...................................................... 10.000 12.869 28.69% (2)
Qualified X (1.25) ...................................................... 10.000 12.861 28.61% (2)
- -------------------------------------------------------------------------------------------------------------------------
BALANCED PORTFOLIO:
Qualified III ........................................................... $ 10.000 $ 10.853 8.53% (4)
Qualified V ............................................................. 10.000 10.843 8.43% (5)
Qualified VI ............................................................ 10.000 10.850 8.50% (5)
Qualified X (1.15) ...................................................... 10.000 11.265 12.65% (3)
Qualified X (1.25) ...................................................... 10.000 11.259 12.59% (3)
- -------------------------------------------------------------------------------------------------------------------------
FLEXIBLE INCOME PORTFOLIO:
Qualified III ........................................................... $ 9.911 $ 12.124 22.33%
Qualified V ............................................................. 10.000 12.054 20.54% (1)
Qualified VI ............................................................ 9.873 12.077 22.33%
- -------------------------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO:
Qualified III ........................................................... $ 10.000 $ 11.859 18.59% (4)
Qualified V ............................................................. 10.000 10.872 8.72% (5)
Qualified VI ............................................................ 10.000 10.870 8.70% (5)
Qualified X (1.15) ...................................................... 10.000 11.633 16.33% (3)
Qualified X (1.25) ...................................................... 10.000 11.626 16.26% (3)
- -------------------------------------------------------------------------------------------------------------------------
SHORT TERM BOND PORTFOLIO:
Qualified III ........................................................... $ 10.000 $ 10.393 3.93% (4)
Qualified V ............................................................. 10.000 10.316 3.16% (5)
Qualified VI ............................................................ 10.000 10.323 3.23% (5)
Qualified X (1.25) ...................................................... 10.000 10.285 2.85% (4)
- -------------------------------------------------------------------------------------------------------------------------
WORLDWIDE GROWTH PORTFOLIO:
Qualified III ........................................................... $ 10.000 $ 12.158 21.58% (4)
Qualified V ............................................................. 10.000 10.952 9.52% (4)
Qualified VI ............................................................ 10.000 10.877 8.77% (5)
Qualified VIII .......................................................... 10.000 10.846 8.46% (5)
Qualified X (1.15) ...................................................... 10.000 12.223 22.23% (2)
Qualified X (1.25) ...................................................... 10.000 12.216 22.16% (2)
- -------------------------------------------------------------------------------------------------------------------------
LEXINGTON EMERGING MARKETS FUND:
Qualified III ........................................................... $ 8.772 $ 8.323 (5.12%)
- -------------------------------------------------------------------------------------------------------------------------
LEXINGTON NATURAL RESOURCES TRUST:
Qualified III ........................................................... $ 9.412 $ 10.862 15.41%
Qualified V ............................................................. 10.496 12.095 15.24%
Qualified VI ............................................................ 10.154 11.720 15.42%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

S-15
<PAGE>

VARIABLE ANNUITY ACCOUNT C

CONDENSED FINANCIAL INFORMATION

CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995
(continued)

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Increase
Value at Value at in Value of
Beginning End of Accumulation
of Year Year Unit
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NEUBERGER & BERMAN ADVISERS
MANAGEMENT TRUST - GROWTH PORTFOLIO:
Qualified III ........................................................... $ 13.398 $ 17.430 30.09%
Qualified V ............................................................. 11.055 14.359 29.89%
Qualified VI ............................................................ 11.026 14.345 30.10%
Qualified VIII .......................................................... 9.482 12.334 30.09%
- --------------------------------------------------------------------------------------------------------------------------
SCUDDER VARIABLE LIFE INVESTMENT FUND - INTERNATIONAL
PORTFOLIO:
Qualified III ........................................................... $ 13.227 $ 14.515 9.74%
Qualified V ............................................................. 12.595 13.799 9.56%
Qualified VI ............................................................ 12.687 13.923 9.74%
Qualified VIII .......................................................... 10.692 11.733 9.73%
Qualified X (1.15) ...................................................... 12.701 13.952 9.85%
Qualified X (1.25) ...................................................... 12.687 13.923 9.74%
- --------------------------------------------------------------------------------------------------------------------------
TCI PORTFOLIOS, INC.:
TCI GROWTH:
Qualified III* .......................................................... $ 11.172 $ 14.464 29.47%
Qualified III ........................................................... 10.213 13.224 29.47%
Qualified V ............................................................. 11.740 15.176 29.27%
Qualified VI ............................................................ 11.781 15.253 29.47%
Qualified VII ........................................................... 9.911 12.840 29.55%
Qualified VIII .......................................................... 9.939 12.868 29.46%
Qualified IX ............................................................ 9.693 12.581 29.80%
Qualified X (1.15) ...................................................... 11.794 15.285 29.60%
Qualified X (1.25) ...................................................... 11.781 15.253 29.47%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>

*Applies only to participants of the Opportunity Plus program and Multiple
Options Contracts.

QUALIFIED I Individual contracts issued prior to May 1, 1975
in connection with "Qualified Corporate Retirement
Plans" established pursuant to Section 401 of the
Internal Revenue Code ("Code"); "Tax-Deferred
Annuity Plans" established by the public school
systems and tax-exempt organizations pursuant to
Section 403(b) of the Code, and certain Individual
Retirement Annuity Plans established by or on
behalf of individuals pursuant to section 408(b)
of the Code; Individual contracts issued prior to
November 1, 1975 in connection with "H.R. 10
Plans" established by persons entitled to the
benefits of the Self-Employed Individuals Tax
Retirement Act of 1962, as amended; allocated
group contracts issued prior to May 1, 1975 in
connection with Qualified Corporate Retirement
Plans; and group contracts issued prior to
October 1, 1978 in connection with Tax-Deferred
Annuity Plans.

QUALIFIED III Individual contracts issued in connection with
Tax-Deferred Annuity Plans and Individual
Retirement Annuity Plans since May 1, 1975, H.R.
10 Plans since November 1, 1975; group contracts
issued since October 1, 1978 in connection with
Tax-Deferred Annuity

S-16
<PAGE>

VARIABLE ANNUITY ACCOUNT C

CONDENSED FINANCIAL INFORMATION

CHANGE IN VALUE OF ACCUMULATION UNIT - JANUARY 1, 1995 TO DECEMBER 31, 1995
(continued)

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

QUALIFIED III (continued): Plans and group contracts issued since May 1, 1979
in connection with "Deferred Compensation Plans"
adopted by state and local governments and H.R. 10
Plans.

QUALIFIED IV Certain large group contracts (Jumbo) issued in
connection with Tax-Deferred Annuity Plans and
Deferred Compensation Plans issued since
January 1, 1979.

QUALIFIED V Group AetnaPlus contracts issued since August 28,
1992 in connection with "Optional Retirement
Plans" established pursuant to Section 403(b) or
401(a) of the Internal Revenue Code.

QUALIFIED VI Group AetnaPlus contracts issued in connection
with Tax-Deferred Annuity Plans and Retirement
Plus Plans since August 28, 1992.

QUALIFIED VII Certain existing contracts that were converted to
ACES, the new administrative system (Previously
valued under Qualified I).

QUALIFIED VIII "Group Aetna Plus" contracts issued in connection
with Tax-Deferred Annuity Plans and "Deferred
Compensation Plans" adopted by state and local
governments since June 30, 1993.

QUALIFIED IX Certain large group contracts (Jumbo) that were
converted to ACES, the new administrative system
(previously valued under Qualified VI).

QUALIFIED X Individual Retirement Annuity and Simplified
Employee Pension Plans issued or converted to
ACES, the new administrative system.

1 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during March 1995 when
the fund became available under the contract or the applicable daily asset
charge was first utilized.
2 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during May 1995 when the
fund became available under the contract or the applicable daily asset
charge was first utilized.
3 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during June 1995 when
the fund became available under the contract or the applicable daily asset
charge was first utilized.
4 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during July 1995 when
the fund became available under the contract or the applicable daily asset
charge was first utilized.
5 - Reflects less than a full year of performance activity. The initial
Accumulation Unit Value was established at $10.000 during August 1995 when
the fund became available under the contract or the applicable daily asset
charge was first utilized.

S-17
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
Index

<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Independent Auditors' Report..................................... F-2
Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993.............................. F-3
Consolidated Balance Sheets as of December 31, 1995 and 1994... F-4
Consolidated Statements of Changes in Shareholder's Equity for
the Years Ended
December 31, 1995, 1994 and 1993.............................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993.............................. F-6
Notes to Consolidated Financial Statements....................... F-7
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Shareholder and Board of Directors
Aetna Life Insurance and Annuity Company:

We have audited the accompanying consolidated balance sheets of Aetna Life
Insurance and Annuity Company and Subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of income, changes in shareholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aetna Life Insurance
and Annuity Company and Subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.

As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its methods of accounting for certain investments in debt and
equity securities.

KPMG Peat Marwick LLP

Hartford, Connecticut
February 6, 1996

F-2
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Income
(millions)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Premiums............................................. $ 130.8 $ 124.2 $ 82.1
Charges assessed against policyholders............... 318.9 279.0 251.5
Net investment income................................ 1,004.3 917.2 911.9
Net realized capital gains........................... 41.3 1.5 9.5
Other income......................................... 42.0 10.3 9.5
-------- -------- --------
Total revenue...................................... 1,537.3 1,332.2 1,264.5
-------- -------- --------
Benefits and expenses:
Current and future benefits.......................... 915.3 854.1 818.4
Operating expenses................................... 318.7 235.2 207.2
Amortization of deferred policy acquisition costs.... 43.3 26.4 19.8
-------- -------- --------
Total benefits and expenses........................ 1,277.3 1,115.7 1,045.4
-------- -------- --------
Income before federal income taxes..................... 260.0 216.5 219.1
Federal income taxes................................. 84.1 71.2 76.2
-------- -------- --------
Net income............................................. $ 175.9 $ 145.3 $ 142.9
-------- -------- --------
-------- -------- --------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-3
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Balance Sheets
(millions)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
- -------------------------------------------------------
Investments:
Debt securities, available for sale:
(amortized cost: $11,923.7 and $10,577.8)........... $12,720.8 $10,191.4
Equity securities, available for sale:
Non-redeemable preferred stock (cost: $51.3 and
$43.3)............................................ 57.6 47.2
Investment in affiliated mutual funds (cost: $173.4
and $187.1)....................................... 191.8 181.9
Common stock (cost: $6.9 at December 31, 1995)..... 8.2 --
Short-term investments............................... 15.1 98.0
Mortgage loans....................................... 21.2 9.9
Policy loans......................................... 338.6 248.7
Limited partnership.................................. -- 24.4
--------- ---------
Total investments................................ 13,353.3 10,801.5

Cash and cash equivalents.............................. 568.8 623.3
Accrued investment income.............................. 175.5 142.2
Premiums due and other receivables..................... 37.3 75.8
Deferred policy acquisition costs...................... 1,341.3 1,164.3
Reinsurance loan to affiliate.......................... 655.5 690.3
Other assets........................................... 26.2 15.9
Separate Accounts assets............................... 10,987.0 7,420.8
--------- ---------
Total assets..................................... $27,144.9 $20,934.1
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY
- -------------------------------------------------------
Liabilities:
Future policy benefits............................... $ 3,594.6 $ 2,912.7
Unpaid claims and claim expenses..................... 27.2 23.8
Policyholders' funds left with the Company........... 10,500.1 8,949.3
--------- ---------
Total insurance reserve liabilities.............. 14,121.9 11,885.8
Other liabilities.................................... 259.2 302.1
Federal income taxes:
Current............................................ 24.2 3.4
Deferred........................................... 169.6 233.5
Separate Accounts liabilities........................ 10,987.0 7,420.8
--------- ---------
Total liabilities................................ 25,561.9 19,845.6
--------- ---------
--------- ---------
Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized;
55,000 shares issued and outstanding)............... 2.8 2.8
Paid-in capital...................................... 407.6 407.6
Net unrealized capital gains (losses)................ 132.5 (189.0)
Retained earnings.................................... 1,040.1 867.1
--------- ---------
Total shareholder's equity....................... 1,583.0 1,088.5
--------- ---------
Total liabilities and shareholder's equity..... $27,144.9 $20,934.1
--------- ---------
--------- ---------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-4
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(millions)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Shareholder's equity, beginning of year................ $ 1,088.5 $ 1,246.7 $ 990.1
Net change in unrealized capital gains (losses)........ 321.5 (303.5) 113.7
Net income............................................. 175.9 145.3 142.9
Common stock dividends declared........................ (2.9) -- --
--------- --------- ---------
Shareholder's equity, end of year...................... $ 1,583.0 $ 1,088.5 $ 1,246.7
--------- --------- ---------
--------- --------- ---------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-5
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Consolidated Statements of Cash Flows
(millions)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income........................................... $ 175.9 $ 145.3 $ 142.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income.............. (33.3) (17.5) (11.1)
Decrease (increase) in premiums due and other
receivables....................................... 25.4 1.3 (5.6)
Increase in policy loans........................... (89.9) (46.0) (36.4)
Increase in deferred policy acquisition costs...... (177.0) (105.9) (60.5)
Decrease in reinsurance loan to affiliate.......... 34.8 27.8 31.8
Net increase in universal life account balances.... 393.4 164.7 126.4
Increase in other insurance reserve liabilities.... 79.0 75.1 86.1
Net increase in other liabilities and other
assets............................................ 15.0 53.9 7.0
Decrease in federal income taxes................... (6.5) (11.7) (3.7)
Net accretion of discount on bonds................. (66.4) (77.9) (88.1)
Net realized capital gains......................... (41.3) (1.5) (9.5)
Other, net......................................... -- (1.0) 0.2
---------- ---------- ----------
Net cash provided by operating activities........ 309.1 206.6 179.5
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale................. 4,207.2 3,593.8 473.9
Equity securities.................................. 180.8 93.1 89.6
Mortgage loans..................................... 10.7 -- --
Limited partnership................................ 26.6 -- --
Investment maturities and collections of:
Debt securities available for sale................. 583.9 1,289.2 2,133.3
Short-term investments............................. 106.1 30.4 19.7
Cost of investment purchases in:
Debt securities.................................... (6,034.0) (5,621.4) (3,669.2)
Equity securities.................................. (170.9) (162.5) (157.5)
Short-term investments............................. (24.7) (106.1) (41.3)
Mortgage loans..................................... (21.3) -- --
Limited partnership................................ -- (25.0) --
---------- ---------- ----------
Net cash used for investing activities........... (1,135.6) (908.5) (1,151.5)
---------- ---------- ----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment
contracts........................................... 1,884.5 1,737.8 2,117.8
Withdrawals of investment contracts.................. (1,109.6) (948.7) (1,000.3)
Dividends paid to shareholder........................ (2.9) -- --
---------- ---------- ----------
Net cash provided by financing activities........ 772.0 789.1 1,117.5
---------- ---------- ----------

Net (decrease) increase in cash and cash equivalents... (54.5) 87.2 145.5
Cash and cash equivalents, beginning of year........... 623.3 536.1 390.6
---------- ---------- ----------
Cash and cash equivalents, end of year................. $ 568.8 $ 623.3 $ 536.1
---------- ---------- ----------
---------- ---------- ----------
Supplemental cash flow information:
Income taxes paid, net............................... $ 90.2 $ 82.6 $ 79.9
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-6
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements
December 31, 1995, 1994, and 1993

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Aetna Life Insurance and Annuity Company and its wholly owned subsidiaries
(collectively, the "Company") is a provider of financial services and life
insurance products in the United States. The Company has two business segments,
financial services and life insurance.

The financial services products include individual and group annuity contracts
which offer a variety of funding and distribution options for personal and
employer-sponsored retirement plans that qualify under Internal Revenue Code
Sections 401, 403, 408 and 457, and individual and group non-qualified annuity
contracts. These contracts may be immediate or deferred and are offered
primarily to individuals, pension plans, small businesses and employer-sponsored
groups in the health care, government, education (collectively "not-for-profit"
organizations) and corporate markets. Financial services also include pension
plan administrative services.

The life insurance products include universal life, variable universal life,
interest sensitive whole life and term insurance. These products are offered
primarily to individuals, small businesses, employer sponsored groups and
executives of Fortune 2000 companies.

BASIS OF PRESENTATION

The consolidated financial statements include Aetna Life Insurance and Annuity
Company and its wholly owned subsidiaries, Aetna Insurance Company of America
and Aetna Private Capital, Inc. Aetna Life Insurance and Annuity Company is a
wholly owned subsidiary of Aetna Retirement Services, Inc. ("ARSI"). ARSI is a
wholly owned subsidiary of Aetna Life and Casualty Company ("Aetna"). Two
subsidiaries, Systematized Benefits Administrators, Inc. ("SBA"), and Aetna
Investment Services, Inc. ("AISI"), which were previously reported in the
consolidated financial statements were distributed in the form of dividends to
ARSI in December of 1995. The impact to the Company's financial statements of
distributing these dividends was immaterial.

The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Intercompany transactions have been
eliminated. Certain reclassifications have been made to 1994 and 1993 financial
information to conform to the 1995 presentation.

ACCOUNTING CHANGES

Accounting for Certain Investments in Debt and Equity Securities

On December 31, 1993, the Company adopted Financial Accounting Standard ("FAS")
No. 115, Accounting for Certain Investments in Debt and Equity Securities, which
requires the classification of debt securities into three categories: "held to
maturity", which are carried at amortized cost; "available for sale", which are
carried at fair value with changes in fair value recognized as a component of
shareholder's equity; and "trading", which are carried at fair value with
immediate recognition in income of changes in fair value.

Initial adoption of this standard resulted in a net increase of $106.8 million,
net of taxes of $57.5 million, to net unrealized gains in shareholder's equity.
These amounts exclude gains and losses allocable to experience-rated (including
universal life) contractholders. Adoption of FAS No. 115 did not have a material
effect on deferred policy acquisition costs.

F-7
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from reported results using those estimates.

CASH AND CASH EQUIVALENT

Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of ninety days or less when purchased.

INVESTMENTS

Debt Securities

At December 31, 1995 and 1994, all of the Company's debt securities are
classified as available for sale and carried at fair value. These securities are
written down (as realized losses) for other than temporary decline in value.
Unrealized gains and losses related to these securities, after deducting amounts
allocable to experience-rated contractholders and related taxes, are reflected
in shareholder's equity.

Fair values for debt securities are based on quoted market prices or dealer
quotations. Where quoted market prices or dealer quotations are not available,
fair values are measured utilizing quoted market prices for similar securities
or by using discounted cash flow methods. Cost for mortgage-backed securities is
adjusted for unamortized premiums and discounts, which are amortized using the
interest method over the estimated remaining term of the securities, adjusted
for anticipated prepayments.

Purchases and sales of debt securities are recorded on the trade date.

Equity Securities

Equity securities are classified as available for sale and carried at fair value
based on quoted market prices or dealer quotations. Equity securities are
written down (as realized losses) for other than temporary declines in value.
Unrealized gains and losses related to such securities are reflected in
shareholder's equity. Purchases and sales are recorded on the trade date.

The investment in affiliated mutual funds represents an investment in the Aetna
Series Fund, Inc., a retail mutual fund which has been seeded by the Company,
and is carried at fair value.

Mortgage Loans and Policy Loans

Mortgage loans and policy loans are carried at unpaid principal balances net of
valuation reserves, which approximates fair value, and are generally secured.
Purchases and sales of mortgage loans are recorded on the closing date.

F-8
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Limited Partnership

The Company's limited partnership investment was carried at the amount invested
plus the Company's share of undistributed operating results and unrealized gains
(losses), which approximates fair value. The Company disposed of the limited
partnership during 1995.

Short-Term Investments

Short-term investments, consisting primarily of money market instruments and
other debt issues purchased with an original maturity of over ninety days and
less than one year, are considered available for sale and are carried at fair
value, which approximates amortized cost.

DEFERRED POLICY ACQUISITION COSTS

Certain costs of acquiring insurance business have been deferred. These costs,
all of which vary with and are primarily related to the production of new
business, consist principally of commissions, certain expenses of underwriting
and issuing contracts and certain agency expenses. For fixed ordinary life
contracts, such costs are amortized over expected premium-paying periods. For
universal life and certain annuity contracts, such costs are amortized in
proportion to estimated gross profits and adjusted to reflect actual gross
profits. These costs are amortized over twenty years for annuity pension
contracts, and over the contract period for universal life contracts.

Deferred policy acquisition costs are written off to the extent that it is
determined that future policy premiums and investment income or gross profits
would not be adequate to cover related losses and expenses.

INSURANCE RESERVE LIABILITIES

The Company's liabilities include reserves related to fixed ordinary life, fixed
universal life and fixed annuity contracts. Reserves for future policy benefits
for fixed ordinary life contracts are computed on the basis of assumed
investment yield, assumed mortality, withdrawals and expenses, including a
margin for adverse deviation, which generally vary by plan, year of issue and
policy duration. Reserve interest rates range from 2.25% to 10.00%. Assumed
investment yield is based on the Company's experience. Mortality and withdrawal
rate assumptions are based on relevant Aetna experience and are periodically
reviewed against both industry standards and experience.

Reserves for fixed universal life (included in Future Policy Benefits) and fixed
deferred annuity contracts (included in Policyholders' Funds Left With the
Company) are equal to the fund value. The fund value is equal to cumulative
deposits less charges plus credited interest thereon, without reduction for
possible future penalties assessed on premature withdrawal. For guaranteed
interest options, the interest credited ranged from 4.00% to 6.38% in 1995 and
4.00% to 5.85% in 1994. For all other fixed options, the interest credited
ranged from 5.00% to 7.00% in 1995 and 5.00% to 7.50% in 1994.

Reserves for fixed annuity contracts in the annuity period and for future
amounts due under settlement options are computed actuarially using the 1971
Individual Annuity Mortality Table, the 1983 Individual Annuity Mortality Table,
the

F-9
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1983 Group Annuity Mortality Table and, in some cases, mortality improvement
according to scales G and H, at assumed interest rates ranging from 3.5% to
9.5%. Reserves relating to contracts with life contingencies are included in
Future Policy Benefits. For other contracts, the reserves are reflected in
Policyholders' Funds Left With the Company.

Unpaid claims for all lines of insurance include benefits for reported losses
and estimates of benefits for losses incurred but not reported.

PREMIUMS, CHARGES ASSESSED AGAINST POLICYHOLDERS, BENEFITS AND EXPENSES

Premiums are recorded as revenue when due for fixed ordinary life contracts.
Charges assessed against policyholders' funds for cost of insurance, surrender
charges, actuarial margin and other fees are recorded as revenue for universal
life and certain annuity contracts. Policy benefits and expenses are recorded in
relation to the associated premiums or gross profit so as to result in
recognition of profits over the expected lives of the contracts.

SEPARATE ACCOUNTS

Assets held under variable universal life, variable life and variable annuity
contracts are segregated in Separate Accounts and are invested, as designated by
the contractholder or participant under a contract, in shares of Aetna Variable
Fund, Aetna Income Shares, Aetna Variable Encore Fund, Aetna Investment Advisers
Fund, Inc., Aetna GET Fund, or The Aetna Series Fund Inc., which are managed by
the Company or other selected mutual funds not managed by the Company. Separate
Accounts assets and liabilities are carried at fair value except for those
relating to a guaranteed interest option which is offered through a Separate
Account. The assets of the Separate Account supporting the guaranteed interest
option are carried at an amortized cost of $322.2 million for 1995 (fair value
$343.9 million) and $149.7 million for 1994 (fair value $146.3 million), since
the Company bears the investment risk where the contract is held to maturity.
Reserves relating to the guaranteed interest option are maintained at fund value
and reflect interest credited at rates ranging from 4.5% to 8.38% in both 1995
and 1994. Separate Accounts assets and liabilities are shown as separate
captions in the Consolidated Balance Sheets. Deposits, investment income and net
realized and unrealized capital gains (losses) of the Separate Accounts are not
reflected in the Consolidated Statements of Income (with the exception of
realized capital gains (losses) on the sale of assets supporting the guaranteed
interest option). The Consolidated Statements of Cash Flows do not reflect
investment activity of the Separate Accounts.

FEDERAL INCOME TAXES

The Company is included in the consolidated federal income tax return of Aetna.
The Company is taxed at regular corporate rates after adjusting income reported
for financial statement purposes for certain items. Deferred income tax benefits
result from changes during the year in cumulative temporary differences between
the tax basis and book basis of assets and liabilities.

F-10
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

2. INVESTMENTS
Investments in debt securities available for sale as of December 31, 1995 were
as follows:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government agencies and corporations... $ 539.5 $ 47.5 $ -- $ 587.0
Obligations of states and political
subdivisions................................ 41.4 12.4 -- 53.8
U.S. Corporate securities:
Financial.................................. 2,764.4 110.3 2.1 2,872.6
Utilities.................................. 454.4 27.8 1.0 481.2
Other...................................... 2,177.7 159.5 1.2 2,336.0
--------- ---------- ----- ---------
Total U.S. Corporate securities............ 5,396.5 297.6 4.3 5,689.8
Foreign securities:
Government................................. 316.4 26.1 2.0 340.5
Financial.................................. 534.2 45.4 3.5 576.1
Utilities.................................. 236.3 32.9 -- 269.2
Other...................................... 215.7 15.1 -- 230.8
--------- ---------- ----- ---------
Total Foreign securities................... 1,302.6 119.5 5.5 1,416.6
Residential mortgage-backed securities:
Residential pass-throughs.................. 556.7 99.2 1.8 654.1
Residential CMOs........................... 2,383.9 167.6 2.2 2,549.3
--------- ---------- ----- ---------
Total Residential mortgage-backed
securities................................ 2,940.6 266.8 4.0 3,203.4
Commercial/Multifamily mortgage-backed
securities.................................. 741.9 32.3 0.2 774.0
--------- ---------- ----- ---------
Total Mortgage-backed securities........... 3,682.5 299.1 4.2 3,977.4
Other asset-backed securities................ 961.2 35.5 0.5 996.2
--------- ---------- ----- ---------
Total debt securities available for sale..... $11,923.7 $811.6 $14.5 $12,720.8
--------- ---------- ----- ---------
--------- ---------- ----- ---------
</TABLE>

F-11
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

2. INVESTMENTS (CONTINUED)
Investments in debt securities available for sale as of December 31, 1994 were
as follows:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government agencies and corporations... $ 1,396.1 $ 2.0 $ 84.2 $ 1,313.9
Obligations of states and political
subdivisions................................ 37.9 1.2 -- 39.1
U.S. Corporate securities:
Financial.................................. 2,216.9 3.8 109.4 2,111.3
Utilities.................................. 100.1 -- 7.9 92.2
Other...................................... 1,344.3 6.0 67.9 1,282.4
--------- ---------- ---------- ---------
Total U.S. Corporate securities............ 3,661.3 9.8 185.2 3,485.9
Foreign securities:
Government................................. 434.4 1.2 33.9 401.7
Financial.................................. 368.2 1.1 23.0 346.3
Utilities.................................. 204.4 2.5 9.5 197.4
Other...................................... 46.3 0.8 1.5 45.6
--------- ---------- ---------- ---------
Total Foreign securities................... 1,053.3 5.6 67.9 991.0
Residential mortgage-backed securities:
Residential pass-throughs.................. 627.1 81.5 5.0 703.6
Residential CMOs........................... 2,671.0 32.9 139.4 2,564.5
--------- ---------- ---------- ---------
Total Residential mortgage-backed
securities.................................. 3,298.1 114.4 144.4 3,268.1
Commercial/Multifamily mortgage-backed
securities.................................. 435.0 0.2 21.3 413.9
--------- ---------- ---------- ---------
Total Mortgage-backed securities............. 3,733.1 114.6 165.7 3,682.0
Other asset-backed securities................ 696.1 0.2 16.8 679.5
--------- ---------- ---------- ---------
Total debt securities available for sale..... $10,577.8 $133.4 $519.8 $10,191.4
--------- ---------- ---------- ---------
--------- ---------- ---------- ---------
</TABLE>

At December 31, 1995 and 1994, net unrealized appreciation (depreciation) of
$797.1 million and $(386.4) million, respectively, on available for sale debt
securities included $619.1 million and $(308.6) million, respectively, related
to experience-rated contractholders, which were not included in shareholder's
equity.

F-12
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

2. INVESTMENTS (CONTINUED)
The amortized cost and fair value of debt securities for the year ended December
31, 1995 are shown below by contractual maturity. Actual maturities may differ
from contractual maturities because securities may be restructured, called, or
prepaid.

<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- ---------
(MILLIONS)
<S> <C> <C>
Due to mature:
One year or less..................................... $ 348.8 $ 351.1
After one year through five years.................... 2,100.2 2,159.5
After five years through ten years................... 2,516.0 2,663.4
After ten years...................................... 2,315.0 2,573.2
Mortgage-backed securities........................... 3,682.5 3,977.4
Other asset-backed securities........................ 961.2 996.2
--------- ---------
Total................................................ $11,923.7 $12,720.8
--------- ---------
--------- ---------
</TABLE>

The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Cash
collateral, which is in excess of the market value of the loaned securities, is
deposited by the borrower with a lending agent, and retained and invested by the
lending agent to generate additional income for the Company. The market value of
the loaned securities is monitored on a daily basis with additional collateral
obtained or refunded as the market value fluctuates. At December 31, 1995, the
Company had loaned securities (which are reflected as invested assets on the
Consolidated Balance Sheets) with a market value of approximately $264.5
million.

At December 31, 1995 and 1994, debt securities carried at $7.4 million and $7.0
million, respectively, were on deposit as required by regulatory authorities.

The valuation reserve for mortgage loans was $3.1 million at December 31, 1994.
There was no valuation reserve for mortgage loans at December 31, 1995. The
carrying value of non-income producing investments was $0.1 million and $0.2
million at December 31, 1995 and 1994, respectively.

F-13
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

2. INVESTMENTS (CONTINUED)
Investments in a single issuer, other than obligations of the U.S. government,
with a carrying value in excess of 10% of the Company's shareholder's equity at
December 31, 1995 are as follows:

<TABLE>
<CAPTION>
AMORTIZED
DEBT SECURITIES COST FAIR VALUE
---------- ----------
(MILLIONS)
<S> <C> <C>
General Electric Corporation........................... $ 314.9 $ 329.3
General Motors Corporation............................. 273.9 284.5
Associates Corporation of North America................ 230.2 239.1
Society National Bank.................................. 203.5 222.3
Ciesco, L.P............................................ 194.9 194.9
Countrywide Funding.................................... 171.2 172.7
Baxter International................................... 168.9 168.9
Time Warner............................................ 158.6 166.1
Ford Motor Company..................................... 156.7 162.6
</TABLE>

The portfolio of debt securities at December 31, 1995 and 1994 included $662.5
million and $318.3 million, respectively, (5% and 3%, respectively, of the debt
securities) of investments that are considered "below investment grade". "Below
investment grade" securities are defined to be securities that carry a rating
below BBB-/Baa3, by Standard & Poors/ Moody's Investor Services, respectively.
The increase in below investment grade securities is the result of a change in
investment strategy, which has reduced the Company's holdings in residential
mortgage-back securities and increased the Company's holdings in corporate
securities. Residential mortgage-back securities are subject to higher
prepayment risk and lower credit risk, while corporate securities earning a
comparable yield are subject to higher credit risk and lower prepayment risk. We
expect the percentage of below investment grade securities will increase in
1996, but we expect that the overall average quality of the portfolio of debt
securities will remain at AA-. Of these below investment grade assets, $14.5
million and $31.8 million, at December 31, 1995 and 1994, respectively, were
investments that were purchased at investment grade, but whose ratings have
since been downgraded.

Included in residential mortgage-back securities are collateralized mortgage
obligations ("CMOs") with carrying values of $2.5 billion and $2.6 billion at
December 31, 1995 and 1994, respectively. The principal risks inherent in
holding CMOs are prepayment and extension risks related to dramatic decreases
and increases in interest rates whereby the CMOs would be subject to repayments
of principal earlier or later than originally anticipated. At December 31, 1995
and 1994, approximately 79% and 85%, respectively, of the Company's CMO holdings
consisted of sequential and planned amortization class debt securities which are
subject to less prepayment and extension risk than other CMO instruments. At
December 31, 1995 and 1994, approximately 81% and 82%, respectively, of the
Company's CMO holdings were collateralized by residential mortgage loans, on
which the timely payment of principal and interest was backed by specified
government agencies (e.g., GNMA, FNMA, FHLMC).

If due to declining interest rates, principal was to be repaid earlier than
originally anticipated, the Company could be affected by a decrease in
investment income due to the reinvestment of these funds at a lower interest
rate. Such prepayments may result in a duration mismatch between assets and
liabilities which could be corrected as cash from prepayments could be
reinvested at an appropriate duration to adjust the mismatch.

F-14
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

2. INVESTMENTS (CONTINUED)
Conversely, if due to increasing interest rates, principal was to be repaid
slower than originally anticipated, the Company could be affected by a decrease
in cash flow which reduces the ability to reinvest expected principal repayments
at higher interest rates. Such slower payments may result in a duration mismatch
between assets and liabilities which could be corrected as available cash flow
could be reinvested at an appropriate duration to adjust the mismatch.

At December 31, 1995 and 1994, approximately 3% and 4%, respectively, of the
Company's CMO holdings consisted of interest-only strips ("IOs") or
principal-only strips ("POs"). IOs receive payments of interest and POs receive
payments of principal on the underlying pool of mortgages. The risk inherent in
holding POs is extension risk related to dramatic increases in interest rates
whereby the future payments due on POs could be repaid much slower than
originally anticipated. The extension risks inherent in holding POs was
mitigated somewhat by offsetting positions in IOs. During dramatic increases in
interest rates, IOs would generate more future payments than originally
anticipated.

The risk inherent in holding IOs is prepayment risk related to dramatic
decreases in interest rates whereby future IO cash flows could be much less than
originally anticipated and in some cases could be less than the original cost of
the IO. The risks inherent in IOs are mitigated somewhat by holding offsetting
positions in POs. During dramatic decreases in interest rates POs would generate
future cash flows much quicker than originally anticipated.

Investments in available for sale equity securities were as follows:

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------ ---------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C> <C>
1995
Equity Securities................ $231.6 $ 27.2 $ 1.2 $ 257.6
------ ----- --- ----------
1994
Equity Securities................ $230.5 $ 6.5 $ 7.9 $ 229.1
------ ----- --- ----------
</TABLE>

3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS
Realized capital gains or losses are the difference between proceeds received
from investments sold or prepaid, and amortized cost. Net realized capital gains
as reflected in the Consolidated Statements of Income are after deductions for
net realized capital gains (losses) allocated to experience-rated contracts of
$61.1 million, $(29.1) million and $(54.8) million for the years ended December
31, 1995, 1994, and 1993, respectively. Net realized capital gains (losses)
allocated to experience-rated contracts are deferred and subsequently reflected
in credited rates on an amortized basis. Net unamortized gains (losses),
reflected as a component of Policyholders' Funds Left With the Company, were
$7.3 million and $(50.7) million at the end of December 31, 1995 and 1994,
respectively.

Changes to the mortgage loan valuation reserve and writedowns on debt securities
are included in net realized capital gains (losses) and amounted to $3.1
million, $1.1 million and $(98.5) million, of which $2.2 million, $0.8 million
and $(91.5) million were allocable to experience-rated contractholders, for the
years ended December 31, 1995, 1994 and 1993, respectively. The 1993 losses were
primarily related to writedowns of interest-only mortgage-backed securities to
their fair value.

F-15
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (CONTINUED)
Net realized capital gains (losses) on investments, net of amounts allocated to
experience-rated contracts, were as follows:

<TABLE>
<CAPTION>
1995 1994 1993
----- ----- ------
(MILLIONS)
<S> <C> <C> <C>
Debt securities........................................ $32.8 $ 1.0 $ 9.6
Equity securities...................................... 8.3 0.2 0.1
Mortgage loans......................................... 0.2 0.3 (0.2)
----- ----- ------
Pretax realized capital gains.......................... $41.3 $ 1.5 $ 9.5
----- ----- ------
After-tax realized capital gains....................... $25.8 $ 1.0 $ 6.2
----- ----- ------
</TABLE>

Gross gains of $44.6 million, $26.6 million and $33.3 million and gross losses
of $11.8 million, $25.6 million and $23.7 million were realized from the sales
of investments in debt securities in 1995, 1994 and 1993, respectively.

Changes in unrealized capital gains (losses), excluding changes in unrealized
capital gains (losses) related to experience-rated contracts, for the years
ended December 31, were as follows:

<TABLE>
<CAPTION>
1995 1994 1993
------ -------- ------
(MILLIONS)
<S> <C> <C> <C>
Debt securities........................................ $255.9 $ (242.1) $164.3
Equity securities...................................... 27.3 (13.3) 10.6
Limited partnership.................................... 1.8 (1.8) --
------ -------- ------
285.0 (257.2) 174.9
Deferred federal income taxes (See Note 6)............. (36.5) 46.3 61.2
------ -------- ------
Net change in unrealized capital gains (losses)........ $321.5 $ (303.5) $113.7
------ -------- ------
------ -------- ------
</TABLE>

Net unrealized capital gains (losses) allocable to experience-rated contracts of
$515.0 million and $104.1 million at December 31, 1995 and $(260.9) million and
$(47.7) million at December 31, 1994 are reflected on the Consolidated Balance
Sheet in Policyholders' Funds Left With the Company and Future Policy Benefits,
respectively, and are not included in shareholder's equity.

F-16
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

3. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (CONTINUED)
Shareholder's equity included the following unrealized capital gains (losses),
which are net of amounts allocable to experience-rated contractholders, at
December 31:

<TABLE>
<CAPTION>
1995 1994 1993
------ ------- -------
(MILLIONS)
<S> <C> <C> <C>
Debt securities
Gross unrealized capital gains....................... $179.3 $ 27.4 $ 164.3
Gross unrealized capital losses...................... (1.3) (105.2) --
------ ------- -------
178.0 (77.8) 164.3
Equity securities
Gross unrealized capital gains....................... 27.2 6.5 12.0
Gross unrealized capital losses...................... (1.2) (7.9) (0.1)
------ ------- -------
26.0 (1.4) 11.9
Limited Partnership
Gross unrealized capital gains....................... -- -- --
Gross unrealized capital losses...................... -- (1.8) --
------ ------- -------
Deferred federal income taxes (See Note 6)............. 71.5 108.0 61.7
------ ------- -------
Net unrealized capital gains (losses).................. $132.5 $(189.0) $ 114.5
------ ------- -------
------ ------- -------
</TABLE>

4. NET INVESTMENT INCOME
Sources of net investment income were as follows:

<TABLE>
<CAPTION>
1995 1994 1993
-------- ------ ------
(MILLIONS)
<S> <C> <C> <C>
Debt securities........................................ $ 891.5 $823.9 $828.0
Preferred stock........................................ 4.2 3.9 2.3
Investment in affiliated mutual funds.................. 14.9 5.2 2.9
Mortgage loans......................................... 1.4 1.4 1.5
Policy loans........................................... 13.7 11.5 10.8
Reinsurance loan to affiliate.......................... 46.5 51.5 53.3
Cash equivalents....................................... 38.9 29.5 16.8
Other.................................................. 8.4 6.7 7.7
-------- ------ ------
Gross investment income................................ 1,019.5 933.6 923.3
Less investment expenses............................... (15.2) (16.4) (11.4)
-------- ------ ------
Net investment income.................................. $1,004.3 $917.2 $911.9
-------- ------ ------
-------- ------ ------
</TABLE>

Net investment income includes amounts allocable to experience-rated
contractholders of $744.2 million, $677.1 million and $661.3 million for the
years ended December 31, 1995, 1994 and 1993, respectively. Interest credited to
contractholders is included in Current and Future Benefits.

F-17
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY
The Company distributed $2.9 million in the form of dividends of two of its
subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995.

The amount of dividends that may be paid to the shareholder in 1996 without
prior approval by the Insurance Commissioner of the State of Connecticut is
$70.0 million.

The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and shareholder's equity those amounts determined in
conformity with statutory accounting practices prescribed or permitted by the
Department, which differ in certain respects from generally accepted accounting
principles. Statutory net income was $70.0 million, $64.9 million and $77.6
million for the years ended December 31, 1995, 1994 and 1993, respectively.
Statutory shareholder's equity was $670.7 million and $615.0 million as of
December 31, 1995 and 1994, respectively.

At December 31, 1995 and December 31, 1994, the Company does not utilize any
statutory accounting practices which are not prescribed by insurance regulators
that, individually or in the aggregate, materially affect statutory
shareholder's equity.

6. FEDERAL INCOME TAXES
The Company is included in the consolidated federal income tax return of Aetna.
Aetna allocates to each member an amount approximating the tax it would have
incurred were it not a member of the consolidated group, and credits the member
for the use of its tax saving attributes in the consolidated return.

In August 1993, the Omnibus Budget Reconciliation Act of 1993 (OBRA) was enacted
which resulted in an increase in the federal corporate tax rate from 34% to 35%
retroactive to January 1, 1993. The enactment of OBRA resulted in an increase in
the deferred tax liability of $3.4 million at date of enactment, which is
included in the 1993 deferred tax expense.

Components of income tax expense (benefits) were as follows:

<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -------
(MILLIONS)
<S> <C> <C> <C>
Current taxes (benefits):
Income from operations............................... $82.9 $78.7 $ 87.1
Net realized capital gains........................... 28.5 (33.2) 18.1
----- ----- -------
111.4 45.5 105.2
----- ----- -------
Deferred taxes (benefits):
Income from operations............................... (14.4) (8.0) (14.2)
Net realized capital gains........................... (12.9) 33.7 (14.8)
----- ----- -------
(27.3) 25.7 (29.0)
----- ----- -------
Total................................................ $84.1 $71.2 $ 76.2
----- ----- -------
----- ----- -------
</TABLE>

F-18
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

6. FEDERAL INCOME TAXES (CONTINUED)
Income tax expense was different from the amount computed by applying the
federal income tax rate to income before federal income taxes for the following
reasons:

<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
(MILLIONS)
<S> <C> <C> <C>
Income before federal income taxes..................... $260.0 $216.5 $219.1
Tax rate............................................... 35% 35% 35%
------ ------ ------
Application of the tax rate............................ 91.0 75.8 76.7
------ ------ ------
Tax effect of:
Excludable dividends................................. (9.3) (8.6) (8.7)
Tax reserve adjustments.............................. 3.9 2.9 4.7
Reinsurance transaction.............................. (0.5) 1.9 (0.2)
Tax rate change on deferred liabilities.............. -- -- 3.7
Other, net........................................... (1.0) (0.8) --
------ ------ ------
Income tax expense................................... $ 84.1 $ 71.2 $ 76.2
------ ------ ------
------ ------ ------
</TABLE>

The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31 are presented below:

<TABLE>
<CAPTION>
1995 1994
------ ------
(MILLIONS)
<S> <C> <C>
Deferred tax assets:
Insurance reserves................................... $290.4 $211.5
Net unrealized capital losses........................ -- 136.3
Unrealized gains allocable to experience-rated
contracts........................................... 216.7 --
Investment losses not currently deductible........... 7.3 15.5
Postretirement benefits other than pensions.......... 7.7 8.4
Other................................................ 32.0 28.3
------ ------
Total gross assets..................................... 554.1 400.0
Less valuation allowance............................... -- 136.3
------ ------
Deferred tax assets, net of valuation.................. 554.1 263.7
Deferred tax liabilities:
Deferred policy acquisition costs.................... 433.0 385.2
Unrealized losses allocable to experience-rated
contracts........................................... -- 108.0
Market discount...................................... 4.4 3.6
Net unrealized capital gains......................... 288.2 --
Other................................................ (1.9) 0.4
------ ------
Total gross liabilities................................ 723.7 497.2
------ ------
Net deferred tax liability............................. $169.6 $233.5
------ ------
------ ------
</TABLE>

F-19
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

6. FEDERAL INCOME TAXES (CONTINUED)
Net unrealized capital gains and losses are presented in shareholder's equity
net of deferred taxes. At December 31, 1994, $81.0 million of net unrealized
capital losses were reflected in shareholder's equity without deferred tax
benefits. As of December 31, 1995, no valuation allowance was required for
unrealized capital gains and losses. The reversal of the valuation allowance had
no impact on net income in 1995.

The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that has
not been subject to taxation. As of December 31, 1983, no further additions
could be made to the Policyholders' Surplus Account for tax return purposes
under the Deficit Reduction Act of 1984. The balance in such account was
approximately $17.2 million at December 31, 1995. This amount would be taxed
only under certain conditions. No income taxes have been provided on this amount
since management believes the conditions under which such taxes would become
payable are remote.

The Internal Revenue Service ("Service") has completed examinations of the
consolidated federal income tax returns of Aetna through 1986. Discussions are
being held with the Service with respect to proposed adjustments. However,
management believes there are adequate defenses against, or sufficient reserves
to provide for, such challenges. The Service has commenced its examinations for
the years 1987 through 1990.

7. BENEFIT PLANS
Employee Pension Plans--The Company, in conjunction with Aetna, has
non-contributory defined benefit pension plans covering substantially all
employees. The plans provide pension benefits based on years of service and
average annual compensation (measured over sixty consecutive months of highest
earnings in a 120 month period). Contributions are determined using the
Projected Unit Credit Method and, for qualified plans subject to ERISA
requirements, are limited to the amounts that are currently deductible for tax
reporting purposes. The accumulated benefit obligation and plan assets are
recorded by Aetna. The accumulated plan assets exceed accumulated plan benefits.
There has been no funding to the plan for the years 1993 through 1995, and
therefore, no expense has been recorded by the Company.

Agent Pension Plans--The Company, in conjunction with Aetna, has a non-qualified
pension plan covering certain agents. The plan provides pension benefits based
on annual commission earnings. The accumulated plan assets exceed accumulated
plan benefits. There has been no funding to the plan for the years 1993 through
1995, and therefore, no expense has been recorded by the Company.

Employee Postretirement Benefits--In addition to providing pension benefits,
Aetna also provides certain postretirement health care and life insurance
benefits, subject to certain caps, for retired employees. Medical and dental
benefits are offered to all full-time employees retiring at age 50 with at least
15 years of service or at age 65 with at least 10 years of service. Retirees are
required to contribute to the plans based on their years of service with Aetna.

The cost to the Company associated with the Aetna postretirement plans for 1995,
1994 and 1993 were $1.4 million, $1.0 million and $0.8 million, respectively.

Agent Postretirement Benefits--The Company, in conjunction with Aetna, also
provides certain postemployment health care and life insurance benefits for
certain agents.

F-20
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

7. BENEFIT PLANS (CONTINUED)

The cost to the Company associated to the agents' postretirement plans for 1995,
1994 and 1993 were $0.8 million, $0.7 million and $0.6 million, respectively.

Incentive Savings Plan--Substantially all employees are eligible to participate
in a savings plan under which designated contributions, which may be invested in
common stock of Aetna or certain other investments, are matched, up to 5% of
compensation, by Aetna. Pretax charges to operations for the incentive savings
plan were $4.9 million, $3.3 million and $3.1 million in 1995, 1994 and 1993,
respectively.

Stock Plans--Aetna has a stock incentive plan that provides for stock options
and deferred contingent common stock or cash awards to certain key employees.
Aetna also has a stock option plan under which executive and middle management
employees of Aetna may be granted options to purchase common stock of Aetna at
the market price on the date of grant or, in connection with certain business
combinations, may be granted options to purchase common stock on different
terms. The cost to the Company associated with the Aetna stock plans for 1995,
1994 and 1993, was $6.3 million, $1.7 million and $0.4 million, respectively.

8. RELATED PARTY TRANSACTIONS
The Company is compensated by the Separate Accounts for bearing mortality and
expense risks pertaining to variable life and annuity contracts. Under the
insurance contracts, the Separate Accounts pay the Company a daily fee which, on
an annual basis, ranges, depending on the product, from .25% to 1.80% of their
average daily net assets. The Company also receives fees from the variable life
and annuity mutual funds and The Aetna Series Fund for serving as investment
adviser. Under the advisory agreements, the Funds pay the Company a daily fee
which, on an annual basis, ranges, depending on the fund, from .25% to 1.00% of
their average daily net assets. The advisory agreements also call for the
variable funds to pay their own administrative expenses and for The Aetna Series
Fund to pay certain administrative expenses. The Company also receives fees
(expressed as a percentage of the average daily net assets) from The Aetna
Series Fund for providing administration, shareholder services and promoting
sales. The amount of compensation and fees received from the Separate Accounts
and Funds, included in Charges Assessed Against Policyholders, amounted to
$128.1 million, $104.6 million and $93.6 million in 1995, 1994 and 1993,
respectively. The Company may waive advisory fees at its discretion.

The Company may, from time to time, make reimbursements to a Fund for some or
all of its operating expenses. Reimbursement arrangements may be terminated at
any time without notice.

Since 1981, all domestic individual non-participating life insurance of Aetna
and its subsidiaries has been issued by the Company. Effective December 31,
1988, the Company entered into a reinsurance agreement with Aetna Life Insurance
Company ("Aetna Life") in which substantially all of the non-participating
individual life and annuity business written by Aetna Life prior to 1981 was
assumed by the Company. A $108.0 million commission, paid by the Company to
Aetna Life in 1988, was capitalized as deferred policy acquisition costs. The
Company maintained insurance reserves of $655.5 million and $690.3 million as of
December 31, 1995 and 1994, respectively, relating to the business assumed. In
consideration for the assumption of this business, a loan was established
relating to the assets held by Aetna Life which support the insurance reserves.
The loan is being reduced in accordance with the decrease in the reserves. The
fair value of this loan was $663.5 million and $630.3 million as of December 31,
1995 and 1994, respectively, and is based upon the fair value of the underlying
assets. Premiums of $28.0 million, $32.8 million and $33.3 million and current
and future benefits of $43.0 million, $43.8 million and $55.4 million were
assumed in 1995, 1994 and 1993, respectively.

F-21
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

8. RELATED PARTY TRANSACTIONS (CONTINUED)
Investment income of $46.5 million, $51.5 million and $53.3 million was
generated from the reinsurance loan to affiliate in 1995, 1994 and 1993,
respectively. Net income of approximately $18.4 million, $25.1 million and $13.6
million resulted from this agreement in 1995, 1994 and 1993, respectively.

On December 16, 1988, the Company assumed $25.0 million of premium revenue from
Aetna Life for the purchase and administration of a life contingent single
premium variable payout annuity contract. In addition, the Company also is
responsible for administering fixed annuity payments that are made to annuitants
receiving variable payments. Reserves of $28.0 million and $24.2 million were
maintained for this contract as of December 31, 1995 and 1994, respectively.

Effective February 1, 1992, the Company increased its retention limit per
individual life to $2.0 million and entered into a reinsurance agreement with
Aetna Life to reinsure amounts in excess of this limit, up to a maximum of $8.0
million on any new individual life business, on a yearly renewable term basis.
Premium amounts related to this agreement were $3.2 million, $1.3 million and
$0.6 million for 1995, 1994 and 1993, respectively.

The Company received no capital contributions in 1995, 1994 or 1993.

The Company distributed $2.9 million in the form of dividends of two of its
subsidiaries, SBA and AISI, to Aetna Retirement Services, Inc. in 1995.

Premiums due and other receivables include $5.7 million and $27.6 million due
from affiliates in 1995 and 1994, respectively. Other liabilities include $12.4
million and $27.9 million due to affiliates for 1995 and 1994, respectively.

Substantially all of the administrative and support functions of the Company are
provided by Aetna and its affiliates. The financial statements reflect allocated
charges for these services based upon measures appropriate for the type and
nature of service provided.

9. REINSURANCE
The Company utilizes indemnity reinsurance agreements to reduce its exposure to
large losses in all aspects of its insurance business. Such reinsurance permits
recovery of a portion of losses from reinsurers, although it does not discharge
the primary liability of the Company as direct insurer of the risks reinsured.
The Company evaluates the financial strength of potential reinsurers and
continually monitors the financial condition of reinsurers. Only those
reinsurance recoverables deemed probable of recovery are reflected as assets on
the Company's Consolidated Balance Sheets.

F-22
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

9. REINSURANCE (CONTINUED)
The following table includes premium amounts ceded/assumed to/from affiliated
companies as discussed in Note 8 above.

<TABLE>
<CAPTION>
CEDED TO ASSUMED
DIRECT OTHER FROM OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
--------- ------------- ------------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
1995
Premiums:
Life Insurance....................................... $ 28.8 $ 8.6 $ 28.0 $ 48.2
Accident and Health Insurance........................ 7.5 7.5 -- --
Annuities............................................ 82.1 -- 0.5 82.6
--------- ----- ----- ---------
Total earned premiums................................ $ 118.4 $ 16.1 $ 28.5 $ 130.8
--------- ----- ----- ---------
--------- ----- ----- ---------

1994
Premiums:
Life Insurance....................................... $ 27.3 $ 6.0 $ 32.8 $ 54.1
Accident and Health Insurance........................ 9.3 9.3 -- --
Annuities............................................ 69.9 -- 0.2 70.1
--------- ----- ----- ---------
Total earned premiums................................ $ 106.5 $ 15.3 $ 33.0 $ 124.2
--------- ----- ----- ---------
--------- ----- ----- ---------
1993
Premiums:
Life Insurance....................................... $ 22.4 $ 5.6 $ 33.3 $ 50.1
Accident and Health Insurance........................ 12.9 12.9 -- --
Annuities............................................ 31.3 -- 0.7 32.0
--------- ----- ----- ---------
Total earned premiums................................ $ 66.6 $ 18.5 $ 34.0 $ 82.1
--------- ----- ----- ---------
--------- ----- ----- ---------
</TABLE>

F-23
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

10. FINANCIAL INSTRUMENTS

ESTIMATED FAIR VALUE

The carrying values and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 were as follows:

<TABLE>
<CAPTION>
1995 1994
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- --------- ---------
(MILLIONS)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents................................. $ 568.8 $ 568.8 $ 623.3 $ 623.3
Short-term investments.................................... 15.1 15.1 98.0 98.0
Debt securities........................................... 12,720.8 12,720.8 10,191.4 10,191.4
Equity securities......................................... 257.6 257.6 229.1 229.1
Limited partnership....................................... -- -- 24.4 24.4
Mortgage loans............................................ 21.2 21.9 9.9 9.9

Liabilities:
Investment contract liabilities:
With a fixed maturity................................... 989.1 1,001.2 826.7 833.5
Without a fixed maturity................................ 9,511.0 9,298.4 8,122.6 7,918.2
</TABLE>

Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, such as
estimates of timing and amount of expected future cash flows. Such estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument, nor
do they consider the tax impact of the realization of unrealized gains or
losses. In many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value be realized in
immediate settlement of the instrument. In evaluating the Company's management
of interest rate and liquidity risk, the fair values of all assets and
liabilities should be taken into consideration, not only those above.

The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:

SHORT-TERM INSTRUMENTS: Fair values are based on quoted market prices or dealer
quotations. Where quoted market prices are not available, the carrying amounts
reported in the Consolidated Balance Sheets approximates fair value. Short-term
instruments have a maturity date of one year or less and include cash and cash
equivalents, and short-term investments.

DEBT AND EQUITY SECURITIES: Fair values are based on quoted market prices or
dealer quotations. Where quoted market prices or dealer quotations are not
available, fair value is estimated by using quoted market prices for similar
securities or discounted cash flow methods.

F-24
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

10. FINANCIAL INSTRUMENTS (CONTINUED)
MORTGAGE LOANS: Fair value is estimated by discounting expected mortgage loan
cash flows at market rates which reflect the rates at which similar loans would
be made to similar borrowers. The rates reflect management's assessment of the
credit quality and the remaining duration of the loans. The fair value estimate
of mortgage loans of lower quality, including problem and restructured loans, is
based on the estimated fair value of the underlying collateral.

INVESTMENT CONTRACT LIABILITIES (INCLUDED IN POLICYHOLDERS' FUNDS LEFT WITH THE
COMPANY):

WITH A FIXED MATURITY: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.

WITHOUT A FIXED MATURITY: Fair value is estimated as the amount payable to the
contractholder upon demand. However, the Company has the right under such
contracts to delay payment of withdrawals which may ultimately result in paying
an amount different than that determined to be payable on demand.

OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS (INCLUDING DERIVATIVE FINANCIAL
INSTRUMENTS)

During 1995, the Company received $0.4 million for writing call options on
underlying securities. As of December 31, 1995 there were no option contracts
outstanding.

At December 31, 1995, the Company had a forward swap agreement with a notional
amount of $100.0 million and a fair value of $0.1 million.

The Company did not have transactions in derivative instruments in 1994.

The Company also holds investments in certain debt and equity securities with
derivative characteristics (i.e., including the fact that their market value is
at least partially determined by, among other things, levels of or changes in
interest rates, prepayment rates, equity markets or credit ratings/spreads). The
amortized cost and fair value of these securities, included in the $13.4 billion
investment portfolio, as of December 31, 1995 was as follows:

<TABLE>
<CAPTION>
AMORTIZED FAIR
(MILLIONS) COST VALUE
----------- -----------
<S> <C> <C>
Collateralized mortgage obligations......................... $ 2,383.9 $ 2,549.3
Principal-only strips (included above)...................... 38.7 50.0
Interest-only strips (included above)....................... 10.7 20.7
Structured Notes (1)........................................ 95.0 100.3
</TABLE>

(1) Represents non-leveraged instruments whose fair values and credit risk are
based on underlying securities, including fixed income securities and
interest rate swap agreements.

11. COMMITMENTS AND CONTINGENT LIABILITIES

COMMITMENTS

Through the normal course of investment operations, the Company commits to
either purchase or sell securities or money market instruments at a specified
future date and at a specified price or yield. The inability of counterparties
to honor these commitments may result in either higher or lower replacement
cost. Also, there is likely to be a change in

F-25
<PAGE>
AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly owned subsidiary of Aetna Retirement Services, Inc.)
Notes to Consolidated Financial Statements (continued)
December 31, 1995, 1994, and 1993

11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
the value of the securities underlying the commitments. At December 31, 1995,
the Company had commitments to purchase investments of $31.4 million. The fair
value of the investments at December 31, 1995 approximated $31.5 million. There
were no outstanding forward commitments at December 31, 1994.

LITIGATION

There were no material legal proceedings pending against the Company as of
December 31, 1995 or December 31, 1994 which were beyond the ordinary course of
business. The Company is involved in lawsuits arising, for the most part, in the
ordinary course of its business operations as an insurer.

12. SEGMENT INFORMATION
The Company's operations are reported through two major business segments: Life
Insurance and Financial Services.

Summarized financial information for the Company's principal operations was as
follows:

<TABLE>
<CAPTION>
(MILLIONS) 1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Financial services........................................ $ 1,129.4 $ 946.1 $ 892.8
Life insurance............................................ 407.9 386.1 371.7
----------- ----------- -----------
Total revenue............................................. $ 1,537.3 $ 1,332.2 $ 1,264.5
----------- ----------- -----------
Income before federal income taxes:
Financial services........................................ $ 158.0 $ 119.7 $ 121.1
Life insurance............................................ 102.0 96.8 98.0
----------- ----------- -----------
Total income before federal income taxes.................. $ 260.0 $ 216.5 $ 219.1
----------- ----------- -----------
Net income:
Financial services........................................ $ 113.8 $ 85.5 $ 86.8
Life insurance............................................ 62.1 59.8 56.1
----------- ----------- -----------
Net income.................................................. $ 175.9 $ 145.3 $ 142.9
----------- ----------- -----------
Assets under management, at fair value:
Financial services........................................ $ 23,224.3 $ 17,785.2 $ 16,600.5
Life insurance............................................ 2,698.1 2,171.7 2,175.5
----------- ----------- -----------
Total assets under management............................. $ 25,922.4 $ 19,956.9 $ 18,776.0
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

F-26
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

VARIABLE ANNUITY ACCOUNT C

VARIABLE ANNUITY CONTRACTS ISSUED BY
AETNA LIFE INSURANCE AND ANNUITY COMPANY

FORM NO. ADVANCE -2 ALIAC ED. MAY 1996
USED FOR 75974 AND 75984