VARIABLE ANNUITY ACCT C OF AETNA LIFE INSURANCE & ANNUITY CO
485BPOS, 1997-04-24
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As filed with the Securities and Exchange              Registration No. 33-75974
Commission on April 24, 1997                           Registration No. 811-2513

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

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM N-4

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

                        POST-EFFECTIVE AMENDMENT NO. 7 TO
             REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

                                and Amendment To

         REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

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

     Variable Annuity Account C of Aetna Life Insurance and Annuity Company
     ----------------------------------------------------------------------
                           (Exact Name of Registrant)

                    Aetna Life Insurance and Annuity Company
                    ----------------------------------------
                               (Name of Depositor)

            151 Farmington Avenue, RE4A, Hartford, Connecticut 06156
         ---------------------------------------------------------------
         (Address of Depositor's Principal Executive Offices) (Zip Code)

        Depositor's Telephone Number, including Area Code: (860) 273-7834

                            Susan E. Bryant, Counsel
                    Aetna Life Insurance and Annuity Company
            151 Farmington Avenue, RE4A, Hartford, Connecticut 06156
                     (Name and Address of Agent for Service)

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

It is proposed that this filing will become effective:

     [ ]  immediately upon filing pursuant to paragraph (b) of Rule 485
     [X]  on May 1, 1997 pursuant to paragraph (b) of Rule 485

Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
registered an indefinite number of securities under the Securities Act of 1933.
Registrant filed a Rule 24f-2 Notice for the fiscal year ended December 31, 1996
on February 28, 1997.

<PAGE>

                           VARIABLE ANNUITY ACCOUNT C
                              CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
FORM N-4
ITEM NO.                            PART A (PROSPECTUS)                  LOCATION

<S>         <C>                                                     <C>
 1          Cover Page...........................................   Cover Page

 2          Definitions..........................................   Definitions

 3          Synopsis.............................................   Prospectus Summary; Fee Table

 4          Condensed Financial Information......................   Condensed Financial Information

 5          General Description of Registrant, Depositor, and
            Portfolio Companies..................................   The Company; Variable Annuity
                                                                    Account C; The Funds

 6          Deductions and Expenses..............................   Charges and Deductions; The Contract
                                                                    - Distribution

 7          General Description of Variable Annuity Contracts....   General Description of Variable
                                                                    Annuity Contracts; Miscellaneous

 8          Annuity Period.......................................   Annuity Period

 9          Death Benefit........................................   Death Benefit

10          Purchases and Contract Value.........................   The Contract

11          Redemptions..........................................   Withdrawals; Right to Cancel

12          Taxes................................................   Tax Status

13          Legal Proceedings....................................   Miscellaneous - Legal Proceedings

14          Table of Contents of the Statement of Additional
            Information..........................................   Statement of Additional Information
                                                                    - Table of Contents

<PAGE>

<CAPTION>
FORM N-4
ITEM NO.       PART B (STATEMENT OF ADDITIONAL INFORMATION)              LOCATION

<S>         <C>                                                     <C>
15          Cover Page...........................................   Cover page

16          Table of Contents....................................   Table of Contents

17          General Information and History......................   General Information and History

18          Services.............................................   General Information and History;
                                                                    Independent Auditors

19          Purchase of Securities Being Offered.................   Offering and Purchase of Contracts

20          Underwriters.........................................   Offering and Purchase of Contracts

21          Calculation of Performance Data......................   Performance Data; Average Annual
                                                                    Total Return Quotations

22          Annuity Payments.....................................   Annuity Payments

23          Financial Statements.................................   Financial Statements
</TABLE>

                           Part C (Other Information)
                           --------------------------

Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C to this Registration Statement.

<PAGE>

                           Variable Annuity Account C
                                Prospectus Dated:
                                   May 1, 1997

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

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

The contracts offered in connection with this Prospectus are 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:

    [bullet] Aetna Variable Fund

    [bullet] Aetna Income Shares

    [bullet] Aetna Variable Encore Fund

    [bullet] Aetna Investment Advisers Fund, Inc.

    [bullet] American Century VP Capital Appreciation (formerly TCI Growth)

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, 1997, 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. You
may also obtain an SAI for any Funds by calling that phone number.

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., AMERICAN CENTURY VP CAPITAL APPRECIATION AND THE
GUARANTEED ACCUMULATION ACCOUNT. ALL PROSPECTUSES SHOULD BE READ AND RETAINED
FOR FUTURE REFERENCE. THIS PROSPECTUS, THE STATEMENT OF ADDITIONAL INFORMATION
AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC) CAN BE FOUND IN THE SEC'S WEB SITE AT
http://www.sec.gov.
    

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............................................................   14
    Contract Purchase...................................................   14
    Net Purchase Payments...............................................   15
    Accumulation Units..................................................   15
    Net Investment Factor...............................................   16
    Distribution........................................................   16
RIGHT TO CANCEL.........................................................   16
CHARGES AND DEDUCTIONS..................................................   17
    Mortality and Expense Risk Charges..................................   17
    Fund Expenses.......................................................   17
    Allocation and Transfer Fees........................................   17
    Insurance Rider.....................................................   17
    Sales and Administrative Expense Charge.............................   18
    Termination Fee.....................................................   18
    Premium Tax.........................................................   18
GENERAL DESCRIPTION OF VARIABLE ANNUITY CONTRACTS.......................   19
    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...........................................   21
    General.............................................................   21
    Estate Conservation Option..........................................   22
    Systematic Withdrawal Option........................................   22
ANNUITY PERIOD..........................................................   23
    Annuity Period Elections............................................   23
    403(b) Plans........................................................   24
    401 and HR 10 Plans.................................................   24
    Annuity Options.....................................................   25

                                       2
<PAGE>

DEATH BENEFIT...........................................................   25
    Accumulation Period.................................................   25
    403(b) Plans........................................................   26
    401 and HR 10 Plans.................................................   26
    Annuity Period......................................................   26
    403(b) Plans........................................................   27
    401 and HR 10 Plans.................................................   27
TAX STATUS..............................................................   27
    Federal Tax Status of the Company...................................   27
    Use of the Contract.................................................   27
    Tax Status of Amounts Distributed Under the Contract................   27
MISCELLANEOUS...........................................................   29
    Performance Reporting...............................................   29
    Legal Proceedings...................................................   29
    Legal Matters.......................................................   29
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION.....................   30
APPENDIX I-GUARANTEED ACCUMULATION ACCOUNT..............................   31
APPENDIX II-FIXED ACCOUNT...............................................   32

                                       3
<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 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

                                       4
<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 the Company determines the
   Accumulation Unit Value and Annuity Unit Value of a variable investment
   option until the next time it determines such unit value. Currently, the
   calculation occurs after 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.

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.

                                       5
<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 1.75%; and for 401 Plans, the deduction is 5%. 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 1.8% for an
installment Purchase Payment HR 10 Plan. For 401 Plans, the total deduction
amounts to 5.3% 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 Contract Owner may cancel the Contract no later than ten days after
receiving it (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 you will receive on cancellation under this provision will
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 your Purchase Payments. (See "Right to Cancel.")

                                       6
<PAGE>

                                    FEE TABLE
                     (Based on year ended December 31, 1996)

The purpose of the Fee Table is to assist Contract Holders 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.

<TABLE>
<CAPTION>
Contract Holder Transaction Expenses
- ------------------------------------
<S>                                                                      <C>
     Sales and Administrative Expense Charge
     (as a percentage of Purchase Payments)
         403(b) Plans                                                    6.00%
         401 Plans                                                       5.00%
         HR 10 Plans                                                     1.75%
     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
                                       --------------                ---------
                                              1                         5%
                                              2                         4%
                                              3                         3%
                                              4                         2%
                                              5                         1%
                                          5 or more                     0%

Allocation and Transfer Fees(1)                                   $0.00

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
                                                      ------     -----   -----
     Mortality and Expense Risk Fees                  1.25%      1.19%   1.25%
                                                      -----      -----   -----
     Total Separate Account Annual Expenses           1.25%      1.19%   1.25%
                                                      =====      =====   =====

(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.")

                                       7
<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, 1996)

<TABLE>
   
<CAPTION>
                                               Investment
                                                Advisory                Other                  Total
                                                Fees(1)           Expenses(2) (after           Fund
                                             (after expense            expense                Annual
                                             reimbursement)         reimbursement)           Expenses
                                             --------------         --------------           --------
<S>                                              <C>                    <C>                    <C>
Aetna Variable Fund(3)                           0.50%                  0.06%                  0.56%
Aetna Income Shares(3)                           0.40%                  0.08%                  0.48%
Aetna Variable Encore Fund(3)                    0.25%                  0.10%                  0.35%
Aetna Investment Advisers Fund, Inc. (3)         0.50%                  0.08%                  0.58%
American Century VP Capital Appreciation
    (formerly 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 Holder's or Participant's Account Value.

   
(3)  The Company provides administrative services to the Fund and assumes the
     Fund's ordinary recurring direct costs under an Administrative Services
     Agreement. The new Administrative Services Agreement became effective on
     May 1, 1996 for Aetna Variable Fund, Aetna Income Shares, Aetna Variable
     Encore Fund and Aetna Investment Advisers Fund, Inc. Therefore, the "Other
     Expenses" shown are not based on actual figures for the year ended December
     31, 1996, but reflect the fee payable under that Agreement.

     Effective August 1, 1996, Investment Advisory Fees were increased for Aetna
     Variable Fund, Aetna Income Shares and Aetna Investment Advisers Fund, Inc.
     The Advisory Fees shown above are not based on actual figures for the year
     ended December 31, 1996, but reflect the increased Investment Advisory
     Fees.
    

(4)  The Portfolio's investment adviser pays all expenses of the Portfolio
     except brokerage commissions, taxes, interest, fees and expenses of the
     non-interested person 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 OR 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:

<TABLE>
   
<CAPTION>
                                                     403(b) Plans
                                                     ------------

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

                                              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                            $ 97      $134       $174      $260           $77       $114        $152       $260
Aetna Income Shares                            $ 96      $132       $170      $252           $77       $111        $148       $252
Aetna Variable Encore Fund                     $ 95      $128       $164      $239           $75       $107        $142       $239
Aetna Investment Advisers Fund, Inc.           $ 97      $135       $175      $262           $77       $114        $153       $262
American Century VP Capital Appreciation       $101      $147       $195      $303           $81       $126        $173       $303
</TABLE>

                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                             401 Plans
                                                             ---------
                                               If you make a complete withdrawal of
                                               your contract at the end of the              If you do not make a complete withdrawal
                                               applicable time period:                      of your contract or if you annuitize:
                                               ------------------------------------         --------------------------------------
                                               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                             $116      $134      $151      $ 246            $67      $102     $140       $246
Aetna Income Shares                             $115      $131      $147       $238            $66      $100     $136       $238
Aetna Variable Encore Fund                      $114      $128      $141       $224            $65       $96     $130       $224
Aetna Investment Advisers Fund, Inc.            $116      $134      $152       $248            $67      $103     $141       $248
American Century VP Capital Appreciation        $120      $146      $173       $290            $71      $115     $162       $290
</TABLE>

<TABLE>
<CAPTION>
                                                           HR 10 Plans
                                                           -----------
                                               If you make a complete withdrawal of
                                               your contract at the end of the              If you do not make a complete withdrawal
                                               applicable time period:                      of your contract or if you annuitize:
                                               ------------------------------------         --------------------------------------
                                               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                             $56       $ 95      $137      $226            $36       $73       $114      $226
Aetna Income Shares                             $55       $ 93      $133      $218            $35       $71       $110      $218
Aetna Variable Encore Fund                      $54       $ 89      $126      $204            $33       $67       $103      $204
Aetna Investment Advisers Fund, Inc.            $56       $ 96      $138      $229            $36       $74       $115      $229
American Century VP Capital Appreciation        $60       $108      $158      $271            $40       $87       $136      $271
</TABLE>
    

                                       9
<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 or
periods in the ten-year period ended December 31, 1996, 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 and the Independent Auditors' report thereon are included in the
Statement of Additional Information.

<TABLE>
<CAPTION>
                              1996        1995         1994        1993          1992
                              ----        ----         ----        ----          ----
<S>                         <C>         <C>         <C>          <C>          <C>
AETNA VARIABLE FUND
Value at beginning of
 period                      $137.869    $105.558     $107.925     $102.383      $97.165
Value at end of period       $169.448    $137.869     $105.558     $107.925     $102.383
Increase(decrease) in
   value of accumulation
   unit(1)                     22.91%      30.61%      (2.19)%        5.41%        5.37%
Number of accumulation
   units outstanding at
   end of period            2,071,139   6,364,000   13,966,072   21,148,863   24,201,565

AETNA INCOME SHARES
Value at beginning of
  period                      $46.913     $40.173      $42.283      $39.038      $36.789
Value at end of period        $47.992     $46.913      $40.173      $42.283      $39.038
Increase(decrease) in
   value of accumulation
   unit(1)                      2.30%      16.78%      (4.99)%        8.31%        6.11%
Number of accumulation
   units outstanding at
   end of period              835,724   2,377,622    5,108,720    8,210,666    8,507,292

AETNA VARIABLE ENCORE FUND
Value at beginning of
  period                      $37.988     $36.271      $35.282      $34.619      $33.812
Value at end of period        $39.528     $37.988      $36.271      $35.282      $34.619
Increase(decrease) in
   value of accumulation
   unit(1)                      4.05%       4.73%        2.80%        1.92%        2.39%
Number of accumulation
   units outstanding at
   end of period             597,656   1,836,260    3,679,802    5,086,515    7,534,662

AETNA INVESTMENT ADVISERS FUND, INC.
Value at beginning of
   period                     $17.954     $14.270      $14.519      $13.379      $12.736
Value at end of period        $20.419     $17.954      $14.288      $14.519      $13.379
Increase(decrease) in
   value of accumulation
   unit(1)                     13.73%      25.82%      (1.59)%        8.52%        5.05%
Number of accumulation
   units outstanding at
   end of period            2,716,641   9,193,181   21,990,186   30,784,750   34,802,433

AMERICAN CENTURY VP CAPITAL APPRECIATION (Formerly TCI Growth)
Value at beginning of
   period                     $13.224     $10.213      $10.463      $10.000(3)
Value at end of period        $12.480     $13.224      $10.213      $10.463
Increase(decrease) in
   value of accumulation
   unit(1)                     (5.63%)     29.47%       (2.39)%        4.63%
Number of accumulation
   units outstanding at
   end of period              741,392   4,184,701  12,096,731 12,272,152

<CAPTION>
                             1991         1990          1989         1988         1987
                             ----         ----          ----         ----         ----
<S>                       <C>          <C>           <C>          <C>          <C>
AETNA VARIABLE FUND
Value at beginning of
   period                    $77.845      $76.311       $59.871      $52.885      $50.760
Value at end of period       $97.165      $77.845       $76.311      $59.871      $52.885
Increase(decrease) in
   value of accumulation
   unit(1)                    24.82%        2.01%        27.46%       13.21%        4.19%
Number of accumulation
   units outstanding at
   end of period          20,948,226   18,362,906    17,142,820   16,455,396   16,497,406
AETNA INCOME SHARES
Value at beginning of
   period                    $31.192      $28.943       $25.574      $24.061      $23.308
Value at end of period       $36.789      $31.192       $28.943      $25.574      $24.061
Increase(decrease) in
   value of accumulation
   unit(1)                    17.94%        7.77%        13.17%        6.29%        3.23%
Number of accumulation
   units outstanding at
   end of period           7,844,412    6,984,793     6,202,834    5,955,293    5,372,271
AETNA VARIABLE ENCORE FUND
Value at beginning of
   period                    $32.138      $30.012       $27.783      $26.171      $24.812
Value at end of period       $33.812      $32.138       $30.012      $27.783      $26.171
Increase(decrease) in
   value of accumulation
   unit(1)                     5.21%        7.08%         8.02%        6.16%        5.48%
Number of accumulation
   units outstanding at
   end of period           8,430,082   10,220,110     8,286,033    8,154,644    7,326,151
AETNA INVESTMENT ADVISERS
Value at beginning of
period                       $10.896      $10.437     $10.000(2)
Value at end of period       $12.736      $10.896       $10.437
Increase(decrease) in
   value of accumulation
   unit(1)                    16.89%        4.40%         4.37%
Number of accumulation
   units outstanding at
   end of period          22,898,099    17,078,985    9,535,986

AMERICAN CENTURY VP CAPITAL APPRECIATION (Formerly TCI Growth)
Value at beginning of
period
Value at end of period
Increase(decrease) in
   value of accumulation
   unit(1)
Number of accumulation
   units outstanding at
   end of period
</TABLE>

(1)  The above figures are calculated by subtracting the beginning Accumulation
     Unit value from the ending Accumulation Unit value during a calendar year
     or period, and dividing the result by the beginning Accumulation Unit
     value. These figures do not reflect the deductions from Purchase Payments
     for sales loads. 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.

                                       10
<PAGE>

                         CONDENSED FINANCIAL INFORMATION
           This financial Information is provided for use by 401 Plans

    (Selected data for accumulation units outstanding throughout each period)
   
The condensed financial information presented below for each of the years or
periods in the ten-year period ended December 31, 1996, 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 and the Independent Auditors' report thereon are included in the
Statement of Additional Information.

<TABLE>
<CAPTION>

                               1996      1995       1994      1993       1992       1991      1990       1989      1988       1987
                               ----      ----       ----      ----       ----       ----      ----       ----      ----       ----
<S>                          <C>       <C>        <C>        <C>       <C>        <C>        <C>        <C>       <C>        <C>
AETNA VARIABLE FUND
- ------------------------------------------------------------------------------------------------------------------------------------
Value at beginning of        $180.879  $138.406   $141.424   $134.081  $127.171   $101.824   $99.758    $78.220   $69.051    $66.237
   period
Value at end of period       $222.444  $180.879   $138.406   $141.424  $134.080   $127.171  $101.824    $99.758   $78.220    $69.051
Increase(decrease) in
   value of accumulation
   unit(1)                     22.98%    30.69%    (2.13)%      5.48%     5.43%     24.89%     2.07%     27.54%    13.28%      4.25%
Number of accumulation
   units outstanding at
   end of period              340,229   549,056  1,258,166  1,616,018 1,829,160  1,956,479 2,169,721  2,496,795 3,030,548  3,740,739
AETNA INCOME SHARES
Value at beginning of
   period                     $47.405   $40.570    $42.675    $39.376   $37.086    $31.424   $29.142    $25.734   $24.197    $23.426
Value at end of period        $48.524   $47.405    $40.570    $42.675   $39.376    $37.086   $31.424    $29.142   $25.734    $24.197
Increase(decrease) in
   value of accumulation
   unit(1)                      2.36%    16.85%    (4.93)%      8.38%     6.17%     18.02%     7.83%     13.24%     6.35%      9.29%
Number of accumulation
   units outstanding at
   end of period               43,327    72,902    181,535    241,551   263,105    283,119   251,861    248,678   284,650    251,513
AETNA VARIABLE ENCORE FUND
Value at beginning of
   period                     $38.485   $36.723    $35.701    $35.009   $34.172    $32.460   $30.295    $28.028   $26.387    $25.001
Value at end of period        $40.069   $38.485    $36.723    $35.701   $35.009    $34.172   $32.460    $30.295   $28.028    $26.387
Increase(decrease) in
   value of accumulation
   unit(1)                      4.12%     4.80%      2.88%      1.98%     2.45%      5.27%     7.15%      8.09%     6.22%      5.54%
Number of accumulation
   units outstanding at
   end of period               93,727   150,480    241,159    312,350   471,585    470,248   624,613    542,581   637,833    627,039
AETNA INVESTMENT ADVISERS FUND, INC.
Value at beginning of
   period                     $18.024   $14.336    $14.558    $13.407   $12.755    $10.906   $10.440 $10.000(2)
Value at end of period        $20.511   $18.024    $14.336    $14.558   $13.407    $12.755   $10.906    $10.440
Increase(decrease) in
   value of accumulation
   unit(1)                     13.80%    25.73%    (1.52)%      8.59%     5.11%     16.86%     4.46%      4.40%
Number of accumulation
   units outstanding at
   end of period              280,547   393,613    756,261  1,142,268 1,129,453    725,598   619,748    470,302
AMERICAN CENTURY VP CAPITAL APPRECIATION (Formerly TCI Growth)
Value at beginning of
   period                  $10.000(3)
Value at end of period     $9.428
Increase(decrease) in
   value of accumulation
   unit(1)                  (5.72)%(3)
Number of accumulation
   units outstanding at
   end of period           91,885
</TABLE>


(1)  The above figures are calculated by subtracting the beginning Accumulation
     Unit value from the ending Accumulation Unit value during a calendar year
     or period, and dividing the result by the beginning Accumulation Unit
     value. These figures do not reflect the deductions from Purchase Payments
     for sales loads. 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)  Reflects less than a full year of performance activity. The initial
     Accumulation Unit value was established during April 1996 when the Fund
     became available under the Contract, when funds were first received under
     this option or when the applicable daily asset charge was first utilized.

                                       11
<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 Inc.

                           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 Holder will designate some or all of the Funds described below as
variable funding options under the Contract. The Contract Holder, or the
Participant, if allowed by the Contract Holder 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.

[bullet] Aetna Variable Fund seeks to maximize total return through investments
         in a diversified portfolio of common stocks and securities convertible
         into common stock.

[bullet] Aetna Income Shares seeks to maximize total return, consistent with
         reasonable risk, through investments in a diversified portfolio
         consisting primarily of debt securities.

[bullet] 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.

   
[bullet] Aetna Investment Advisers Fund, Inc. is a managed 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.

[bullet] American Century Variable Portfolios, Inc. - American Century VP
         Capital Appreciation (formerly TCI Growth) seeks capital growth. The
         fund seeks to achieve its objective 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 the Fund's investment manager, have
         better than average potential for appreciation.
    

                                       12
<PAGE>

There is no assurance that the Funds will achieve their investment objectives.
Contract Holders 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 accompanies this Prospectus. You should read the
Fund prospectuses and consider carefully, and on a continuing basis, which Fund
or combination of Funds is best suited to your long-term investment objectives.
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 telephone number listed on the cover of this Prospectus.
    

<TABLE>
<CAPTION>
Fund Investment Advisers
                 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*
American Century VP Capital Appreciation                   American Century Investment Management, Inc.
         (formerly TCI Growth)
*Aeltus Investment Management, Inc., subadviser
</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 us
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 holders 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 Holder or you, if
permitted by the Contract Holder, be permitted to select from these other Funds,
subject to any conditions that may be imposed in connection with those options.
In addition, the Company may substitute Funds subject to the conditions in the
Contract. Under some Contracts, the substitution must be approved by a majority
vote of all persons having an interest through the Separate Account in the
affected Fund.

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 Holder may decide to offer only a select number of Funds under its
Plan.

                                       13
<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 Holder. The Contract Holder 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 Holder 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 Holder or Participant pending acceptance of the application. If the
application is accepted, a Contract will be issued to the Contract Holder 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 Holder.

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.

                                       14
<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 $125,000 (for 1997) 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 unless the
application has not been accepted. In that event, Purchase Payments will be
credited at the Accumulation Unit value next determined after acceptance of the
application. Subsequent Purchase Payments (if any) received by the Company by
the close of business of the New York Stock Exchange 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.

                                       15
<PAGE>

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.

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 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. In addition, some sales
personnel may receive various types of non-cash compensation as special sales
incentives, including trips and educational and/or business seminars.
Supervisory and other management personnel of the Company may receive
compensation that will vary based on the relative profitability to the Company
of the funding options the Participant selects. Funding options that invest in
Funds advised by the Company or its affiliates are generally more profitable to
the Company. 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 the enrollment form.

                                 RIGHT TO CANCEL

A Participant 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 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).

                                       16
<PAGE>

                             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.

   
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, 1996, the Company received $93,446,331 for mortality and
expense risks and other valuation period deductions 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 Holder 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.

                                       17
<PAGE>


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 5% is deducted from the balance of each installment Purchase
Payment made on behalf of a Participant in a 401 Plan, and 1.75% from the
balance of each installment Purchase Payment under an HR 10 Plan. Exclusive of
any premium tax, the total deduction amounts to 5.3% of the Net Purchase Payment
under a 401 Plan and 1.8% of the Net Purchase Payment under an HR 10 Plan.

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.

                                       18
<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;

     (c) conditions governing payments of withdrawal values;

     (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;

     (c) increasing the deduction from Purchase Payment(s) for sales and
         administrative expenses;

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

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

     (f) the maximum allocation and transfer fees.

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.

                                       19
<PAGE>

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, subject to the restrictions below, 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

                                       20
<PAGE>

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.

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. The options currently available 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 are 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 that amount once a year. Other Additional Withdrawal
Options may be added from time to time.
    

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

                                       21
<PAGE>

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.

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 Holder'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.

The first distribution may not be made before the calendar year in which the
Participant attains age 70-1/2, or retires, if later. If the Company maintains a
separate record of a 403(b) Participant's Individual Account value as of
December 31, 1986, this amount is not required to be distributed until the
Participant attains age 75, or retires, if later. In this instance, minimum
distributions made to a retired Participant in or after the year the Participant
attains age 70-1/2 but before the Participant attains age 75, will be calculated
only on amounts contributed after December 31, 1986, and any earnings credited
after that date. If the Participant has received any distribution from his or
her Account, other than distributions required under Code minimum distribution
requirements, the excess amount taken will reduce the December 31, 1986 account
balance.

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.

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 $500. For 403(b) Participants, the minimum payment amount
is $250.

                                       22
<PAGE>

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 Holder, by a life expectancy factor from
tables designated by the IRS. The factor will be based on 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 Holder). For 401 or HR 10 Plans, payments may not begin until the
calendar year in which the Contract Owner attains age 70-1/2 or retires,
whichever is later.

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 or retires, whichever is later.

                                 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 American Century VP Capital
Appreciation cannot be

                                       23
<PAGE>

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 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 or retirement, whichever is later. 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 or retires, whichever is later. 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.

Except for 5% owners, distributions for all 401 and HR10 Plan Participants must
begin no later than April 1 of the calendar year following the calendar year in
which the Participant attains age 70-1/2 or retires, if later. For all 5%
owners, such distributions must begin by April 1 of the calendar year following
the calendar year in which you attain age 70-1/2. These distribution dates may
be further deferred if allowed under federal law or regulations.

                                       24
<PAGE>

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, or such other periods as we may offer at the
         time of annuitization. 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;

           (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 Holder 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;

                                       25
<PAGE>

(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.

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).

                                       26
<PAGE>

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.

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

                                       27
<PAGE>

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.

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).

                                       28
<PAGE>

b.       Annuity Period

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

                                  MISCELLANEOUS

Performance Reporting

From time to time, the Company may advertise different types of historical
performance for the variable funding options under the Separate Account. The
Company may advertise the "standardized average annual total returns,"
calculated in a manner prescribed by the SEC, as well as the "non-standardized
returns." "Standardized average annual total returns" are computed according to
a formula in which a hypothetical investment of $1,000 is applied to the
variable funding option and then related to the ending redeemable values over
the most recent one, five and ten-year periods (or since inception, if less than
those periods). Standardized returns will reflect the reduction of all recurring
charges during each period (e.g. , mortality and expense risk charges, sales and
administrative expense charges and the termination fee). "Non-standardized
returns" will be calculated in a similar manner, except that non-standardized
figures will not reflect the deduction of any applicable termination fee (which
would decrease the level of performance shown if reflected in these
calculations). The non-standardized figures may also include monthly, quarterly,
year-to-date and three-year periods.

The Company may also advertise certain ratings, rankings or other information
related to the Company, the Separate Account or the Funds. Further details
regarding performance reporting and advertising are described in the Statement
of Additional Information.

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 Counsel to the Company.

                                       29
<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
Performance Data...............................................................3

  General......................................................................3
Average Annual Total Return Quotations.........................................4
Annuity Payments...............................................................6
Sales Material and Advertising.................................................7
Independent Auditors...........................................................7
Financial Statements of the Separate Account.................................S-1
Financial Statements for Aetna Life Insurance and Annuity Company............F-1

                                       30
<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 Holders
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 Holder 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 Holder 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.

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.

                                       31
<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.

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.

                                       32
<PAGE>

                           VARIABLE ANNUITY ACCOUNT C

                                   PROSPECTUS
                                DATED MAY 1, 1997

                       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. PROS.75974-97                                                May 1997

<PAGE>

- --------------------------------------------------------------------------------
                           VARIABLE ANNUITY ACCOUNT C
                                       OF
                    AETNA LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------

              Statement of Additional Information dated May 1, 1997

   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, 1997.

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
Performance Data............................................................ 3
     General................................................................ 3
     Average Annual Total Return Quotations................................. 4
Annuity Payments............................................................ 6
Sales Material and Advertising.............................................. 7
Independent Auditors........................................................ 7
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, 1996, the Company had
$30.1 billion invested through its products, including $15.0 billion in its
separate accounts (of which the Company oversees the management of $10.5
billion) and $1.1 billion in its mutual funds offered outside of its separate
accounts. As of December 31, 1995, it ranked among the top 2% of all U.S. life
insurance companies based on assets. 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 Inc. 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 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 the 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. Purchase Payments made under the Contract may be
allocated to one or more of the Funds. The Company may make additions to,
deletions from or substitutions of available investment options as permitted by
law and subject to the conditions in the Contract. The availability of the Funds
is subject to applicable regulatory authorization. Not all Funds are available
in all jurisdictions or under all Contracts.
    

                                       2
<PAGE>

The Funds currently available under the Contract are as follows:

                               Aetna Variable Fund
                               Aetna Income Shares
                           Aetna Variable Encore Fund
                      Aetna Investment Advisers Fund, Inc.
         American Century VP Capital Appreciation (formerly TCI Growth)

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."

                                PERFORMANCE DATA

GENERAL

From time to time, the Company may advertise different types of historical
performance for the variable investment options available under the Contracts
issued by the Company in connection with Plans described in the prospectus. The
Company may advertise the "standardized average annual total returns,"
calculated in a manner prescribed by the Securities and Exchange Commission (the
"standardized return"), as well as "non-standardized returns," both of which are
described below.
   
The standardized and non-standardized total return figures are computed
according to a formula in which a hypothetical initial Purchase Payment of
$1,000 is applied to the various variable investment options under the Contract,
and then related to the ending redeemable values over one, five and ten year
periods (or fractional periods thereof). The redeemable value is then divided by
the initial investment and this quotient is taken to the Nth root (N represents
the number of years in the period) and 1 is subtracted from the result which is
then expressed as a percentage, carried to at least the nearest hundredth of a
percent. The standardized figures use the actual returns of the Fund since
inception and then adjust them to reflect the deduction of all recurring charges
under the Contracts during each period (e.g., mortality and expense risk
charges, sales and administrative expense charges, and the termination fee).
These charges will be deducted on a pro rata basis in the case of fractional
periods. The total return figures shown below may be different from the actual
historical total return under the Contracts because for periods prior to 1994,
the investment performance was based on the performance of the underlying Fund
plus any cash held in the Separate Account.
    

The non-standardized figures will be calculated in a similar manner, except that
they will not reflect the deduction of any applicable termination fee (which
would decrease the level of performance shown if reflected in these
calculations). The non-standardized figures may also include monthly, quarterly,
year-to-date and three-year periods.

                                       3
<PAGE>


Investment results will fluctuate over time, and any presentation of the total
return quotations for any prior period should not be considered as a
representation of how the variable investment options will perform in any future
period. Additionally, the Individual Account Value upon redemption may be more
or less than your original cost.

AVERAGE ANNUAL TOTAL RETURN QUOTATIONS - Standardized and Non-Standardized

The tables shown below reflect the average annual standardized and
non-standardized total return quotation figures for the periods ended December
31, 1996 for the variable investment options available under the Contracts.
Table A reflects the total return quotations for Contracts issued under 403(b)
Plans; Table B reflects the total return quotations for Contracts issued under
401 Plans; and Table C reflects the total return quotations for Contracts issued
under HR 10 Plans. The standardized returns for 403(b) Contracts assume a
mortality and expense risk charge of 1.25%, a sales and administrative expense
charge of 6.00% and the applicable termination fee. The standardized returns for
401 Contracts assume a mortality and expense risk charge of 1.19%, a sales and
administrative expense charge of 5.00% and the applicable termination fee. The
standardized returns for HR 10 Contracts assume a mortality and expense risk
charge of 1.25%, a sales and administrative expense charge of 1.75% and the
applicable termination fee.

The non-standardized returns assume the same charges but do not include the
termination fee. For those variable investment options where results are not
available for the full calendar period indicated, the percentage shown is an
average annual return since inception (denoted with an asterisk).

                                       4
<PAGE>

   
<TABLE>
<CAPTION>
                                                           TABLE A
                                                        403(b) Plans
                                         ---------------------------------- -------------------------------------------- -----------
                                                                                                                            FUND
                                                    STANDARDIZED                         NON-STANDARDIZED                INCEPTION
                                                                                                                            DATE
 --------------------------------------- ---------------------------------- -------------------------------------------- -----------
           INVESTMENT OPTION             1  Year    5 Years     10 Years    1 Year      3 Years    5 Years    10 Years
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------

 <S>                                      <C>         <C>         <C>        <C>          <C>        <C>        <C>      <C>
 Aetna Variable Fund                       13.22%     10.39%      12.11%      15.53%      13.85%     10.39%     12.11%   05/01/75
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------

 Aetna Income Shares                       (5.76%)     4.15%       6.82%      (3.84%)      2.15%      4.15%      6.82%   05/15/73
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------

 Aetna Variable Encore Fund                (4.15%)     1.90%       4.12%      (2.19%)      1.72%      1.90%      4.12%   08/01/75
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------

 Aetna Investment Advisers Fund, Inc.       4.77%      8.54%       9.04%*      6.91%       9.71%      8.54%      9.04%*  04/03/89
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------
 American Century VP Capital
   Appreciation                           (12.96%)     3.57%       8.70%*    (11.19%)      3.93%      3.57%      8.70%*  11/20/87
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------
</TABLE>

Please refer to the discussion preceding the Tables for an explanation of the
charges included in the Standardized and Non-Standardized figures. These figures
represent historical performance and should not be considered a projection of
future performance.

<TABLE>
<CAPTION>
                                                           TABLE B
                                                          401 Plans
                                         ---------------------------------- -------------------------------------------- -----------
                                                                                                                            FUND
                                                    STANDARDIZED                         NON-STANDARDIZED                INCEPTION
                                                                                                                            DATE
 --------------------------------------- ---------------------------------- -------------------------------------------- -----------
           INVESTMENT OPTION             1  Year    5 Years     10 Years    1 Year      3 Years    5 Years    10 Years
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------

 <S>                                      <C>         <C>         <C>        <C>          <C>        <C>        <C>      <C>
 Aetna Variable Fund                       10.99%     10.47%      12.30%      16.83%      14.32%     10.69%     12.30%   05/01/75
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------

 Aetna Income Shares                       (7.62%)     4.22%       7.00%      (2.76%)      2.57%      4.43%      7.00%   05/15/73
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------

 Aetna Variable Encore Fund                (6.04%)     1.97%       4.29%      (1.09%)      2.14%      2.17%      4.29%   08/01/75
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------

 Aetna Investment Advisers Fund, Inc.       2.71%      8.62%       9.25%*      8.11%      10.17%      8.83%      9.25%*  04/03/89
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------
 American Century VP Capital
   Appreciation                           (14.68%)     3.64%       8.90%*    (10.19%)      4.35%      3.85%      8.90%*  11/20/87
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------
</TABLE>

Please refer to the discussion preceding the Tables for an explanation of the
charges included in the Standardized and Non-Standardized figures. These figures
represent historical performance and should not be considered a projection of
future performance.

<TABLE>
<CAPTION>
                                                           TABLE C
                                                         HR 10 Plans
                                         ---------------------------------- -------------------------------------------- -----------
                                                                                                                            FUND
                                                    STANDARDIZED                         NON-STANDARDIZED                INCEPTION
                                                                                                                            DATE
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------
           INVESTMENT OPTION             1  Year    5 Years     10 Years    1 Year      3 Years    5 Years    10 Years
 --------------------------------------- ---------------------------------- -------------------------------------------- -----------

<S>                                        <C>        <C>         <C>         <C>         <C>        <C>        <C>      <C>
 Aetna Variable Fund                       18.33%     11.37%      12.61%      20.76%      15.54%     11.37%     12.61%   05/01/75
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------

 Aetna Income Shares                       (1.51%)     5.07%       7.29%       0.51%       3.67%      5.07%      7.29%   05/15/73
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------

 Aetna Variable Encore Fund                 0.18%      2.80%       4.58%       2.23%       3.23%      2.80%      4.58%   08/01/75
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------

 Aetna Investment Advisers Fund, Inc.       9.50%      9.50%       9.66%*     11.74%      11.34%      9.50%      9.66%*  04/03/89
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------
 American Century VP Capital
   Appreciation                            (9.03%)     4.49%       9.23%*     (7.17%)      5.47%      4.49%      9.23%*  11/20/87
 --------------------------------------- ---------- ----------- ----------- ----------- ---------- ---------- ---------- -----------
</TABLE>

Please refer to the discussion preceding the Tables for an explanation of the
charges included in the Standardized and Non-Standardized figures. These figures
represent historical performance and should not be considered a projection of
future performance.
    

                                       5
<PAGE>

                                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.

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.

                                       6
<PAGE>

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 AND ADVERTISING

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.

We may distribute sales literature that compares the percentage change in
Accumulation Unit values for any of the variable investment options to
established market indices such as the Standard & Poor's 500 Stock Index and the
Dow Jones Industrial Average or to the percentage change in values of other
management investment companies that have investment objectives similar to the
variable investment options being compared.

We may publish in advertisements and reports, the ratings and other information
assigned to us by one or more independent rating organizations such as A.M. Best
Company, Duff & Phelps, Standard & Poor's Corporation and Moody's Investors
Services, Inc. The purpose of the ratings is to reflect our financial strength
and/or claims-paying ability. We may also quote ranking services such as
Morningstar's Variable Annuity/Life Performance Report and Lipper's Variable
Insurance Products Performance Analysis Service (VIPPAS), which rank variable
annuity or life subaccounts or their underlying funds by performance and/or
investment objective. We may illustrate in advertisements the performance of the
underlying funds, if accompanied by performance which also shows the performance
of such funds reduced by applicable charges under the Separate Account. We may
also show in advertisements the portfolio holdings of the underlying funds,
updated at various intervals. From time to time, we will quote articles from
newspapers and magazines or other publications or reports, including, but not
limited to The Wall Street Journal, Money magazine, USA Today and The VARDS
Report.

The Company may provide in advertising, sales literature, periodic publications
or other materials information on various topics of interest to current and
prospective Contract Holders or Participants. These topics may include the
relationship between sectors of the economy and the economy as a whole and its
effect on various securities markets, investment strategies and techniques (such
as value investing, market timing, dollar cost averaging, asset allocation,
constant ratio transfer and account rebalancing), the advantages and
disadvantages of investing in tax-deferred and taxable investments, customer
profiles and hypothetical purchase and investment scenarios, financial
management and tax and retirement planning, and investment alternatives to
certificates of deposit and other financial instruments, including comparison
between the Contracts and the characteristics of and market for such financial
instruments.

                              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.

                                       7
<PAGE>

                              FINANCIAL STATEMENTS

                           VARIABLE ANNUITY ACCOUNT C

                                      Index

Statement of Assets and Liabilities.......................................   S-2
Statements of Operations and Changes in Net Assets........................   S-5
Notes to Financial Statements ............................................   S-6
Independent Auditors' Report..............................................  S-12

                                      S-1
<PAGE>


Variable Annuity Account C

Statement of Assets and Liabilities - December 31, 1996:

<TABLE>
<S>                                                                                            <C>
ASSETS:
Investments, at net asset value: (Note 1)
  Aetna Variable Fund; 151,485,109 shares (cost $4,579,080,272) .............................  $4,906,825,216
  Aetna Income Shares;  28,507,123 shares (cost $369,163,545)................................     359,849,312
  Aetna Variable Encore Fund; 18,592,739 shares (cost $246,054,502) .........................     245,304,466
  Aetna Investment Advisers Fund, Inc.; 53,928,968 shares (cost $718,075,860) ...............     815,295,428
  Aetna GET Fund, Series B; 4,575,463 shares (cost $47,775,458) .............................      65,062,153
  Aetna GET Fund, Series C; 19,458,746 shares (cost $196,074,278) ...........................     199,058,163
  Aetna Ascent Variable Portfolio; 1,716,448 shares (cost $19,943,767) ......................      21,660,591
  Aetna Crossroads Variable Portfolio; 1,232,084 shares (cost $13,920,592) ..................      14,758,921
  Aetna Legacy Variable Portfolio; 805,622 shares (cost $8,954,520) .........................       9,067,002
  Aetna Variable Index Plus Portfolio; 976,838 shares (cost $10,573,112) ....................      10,653,437
  Alger American Funds:
    Growth Portfolio; 3,054,826 shares (cost $98,141,364) ...................................     104,872,172
    Small Capitalization Portfolio; 7,916,675 shares (cost $284,506,629) ....................     323,871,170
  Calvert Responsibly Invested Balanced Fund; 22,541,903 shares (cost $37,025,408) ..........      39,989,335
  Fidelity Investments Variable Insurance Products Fund:
    Equity-Income Portfolio; 5,062,740 shares (cost $95,793,557) ............................     106,469,428
    Growth Portfolio; 2,583,239 shares (cost $75,185,783) ...................................      80,442,047
    Overseas Portfolio; 448,481 shares (cost $7,799,758) ....................................       8,449,388
  Fidelity Investments Variable Insurance Products Fund II:
    Asset Manager Portfolio; 1,010,226 shares (cost $14,600,538) ............................      17,103,129
    Contrafund Portfolio; 7,179,138 shares (cost $103,725,028) ..............................     118,886,521
    Index 500 Portfolio; 238,202 shares (cost $18,926,038) ..................................      21,230,903
 Franklin Government Securities Trust; 1,774,843 shares (cost $22,950,984) ..................      23,356,943
 Janus Aspen Series:
    Aggressive Growth Portfolio; 9,477,882 shares (cost $155,207,650) .......................     172,876,567
    Balanced Portfolio; 1,034,616 shares (cost $14,529,701) .................................      15,281,267
    Flexible Income Portfolio; 748,885 shares (cost $8,276,798) .............................       8,417,464
    Growth Portfolio; 2,630,613 shares (cost $38,608,238) ...................................      40,800,809
    Short-Term Bond Portfolio; 169,569 shares (cost $1,697,074) .............................       1,690,606
    Worldwide Growth Portfolio; 8,868,224 shares (cost $155,687,884) ........................     172,398,274
  Lexington Emerging Markets Fund; 480,702 shares (cost $4,742,490) .........................       4,845,481
  Lexington Natural Resources Trust Fund; 1,668,604 shares (cost $19,847,176) ...............      23,844,347
  Neuberger and Berman Advisers Management Trust -
    Growth Portfolio; 3,688,195 shares (cost $85,622,163) ...................................      95,081,684
  Scudder Variable Life Investment Fund -
    International Portfolio; 14,454,018 shares (cost $162,216,238) ..........................     191,515,746
TCI Portfolios Inc. - Growth Fund; 33,812,929 shares (cost $338,104,873) ....................     346,244,393
                                                                                               --------------
NET ASSETS  (cost $7,952,811,278)............................................................  $8,565,202,363
                                                                                               ==============
Net assets represented by:

Reserves for annuity contracts in accumulation and payment period: (Notes 1 and
5)

Aetna Variable Fund:
  Annuity contracts in accumulation..........................................................  $4,694,078,344
  Annuity contracts in payment period........................................................     212,746,872
Aetna Income Shares:
  Annuity contracts in accumulation..........................................................     354,233,289
  Annuity contracts in payment period........................................................       5,616,023
Aetna Variable Encore Fund:
  Annuity contracts in accumulation..........................................................     245,304,466
Aetna Investment Advisers Fund, Inc.:
  Annuity contracts in accumulation..........................................................     800,532,626
  Annuity contracts in payment period........................................................      14,762,802
</TABLE>

                                      S-2
<PAGE>

Variable Annuity Account C

Statement of Assets and Liabilities - December 31, 1996 (continued):

<TABLE>
<S>                                                                                               <C>
 Aetna GET Fund, Series B:
   Annuity contracts in accumulation.........................................................     $65,062,153
 Aetna GET Fund, Series C:
   Annuity contracts in accumulation.........................................................     199,058,163
 Aetna Ascent Variable Portfolio:
   Annuity contracts in accumulation.........................................................      21,660,591
 Aetna Crossroads Variable Portfolio:
   Annuity contracts in accumulation.........................................................      14,758,921
 Aetna Legacy Variable Portfolio:
   Annuity contracts in accumulation.........................................................       9,067,002
 Aetna Variable Index Plus Portfolio:
   Annuity contracts in accumulation.........................................................      10,653,437
 Alger American Funds:
   Growth Portfolio:
   Annuity contracts in accumulation.........................................................     104,872,172
   Small Capitalization Portfolio:
   Annuity contracts in accumulation.........................................................     323,871,170
 Calvert Responsibly Invested Balanced Fund:
   Annuity contracts in accumulation.........................................................      39,989,335
 Fidelity Investments Variable Insurance Products Fund:
   Equity-Income Portfolio:
   Annuity contracts in accumulation.........................................................     106,469,428
   Growth Portfolio:
   Annuity contracts in accumulation.........................................................      80,442,047
   Overseas Portfolio:
   Annuity contracts in accumulation.........................................................       8,449,388
 Fidelity Investments Variable Insurance Products Fund II:
   Asset Manager Portfolio:
   Annuity contracts in accumulation.........................................................      17,103,129
   Contrafund Portfolio:
   Annuity contracts in accumulation.........................................................     118,886,521
   Index 500 Portfolio:
   Annuity contracts in accumulation.........................................................      21,230,903
 Franklin Government Securities Trust Fund:
   Annuity contracts in accumulation.........................................................      23,356,943
 Janus Aspen Series:
   Aggressive Growth Portfolio:
   Annuity contracts in accumulation.........................................................     172,876,567
   Balanced Portfolio:
   Annuity contracts in accumulation.........................................................      15,281,267
   Flexible Income Portfolio:
   Annuity contracts in accumulation.........................................................       8,417,464
   Growth Portfolio:
   Annuity contracts in accumulation.........................................................      40,800,809
   Short-Term Bond Portfolio:
   Annuity contracts in accumulation.........................................................       1,690,606
   Worldwide Growth Portfolio:
   Annuity contracts in accumulation.........................................................     172,398,274
 Lexington Emerging Markets Fund:
   Annuity contracts in accumulation.........................................................       4,845,481
 Lexington Natural Resources Trust Fund:
   Annuity contracts in accumulation.........................................................      23,844,347
 Neuberger and Berman Advisers Management Trust -
   Growth Portfolio:
   Annuity contracts in accumulation.........................................................      95,081,684
 Scudder Variable Life Investment Fund - International Portfolio:
   Annuity contracts in accumulation.........................................................     191,515,746
</TABLE>

                                      S-3
<PAGE>

Variable Annuity Account C

Statement of Assets and Liabilities - December 31, 1996 (continued):

<TABLE>
<S>                                                                                            <C>
 TCI Portfolios, Inc. - Growth Fund:
   Annuity contracts in accumulation.........................................................    $346,244,393
                                                                                               --------------
                                                                                               $8,565,202,363
                                                                                               ==============
</TABLE>

See Notes to Financial Statements

                                      S-4
<PAGE>

Variable Annuity Account C

Statements of Operations and Changes in Net Assets

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                          1996                1995
                                                                          ----                ----
<S>                                                                  <C>                 <C>
INVESTMENT INCOME:
Income: (Notes 1, 3 and 5)
   Dividends .....................................................     $712,854,599        $730,430,612
Expenses: (Notes 2 and 5)
   Valuation Period Deductions ...................................      (93,446,331)        (71,090,542)
                                                                     --------------      --------------
Net investment income ............................................      619,408,268         659,340,070
                                                                     --------------      --------------
NET REALIZED AND UNREALIZED GAIN
  ON INVESTMENTS:
Net realized gain on sales of investments: (Notes 1, 4 and 5)
  Proceeds from sales ............................................    2,060,808,031         570,154,582
  Cost of investments sold .......................................    1,547,239,509         409,480,615
                                                                     --------------      --------------
    Net realized gain ............................................      513,568,522         160,673,967
Net unrealized gain on investments: (Note 5)
  Beginning of year ..............................................      594,083,184          73,479,233
  End of year ....................................................      612,391,085         594,083,184
                                                                     --------------      --------------
    Net change in unrealized gain ................................       18,307,901         520,603,951
                                                                     --------------      --------------
Net realized and unrealized gain on investments ..................      531,876,423         681,277,918
                                                                     --------------      --------------
Net increase in net assets resulting from operations .............    1,151,284,691       1,340,617,988
                                                                     --------------      --------------
FROM UNIT TRANSACTIONS:
Variable annuity contract purchase payments ......................      951,293,520         771,594,245
Sales and administrative charges deducted by the Company .........          (61,783)            (98,694)
                                                                     --------------      --------------
    Net variable annuity contract purchase payments...............      951,231,737         771,495,551
Transfer from the Company for mortality guarantee adjustments ....        3,247,064           3,678,430
Transfers (to) from the Company's fixed account options ..........      187,508,331         (44,377,350)
Redemptions by contract holders ..................................     (339,383,183)       (287,945,984)
Annuity Payments .................................................      (20,948,181)        (14,807,537)
Other ............................................................          144,245           1,144,770
                                                                     --------------      --------------
    Net increase in net assets from unit transactions (Note 5) ...      781,800,013         429,187,880
                                                                     --------------      --------------
Change in net assets .............................................    1,933,084,704       1,769,805,868
NET ASSETS:
Beginning of year ................................................    6,632,117,659       4,862,311,791
                                                                     --------------      --------------
End of year ......................................................   $8,565,202,363      $6,632,117,659
                                                                     ==============      ==============
</TABLE>

See Notes to Financial Statements

                                      S-5
<PAGE>

Variable Annuity Account C

Notes to Financial Statements - December 31, 1996

1.   Summary of Significant Accounting Policies

     Variable Annuity Account C ("Account") is a separate account established by
     Aetna Life Insurance and Annuity Company and is registered under the
     Investment Company Act of 1940 as a unit investment trust. The Account is
     sold exclusively for use with variable annuity contracts that are qualified
     under the Internal Revenue Code of 1986, as amended.

     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.

     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, 1996:

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

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

     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 the Account 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.

                                      S-6
<PAGE>

Variable Annuity Account C

Notes to Financial Statements - December 31, 1996 (continued):

     d.  Annuity Reserves

     Annuity reserves held in the Separate Accounts are computed for currently
     payable contracts according to the Progressive Annuity, a49, 1971
     Individual Annuity Mortality, 1971 Group Annuity Mortality, 83a, and 1983
     Group Annuity Mortality tables using various assumed interest rates not to
     exceed seven percent. Mortality experience is monitored by the Company.
     Charges to annuity reserves for mortality 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 (distributions in excess of net investment income) and accumulated
     net realized gain (loss) on investments is included in net unrealized gain
     (loss) in the Statements of Operations and Changes in Net Assets.

4.   Purchases and Sales of Investments

     The cost of purchases and proceeds from sales of investments other than
     short-term investments for the years ended December 31, 1996 and December
     31, 1995 aggregated $3,462,016,312 and $2,060,808,031; $1,658,682,532 and
     $570,154,582, respectively.

                                       S-7
<PAGE>

Variable Annuity Account C

Notes to Financial Statements - December 31, 1996 (continued):

5.   Supplemental Information to Statements of Operations and Changes in
     Net Assets - Year Ended December 31, 1996

<TABLE>
<CAPTION>

                                                                                                                      Net Unrealized
                                                           Valuation       Proceeds         Cost of         Net         Gain (Loss)
                                                             Period          from          Investments    Realized       Beginning
                                            Dividends      Deductions        Sales            Sold       Gain (Loss)      of Year
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>            <C>            <C>              <C>           <C>          <C>
Aetna Variable Fund:                       $515,238,366   ($54,321,686)  $1,237,963,630   $841,837,896  $396,125,734 $267,567,573
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Income Shares:                         23,144,319     (4,611,478)     155,474,786    153,469,788     2,004,998    3,230,862
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund:                  14,058,252     (2,878,790)     175,207,017    167,163,639     8,043,378    9,204,418
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.:        72,699,670     (9,562,496)     223,353,174    160,905,519    62,447,655  122,622,603
Annuity contracts in accumulation
Annuity contracts in payment period
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series B:                     5,304,368     (1,100,778)      25,117,816     18,596,857     6,520,959   13,423,804
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series C:                       969,084       (280,865)         229,569        224,240         5,329            0
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio:                963,171       (137,931)         514,612        443,710        70,902      105,405
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio:            797,511       (106,179)         755,620        679,118        76,502       68,967
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio:                595,666        (63,355)       1,206,903      1,119,490        87,413       36,214
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio:             57,328        (16,537)         356,603        338,531        18,072            0
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Alger American Funds:
 Growth Portfolio:                            2,138,198       (966,404)       3,326,813      3,149,890       176,923     (285,937)
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
 Small Capitalization Portfolio:              1,173,212     (3,731,877)      24,333,106     17,577,100     6,756,006   38,038,924
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Calvert Responsibly Invested Balanced Fund:   3,000,539       (425,159)       1,793,014      1,429,393       363,621    2,175,908
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
  Equity-Income Portfolio:                    2,269,871       (994,896)       3,851,613      3,166,678       684,935    2,759,687
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
 Growth Portfolio:                            2,304,888       (707,334)         623,639        453,561       170,078      505,388
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
 Overseas Portfolio:                            115,737        (82,498)       2,280,928      2,065,136       215,792      163,196
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
 Asset Manager Portfolio:                       955,910       (196,386)       2,016,939      1,797,456       219,483    1,530,985
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
 Contrafund Portfolio:                          357,388       (910,633)       1,299,964      1,078,898       221,066      285,166
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
 Index 500 Portfolio:                           219,199       (139,391)       1,105,697        943,071       162,626      223,865
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
Franklin Government Securities Trust:         1,223,061       (290,354)       5,788,894      5,646,267       142,627      831,241
Annuity contracts in accumulation
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       S-8
<PAGE>
Variable Annuity Account C

Notes to Financial Statements - December 31, 1996 (continued):

5.   Supplemental Information to Statements of Operations and Changes in
     Net Assets - Year Ended December 31, 1996

<TABLE>
<CAPTION>
                                                                                        Net
                                             Net Unrealized         Net          Increase(Decrease)
                                               Gain (Loss)        Change in          In Net Assets              Net Assets
                                                  End            Unrealized          from Unit         Beginning          End
                                                of Year          Gain (Loss)        Transactions        of Year         of Year
- -----------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                <C>                 <C>             <C>             <C>
Aetna Variable Fund:                         $327,744,944       $60,177,371         $39,664,335
Annuity contracts in accumulation                                                                   $3,805,891,355  $4,694,078,344
Annuity contracts in payment period                                                                    144,049,741     212,746,872
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Income Shares:                           (9,314,233)      (12,545,095)        (34,151,027)
Annuity contracts in accumulation                                                                      380,937,626     354,233,289
Annuity contracts in payment period                                                                      5,069,969       5,616,023
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Encore Fund:                      (750,036)       (9,954,454)          5,744,394
Annuity contracts in accumulation                                                                      230,291,686     245,304,466
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Investment Advisers Fund, Inc.:          97,219,569       (25,403,034)         (7,904,062)
Annuity contracts in accumulation                                                                      713,304,833     800,532,626
Annuity contracts in payment period                                                                      9,712,862      14,762,802
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series B:                      17,286,695         3,862,891         (22,661,545)
Annuity contracts in accumulation                                                                       73,136,258      65,062,153
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna GET Fund, Series C:                       2,983,885         2,983,885         195,380,730
Annuity contracts in accumulation                                                                                0     199,058,163
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Ascent Variable Portfolio:                1,716,824         1,611,419          14,244,294
Annuity contracts in accumulation                                                                        4,908,736      21,660,591
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Crossroads Variable Portfolio:              838,329           769,362           9,552,968
Annuity contracts in accumulation                                                                        3,668,757      14,758,921
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Legacy Variable Portfolio:                  112,482            76,268           6,451,330
Annuity contracts in accumulation                                                                        1,919,680       9,067,002
- -----------------------------------------------------------------------------------------------------------------------------------
Aetna Variable Index Plus Portfolio:               80,325            80,325          10,514,249
Annuity contracts in accumulation                                                                                0      10,653,437
- -----------------------------------------------------------------------------------------------------------------------------------
Alger American Funds:
 Growth Portfolio:                              6,730,808         7,016,745          58,052,710
Annuity contracts in accumulation                                                                       38,454,000     104,872,172
- -----------------------------------------------------------------------------------------------------------------------------------
 Small Capitalization Portfolio:               39,364,541         1,325,617          77,101,765
Annuity contracts in accumulation                                                                      241,246,447     323,871,170
- -----------------------------------------------------------------------------------------------------------------------------------
Calvert Responsibly Invested Balanced Fund:     2,963,927           788,019           7,573,554
Annuity contracts in accumulation                                                                       28,688,761      39,989,335
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund:
  Equity-Income Portfolio:                     10,675,870         7,916,183          58,569,396
Annuity contracts in accumulation                                                                       38,023,939     106,469,428
- -----------------------------------------------------------------------------------------------------------------------------------
 Growth Portfolio:                              5,256,264         4,750,876          46,205,811
Annuity contracts in accumulation                                                                       27,717,728      80,442,047
- -----------------------------------------------------------------------------------------------------------------------------------
 Overseas Portfolio:                              649,630           486,434           3,994,936
Annuity contracts in accumulation                                                                        3,718,987       8,449,388
- -----------------------------------------------------------------------------------------------------------------------------------
Fidelity Investments Variable Insurance Products Fund II:
 Asset Manager Portfolio:                       2,502,591           971,606             782,358
Annuity contracts in accumulation                                                                       14,370,158      17,103,129
- -----------------------------------------------------------------------------------------------------------------------------------
 Contrafund Portfolio:                         15,161,493        14,876,327          73,985,256
Annuity contracts in accumulation                                                                       30,357,117     118,886,521
- -----------------------------------------------------------------------------------------------------------------------------------
 Index 500 Portfolio:                           2,304,865         2,081,000          15,496,325
Annuity contracts in accumulation                                                                        3,411,144      21,230,903
- -----------------------------------------------------------------------------------------------------------------------------------
Franklin Government Securities Trust:             405,959          (425,282)            664,776
Annuity contracts in accumulation                                                                       22,042,115      23,356,943
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       S-9
<PAGE>
Variable Annuity Account C

Notes to Financial Statements - December 31, 1996 (continued):

5.   Supplemental Information to Statements of Operations and Changes in
     Net Assets - Year Ended December 31, 1996

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

                                                              Valuation         Proceeds          Cost of            Net
                                                                Period            from          Investments        Realized
                                             Dividends        Deductions         Sales             Sold           Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>              <C>            <C>               <C>                 <C>
Janus Aspen Series:
 Aggressive Growth Portfolio:                $1,589,459      ($1,739,222)      $4,803,682        $3,702,615        $1,101,067
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
 Balanced Portfolio:                            238,807          (87,725)       1,671,701         1,511,274           160,427
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
 Flexible Income Portfolio:                     499,929          (72,736)       1,541,843         1,429,353           112,490
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
 Growth Portfolio:                              630,364         (245,877)       1,130,979           963,703           167,276
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
 Short-Term Bond Portfolio:                      61,378          (14,453)         726,351           729,002            (2,651)
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
 Worldwide Growth Portfolio:                  1,725,690       (1,035,043)       1,942,344         1,492,553           449,791
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund:                      0          (55,554)         905,228           870,164            35,064
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund:          80,144         (231,100)       7,649,108         6,026,027         1,623,081
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Neuberger and  Berman Advisers Management Trust -
 Growth Portfolio:                            8,437,018       (1,199,983)      15,336,623        13,853,081         1,483,542
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund -
 International Portfolio:                     4,063,525       (2,264,627)      26,981,873        22,523,390         4,458,483
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
TCI Portfolios, Inc. - Growth Fund:          47,942,547       (4,974,984)     131,517,962       112,052,109        19,465,853
Annuity contracts in accumulation
- ------------------------------------------------------------------------------------------------------------------------------------
Total Variable Annuity Account C           $712,854,599     ($93,446,331)  $2,060,808,031    $1,547,239,509      $513,568,522
====================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
                                                     Net                                  Net
                                                  Unrealized              Net      Increase (Decrease)
                                                 Gain (Loss)           Change in      In Net Assets             Net Assets
                                          Beginning         End       Unrealized       from Unit        Beginning          End
                                           of Year        of Year     Gain (Loss)     Transactions       of Year         of Year
- ------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>            <C>            <C>            <C>             <C>             <C>
Janus Aspen Series:
 Aggressive Growth Portfolio:            $13,091,398    $17,668,916    $4,577,518     $79,952,029
Annuity contracts in accumulation                                                                       $87,395,716    $172,876,567
- ------------------------------------------------------------------------------------------------------------------------------------
 Balanced Portfolio:                          60,530       751,567        691,037      12,773,551
Annuity contracts in accumulation                                                                         1,505,170      15,281,267
- ------------------------------------------------------------------------------------------------------------------------------------
 Flexible Income Portfolio:                  167,581       140,666        (26,915)      4,046,573
Annuity contracts in accumulation                                                                         3,858,123       8,417,464
- ------------------------------------------------------------------------------------------------------------------------------------
 Growth Portfolio:                           145,978     2,192,571      2,046,593      33,135,966
Annuity contracts in accumulation                                                                         5,066,487      40,800,809
- ------------------------------------------------------------------------------------------------------------------------------------
 Short-Term Bond Portfolio:                     (354)       (6,468)        (6,114)      1,108,236
Annuity contracts in accumulation                                                                           544,210       1,690,606

                                      S-10
<PAGE>

- ------------------------------------------------------------------------------------------------------------------------------------
 Worldwide Growth Portfolio:                 786,497    16,710,390     15,923,893     139,287,080
Annuity contracts in accumulation                                                                        16,046,863     172,398,274
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Emerging Markets Fund:             (46,118)      102,991        149,109       1,627,816
Annuity contracts in accumulation                                                                         3,089,046       4,845,481
- ------------------------------------------------------------------------------------------------------------------------------------
Lexington Natural Resources Trust Fund:    1,277,740     3,997,171      2,719,431       5,442,307
Annuity contracts in accumulation                                                                        14,210,484      23,844,347
- ------------------------------------------------------------------------------------------------------------------------------------
Neuberger and  Berman Advisers Management Trust -
 Growth Portfolio:                        11,656,721     9,459,521     (2,197,200)       (937,272)
Annuity contracts in accumulation                                                                        89,495,579      95,081,684
- ------------------------------------------------------------------------------------------------------------------------------------
Scudder Variable Life Investment Fund -
 International Portfolio:                 12,783,439    29,299,509     16,516,070       4,017,712
Annuity contracts in accumulation                                                                       164,724,583     191,515,746
- ------------------------------------------------------------------------------------------------------------------------------------
TCI Portfolios, Inc. - Growth Fund:       91,671,503     8,139,519    (83,531,984)    (57,916,538)
Annuity contracts in accumulation                                                                       425,259,499     346,244,393
- ------------------------------------------------------------------------------------------------------------------------------------
Total Variable Annuity Account C        $594,083,184  $612,391,085    $18,307,901    $781,800,013    $6,632,117,659  $8,565,202,363
===================================================================================================================================
</TABLE>

                                      S-11
<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, 1996, and the related statements of operations and 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, 1996. 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, 1996, 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 Aetna Life Insurance and Annuity Company Variable Annuity Account C
as of December 31, 1996, the results of its operations and the 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, 1996 in conformity with
generally accepted accounting principles.

                                                           KPMG Peat Marwick LLP

Hartford, Connecticut
February 14, 1997

                                      S-12

<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBIDIARIES

                   Index to Consolidated Financial Statements

                                                                            Page

Independent Auditors' Report                                                 F-2

Consolidated Financial Statements:

   Consolidated Statements of Income for the Years Ended
     December 31, 1996, 1995 and 1994                                        F-3

   Consolidated Balance Sheets as of December 31, 1996
     and 1995                                                                F-4

   Consolidated Statements of Changes in Shareholder's Equity
     for the Years Ended December 31, 1996, 1995 and 1994                    F-5

   Consolidated Statements of Cash Flows for the Years
     Ended December 31, 1996, 1995 and 1994                                  F-6

   Notes to Consolidated Financial Statements                                F-7

                                      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, 1996 and 1995,
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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.

                                                       /s/ KPMG Peat Marwick LLP

Hartford, Connecticut
February 4, 1997

                                      F-2
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

                    Consolidated Statements of Income
                               (millions)

                                                Years Ended December 31,
                                           --------------------------------
                                              1996        1995       1994
                                              ----        ----       ----

Revenue:
  Premiums                                   $133.6      $212.7     $191.6
  Charges assessed against policyholders      396.5       318.9      279.0
  Net investment income                     1,045.6     1,004.3      917.2
  Net realized capital gains                   19.7        41.3        1.5
  Other income                                 45.4        42.0       10.3
                                            -------     -------    -------
    Total revenue                           1,640.8     1,619.2    1,399.6
                                            -------     -------    -------

Benefits and expenses:
  Current and future benefits                 968.6       997.2      921.5
  Operating expenses                          342.2       310.8      225.7
  Amortization of deferred policy
   acquisition costs                           69.8        48.0       31.5
  Severance and facilities charges             61.3        --         --
                                            -------     -------    -------
    Total benefits and expenses             1,441.9     1,356.0    1,178.7
                                            -------     -------    -------

Income before income taxes                    198.9       263.2      220.9

Income taxes                                   57.8        87.3       75.6
                                            -------     -------    -------
Net income                                   $141.1      $175.9     $145.3
                                            =======     =======    =======

See Notes to Consolidated Financial Statements.

                                      F-3
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

                         Consolidated Balance Sheets
                        (millions, except share data)

                                                         December 31,
                                                    -------------------------
                                                      1996             1995
                                                      ----             ----
Assets
- ------

Investments:
  Debt securities, available for sale:
   (amortized cost: $12,539.1 and $11,923.7)        $12,905.5        $12,720.8
  Equity securities, available for sale:
   Non-redeemable preferred stock
    (cost: $107.6 and $51.3)                            119.0             57.6
   Investment in affiliated mutual funds
    (cost: $77.3 and $173.4)                             81.1            191.8
   Common stock (cost: $0.0 and $6.9)                     0.3              8.2
   Short-term investments                                34.8             15.1
   Mortgage loans                                        13.0             21.2
   Policy loans                                         399.3            338.6
                                                    ---------        ---------
       Total investments                             13,553.0         13,353.3

  Cash and cash equivalents                             459.1            568.8
  Accrued investment income                             159.0            175.5
  Premiums due and other receivables                     26.6             37.3
  Deferred policy acquisition costs                   1,515.3          1,341.3
  Reinsurance loan to affiliate                         628.3            655.5
  Other assets                                           33.7             26.2
  Separate Account assets                            15,318.3         10,987.0
                                                    ---------        ---------
       Total assets                                 $31,693.3        $27,144.9
                                                    =========        =========

Liabilities and Shareholder's Equity
- -------------------------------------

Liabilities:
  Future policy benefits                             $3,617.0          $3,594.6
  Unpaid claims and claim expenses                       28.9              27.2
  Policyholders' funds left with the Company         10,663.7          10,500.1
                                                    ---------         ---------
      Total insurance reserve liabilities            14,309.6          14,121.9
  Other liabilities                                     354.7             257.2
  Income taxes:
    Current                                              20.7              26.2
    Deferred                                             80.5             169.6
  Separate Account liabilities                       15,318.3          10,987.0
                                                    ---------         ---------
      Total liabilities                              30,083.8          25,561.9
                                                    ---------         ---------

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                                       418.0             407.6
  Net unrealized capital gains                           60.5             132.5
  Retained earnings                                   1,128.2           1,040.1
                                                    ---------         ---------

      Total shareholder's equity                      1,609.5           1,583.0
                                                    ---------         ---------

       Total liabilities and shareholder's equity   $31,693.3         $27,144.9
                                                    =========         =========

See Notes to Consolidated Financial Statements.

                                      F-4
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

          Consolidated Statements of Changes in Shareholder's Equity
                                 (millions)

                                                  Years Ended December 31,
                                             -----------------------------------
                                                  1996       1995      1994
                                                  ----       ----      ----

Shareholder's equity, beginning of year         $1,583.0   $1,088.5   $1,246.7

Capital contributions                               10.4      --         --

Net change in unrealized capital gains (losses)    (72.0)     321.5     (303.5)

Net income                                         141.1      175.9      145.3

Other changes                                      (49.5)     --         --

Common stock dividends declared                     (3.5)      (2.9)     --
                                                --------   --------   --------
Shareholder's equity, end of year               $1,609.5   $1,583.0   $1,088.5
                                                ========   ========   ========

See Notes to Consolidated Financial Statements.

                                      F-5
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

                      Consolidated Statements of Cash Flows
                                   (millions)

<TABLE>
<CAPTION>

                                                                  Years Ended December 31,
                                                           -------------------------------------
                                                               1996        1995         1994
                                                               ----        ----         ----
<S>                                                           <C>          <C>          <C>
Cash Flows from Operating Activities:
  Net income                                                  $141.1       $175.9       $145.3
  Adjustments to reconcile net income to net
   cash (used for) provided by operating activities:
  Decrease (increase) in accrued investment income              16.5        (33.3)       (17.5)
  Decrease in premiums due and other receivables                 1.6         25.4          1.3
  Increase in policy loans                                     (60.7)       (89.9)       (46.0)
  Increase in deferred policy acquisition costs               (174.0)      (177.0)      (105.9)
  Decrease in reinsurance loan to affiliate                     27.2         34.8         27.8
  Net increase in universal life account balances              243.2        393.4        164.7
  (Decrease) increase in other insurance
   reserve liabilities                                        (211.5)        79.0         75.1
  Net increase in other liabilities and other assets             3.1         13.0         52.5
  Decrease in income taxes                                     (26.7)        (4.5)       (10.3)
  Net accretion of discount on investments                     (68.0)       (66.4)       (77.9)
  Net realized capital gains                                   (19.7)       (41.3)        (1.5)
  Other, net                                                     1.1          --          (1.0)
                                                            --------     --------     --------
    Net cash (used for) provided by operating activities      (126.8)       309.1        206.6
                                                            --------     --------     --------

Cash Flows from Investing Activities:
  Proceeds from sales of:
   Debt securities available for sale                        5,182.2      4,207.2      3,593.8
   Equity securities                                           190.5        180.8         93.1
   Mortgage loans                                                8.7         10.7         --
   Limited partnership                                          --           26.6         --
  Investment maturities and collections of:
   Debt securities available for sale                          885.2        583.9      1,289.2
   Short-term investments                                       35.0        106.1         30.4
  Cost of investment purchases in:
   Debt securities available for sale                       (6,534.3)    (6,034.0)    (5,621.4)
   Equity securities                                          (118.1)      (170.9)      (162.5)
   Short-term investments                                      (54.7)       (24.7)      (106.1)
   Mortgage loans                                               --          (21.3)        --
   Limited partnership                                          --           --          (25.0)
  Other, net                                                   (17.6)        --           --
                                                            --------     --------     --------
    Net cash used for investing activities                    (423.1)    (1,135.6)      (908.5)
                                                            --------     --------     --------

Cash Flows from Financing Activities:
  Deposits and interest credited for investment contracts    1,579.5      1,884.5      1,737.8
  Withdrawals of investment contracts                       (1,146.2)    (1,109.6)      (948.7)
  Additional capital contributions                              10.4         --           --
  Dividends paid to shareholder                                 (3.5)        (2.9)        --
                                                            --------     --------     --------
    Net cash provided by financing activities                  440.2        772.0        789.1
                                                            --------     --------     --------

Net (decrease) increase in cash and cash equivalents          (109.7)       (54.5)        87.2
Cash and cash equivalents, beginning of year                   568.8        623.3        536.1
                                                            --------     --------     --------

Cash and cash equivalents, end of year                        $459.1       $568.8       $623.3
                                                            ========     ========     ========

Supplemental cash flow information:
  Income taxes paid, net                                       $85.5        $92.8        $85.9
                                                            ========     ========     ========

See Notes to Consolidated Financial Statements.
</TABLE>

                                      F-6
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

                   Notes to Consolidated Financial Statements

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 individual life insurance.

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

     Individual life insurance products include universal life, variable
     universal life, traditional whole life and term insurance.

     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 Holdings, Inc.
     ("HOLDCO"). HOLDCO is a wholly owned subsidiary of Aetna Retirement
     Services, Inc., whose ultimate parent is Aetna Inc. ("Aetna").

     The consolidated financial statements have been prepared in accordance with
     generally accepted accounting principles. Certain reclassifications have
     been made to 1995 and 1994 financial information to conform to the 1996
     presentation.

     Future Application of Accounting Standards

     Financial Accounting Standard ("FAS") No. 125, Accounting for Transfers and
     Servicing of Financial Assets and Extinguishments of Liabilities, was
     issued in June 1996. This statement provides accounting and reporting
     standards for transfers of financial assets and extinguishments of
     liabilities. Transactions covered by this statement would include
     securitizations, sales of partial interests in assets, repurchase
     agreements and securities lending. This statement requires that after a
     transfer of financial assets, an entity would recognize any assets it
     controls and liabilities it has incurred. An entity would not recognize
     assets when control has been surrendered or liabilities have been
     satisfied. Portions of this statement are effective for each of 1997 and
     1998 financial statements and early adoption is not permitted. The Company
     does not expect adoption of this statement to have a material effect on its
     financial position or results of operations.

                                      F-7
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

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 Equivalents

     Cash and cash equivalents include cash on hand, money market instruments
     and other debt issues with a maturity of 90 days or less when purchased.

     Investments

     All of the Company's debt and equity securities are classified as available
     for sale and carried at fair value. These securities are written down (as
     realized capital losses) for other than temporary declines in value.
     Unrealized capital gains and losses related to available for sale other
     than amounts allocable to experience rated contractholders, are reflected
     in shareholder's equity, net of related taxes.

     Fair values for debt and equity 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 and equity securities are recorded on the trade
     date.

     The investment in affiliated mutual funds primarily 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 are carried at unpaid principal balances,
     net of impairment reserves. Sales of mortgage loans are recorded on the
     closing date.

     Short-term investments, consisting primarily of money market instruments
     and other debt issues purchased with a maturity of 91 days to one year, are
     considered available for sale and are carried at fair value, which
     approximates amortized cost.

                                      F-8
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

1.   Summary of Significant Accounting Policies (Continued)

     Futures contracts are carried at fair value and require daily cash
     settlement. Changes in the fair value of futures contracts that qualify as
     hedges are deferred and recognized as an adjustment to the hedged asset or
     liability. Deferred gains or losses on such futures contracts are amortized
     over the life of the acquired asset or liability as a yield adjustment or
     through net realized capital gains or losses upon disposal of an asset.
     Changes in the fair value of futures contracts that do not qualify as
     hedges are recorded in net realized capital gains or losses. Hedge
     designation requires specific asset or liability identification, a
     probability at inception of high correlation with the position underlying
     the hedge, and that high correlation be maintained throughout the hedge
     period. If a hedging instrument ceases to be highly correlated with the
     position underlying the hedge, hedge accounting ceases at that date and
     excess gains and losses on the hedging instrument are reflected in net
     realized capital gains or losses.

     Swap agreements which are designated as interest rate risk management
     instruments at inception are accounted for using the accrual method.
     Accordingly, the difference between amounts paid and received on such
     agreements is reported in net investment income. There is no recognition in
     the Consolidated Balance Sheets for changes in the fair value of the
     agreement.

     Deferred Policy Acquisition Costs

     Certain costs of acquiring insurance business are deferred. These costs,
     all of which vary with and are primarily related to the production of new
     and renewal 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 (up to 20 years). For universal life and certain
     annuity contracts, such costs are amortized in proportion to estimated
     gross profits and adjusted to reflect actual gross profits over the life of
     the contracts (up to 20 years).

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

     Insurance Reserve Liabilities

     Future Policy Benefits include reserves for universal life, immediate
     annuities with life contingent payouts and traditional life insurance
     contracts. Reserves for universal life contracts are equal to cumulative
     deposits less charges and withdrawals plus credited interest thereon.
     Reserves for immediate annuities with life contingent payouts and
     traditional life insurance contracts are computed on the basis of assumed
     investment yield, mortality, and expenses, including a margin for adverse
     deviations. Such assumptions generally vary by plan, year of issue and
     policy duration. Reserve interest rates range from 2.25% to 12.00%.
     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.

                                      F-9
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

1.   Summary of Significant Accounting Policies (Continued)

     Policyholders' Funds Left With the Company include reserves for deferred
     annuity investment contracts and immediate annuities without life
     contingent payouts. Reserves on such contracts are equal to cumulative
     deposits less charges and withdrawals plus credited interest thereon (rates
     range from 4.00% to 7.00%), net of adjustments for investment experience
     that the Company is entitled to reflect in future credited interest.
     Reserves on contracts subject to experience rating reflect the rights of
     contractholders, plan participants and 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

     For universal life and certain annuity contracts, charges assessed against
     policyholders' funds for the cost of insurance, surrender charges,
     actuarial margin and other fees are recorded as revenue in charges assessed
     against policyholders. Other amounts received for these contracts are
     reflected as deposits and are not recorded as revenue. Life insurance
     premiums, other than premiums for universal life and certain annuity
     contracts, are recorded as premium revenue when due. Related policy
     benefits are recorded in relation to the associated premiums or gross
     profit so that profits are recognized over the expected lives of the
     contracts. When annuity payments begin under contracts with life contingent
     payouts that were initially investment contracts, the accumulated balance
     in the account is treated as a single premium for the purchase of an
     annuity, reflected as an offsetting amount in both premiums and current and
     future benefits in the Consolidated Statements of Income.

     Separate Accounts

     Assets held under variable universal 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, the Aetna Series Fund Inc., or the
     Aetna Generation Funds (collectively, "Funds"), 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. Since the Company bears
     the investment risk where the contract is held to maturity, the assets of
     the Separate Account supporting the guaranteed interest option are carried
     at an amortized cost of $515.6 million for 1996 (fair value $523.0 million)
     and $322.2 million for 1995 (fair value $343.9 million). Reserves relating
     to the guaranteed interest option are maintained at fund value and reflect
     interest credited at rates ranging from 4.10% to 8.00% in 1996 and 4.50% to
     8.38% in 1995.

                                      F-10
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

1.   Summary of Significant Accounting Policies (Continued)

     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 and losses of the Separate Accounts
     are not reflected in the Consolidated Statements of Income (with the
     exception of realized capital gains and 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.

     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 expenses/benefits result from changes during the year
     in cumulative temporary differences between the tax basis and book basis of
     assets and liabilities.

                                      F-11
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

2.   Investments

     Debt securities available for sale as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>

                                                          Gross       Gross
                                            Amortized  Unrealized   Unrealized    Fair
                                              Cost        Gains       Losses     Value
                                              ----        -----       ------     -----
                                                       (millions)
<S>                                        <C>         <C>         <C>         <C>
U.S. government and government
   agencies and authorities                $ 1,072.4   $    20.5   $     4.5   $ 1,088.4

States, municipalities and political
   subdivisions                                  6.0         1.2        --           7.2

U.S. corporate securities:
     Financial                               2,143.4        43.1         9.7     2,176.8
     Food & fiber                              198.2         4.6         1.3       201.5
     Healthcare & consumer products            735.9        20.2         6.3       749.8
     Media & broadcast                         274.9         7.0         2.8       279.1
     Natural resources                         187.7         4.5         0.4       191.8
     Transportation & capital goods            521.9        22.0         1.8       542.1
     Utilities                                 448.8        14.8         2.8       460.8
     Other                                     141.5         3.0        --         144.5
                                           ---------   ---------   ---------   ---------
   Total U.S. corporate securities           4,652.3       119.2        25.1     4,746.4

Foreign Securities:
     Government                                758.6        36.0         5.7       788.9
     Utilities                                 187.8        16.1        --         203.9
     Other                                     945.5        30.9         6.3       970.1
                                           ---------   ---------   ---------   ---------
   Total foreign securities                  1,891.9        83.0        12.0     1,962.9

Residential mortgage-backed securities:
     Pass-throughs                             792.2        78.3         3.1       867.4
     Collateralized mortgage obligations     2,227.8        94.9        13.7     2,309.0
                                           ---------   ---------   ---------   ---------
Total residential mortgage-
   backed securities                         3,020.0       173.2        16.8     3,176.4

Commercial/Multifamily mortgage-
   backed securities                         1,008.7        24.8         5.6     1,027.9

Other asset-backed securities                  887.8        10.7         2.2       896.3
                                           ---------   ---------   ---------   ---------

Total Debt Securities                      $12,539.1   $   432.6   $    66.2   $12,905.5
                                           =========   =========   =========   =========
</TABLE>

                                      F-12
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

2.   Investments (Continued)

     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. government and government
   agencies and authorities                $   539.5   $    47.5   $    --     $   587.0

States, municipalities and political
   subdivisions                                 41.4        12.4        --          53.8

U.S. Corporate securities:
     Financial                               2,764.4       110.3         2.1     2,872.6
     Food & fiber                              310.8        20.8         0.6       331.0
     Healthcare & consumer products            766.0        59.2         0.2       825.0
     Media & broadcast                         191.7        10.0        --         201.7
     Natural resources                         186.9        12.6         0.2       199.3
     Transportation & capital goods            602.4        46.7         0.2       648.9
     Utilities                                 454.4        27.8         1.0       481.2
     Other                                     119.9        10.2        --         130.1
                                           ---------   ---------   ---------   ---------
   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
     Utilities                                 236.3        32.9                   269.2
     Other                                     749.9        60.5         3.5       806.9
                                           ---------   ---------   ---------   ---------
   Total foreign securities                  1,302.6       119.5         5.5     1,416.6

Residential mortgage-backed securities:
     Pass-throughs                             556.7        99.2         1.8       654.1
     Collateralized mortgage obligations     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

Other asset-backed securities                  961.2        35.5         0.5       996.2
                                           ---------   ---------   ---------   ---------

Total Debt Securities                      $11,923.7   $   811.6   $    14.5   $12,720.8
                                           =========   =========   =========   =========

</TABLE>

                                      F-13
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

2.   Investments (Continued)

     At December 31, 1996 and 1995, net unrealized appreciation of $366.4
     million and $797.1 million, respectively, on available for sale debt
     securities included $288.5 million and $619.1 million, respectively,
     related to experience rated contracts, which were not reflected in
     shareholder's equity but in Future Policy Benefits and Policyholders' Funds
     Left With the Company.

     The amortized cost and fair value of debt securities for the year ended
     December 31, 1996 are shown below by contractual maturity. Actual
     maturities may differ from contractual maturities because securities may be
     restructured, called, or prepaid.

                                                      Amortized          Fair
                                                         Cost            Value
                                                      ---------          -----
                                   (millions)
      Due to mature:
        One year or less                              $   424.4        $   425.7
        After one year through five years               2,162.4          2,194.2
        After five years through ten years              2,467.4          2,509.6
        After ten years                                 2,568.4          2,675.4
        Mortgage-backed securities                      4,028.7          4,204.3
        Other asset-backed securities                     887.8            896.3
                                                      ---------        ---------
               Total                                  $12,539.1        $12,905.5
                                                      =========        =========

     The Company engages in securities lending whereby certain securities from
     its portfolio are loaned to other institutions for short periods of time.
     Collateral, primarily cash, 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, 1996 and 1995, the Company had loaned
     securities (which are reflected as invested assets) with a market value of
     approximately $444.7 million and $264.5 million, respectively.

     At December 31, 1996 and 1995, debt securities carried at $7.6 million and
     $7.4 million, respectively, were on deposit as required by regulatory
     authorities.

     The carrying value of non-income producing investments was $0.9 million and
     $0.1 million at December 31, 1996 and 1995, respectively.

     The Company did not have any 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, 1996.

                                      F-14
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

2.   Investments (Continued)

     Included in the Company's total debt securities were residential
     collateralized mortgage obligations ("CMOs") supporting the following:
<TABLE>
<CAPTION>

                                                         1996                   1995
                                                         ----                   ----
                                                    Fair     Amortized     Fair      Amortized
                                                   Value        Cost      Value         Cost
                                                   -----        ----      -----         ----
                                                                  (millions)
<S>                                              <C>         <C>         <C>         <C>
     Total residential CMOs (1)                  $2,309.0    $2,227.8    $2,549.4    $2,383.9
                                                 ========    ========    ========    ========
     Percentage of total:
       Supporting experience rated products          84.2%                   85.3%
       Supporting remaining products                 15.8%                   14.7%
                                                 --------                --------
                                                    100.0%                  100.0%
                                                 ========                ========
</TABLE>

     (1)  At December 31, 1996 and 1995, approximately 71% and 81%,
          respectively, of the Company's residential CMO holdings were backed by
          government agencies such as GNMA, FNMA, FHLMC.

     There are various categories of CMOs which are subject to different degrees
     of risk from changes in interest rates and, for nonagency-backed CMOs,
     defaults. The principal risks inherent in holding CMOs are prepayment and
     extension risks related to dramatic decreases and increases in interest
     rates resulting in the repayment of principal from the underlying mortgages
     either earlier or later than originally anticipated.

     At December 31, 1996 and 1995, approximately 68% and 79%, respectively, of
     the Company's CMO holdings were in planned amortization class ("PAC") and
     sequential structure tranches, which are subject to less prepayment and
     extension risk than other types of CMO instruments. At December 31, 1996
     and 1995, approximately 3% of the Company's CMO holdings were in the
     interest-only ("IOs") and principal-only ("POs") tranches, which are
     subject to more prepayment and extension risks than other types of CMO
     instruments. Remaining CMO holdings are in other tranches that have
     prepayment and extension risks which fall between the degree of risk
     associated with PACs and sequentials, and IOs and POs.

                                      F-15
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

2.   Investments (Continued)

     Investments in available for sale equity securities were as follows:

                                             Gross         Gross
                              Amortized      Unrealized    Unrealized   Fair
                                 Cost        Gains         Losses       Value
                                 ----        ----------    ----------   -----
                                                  (millions)
       1996
       Equity Securities       $ 184.9       $  16.3       $   0.8      $ 200.4
                               =======       =======       =======      =======
       1995
       Equity Securities       $ 231.6       $  27.2       $   1.2      $ 257.6
                               =======       =======       =======      =======

3.   Financial Instruments

     Estimated Fair Value

     The carrying values and estimated fair values of certain of the Company's
     financial instruments at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>

                                                    1996                    1995
                                             ------------------       -----------------
                                             Carrying     Fair        Carrying    Fair
                                             Value        Value       Value       Value
                                             -----        -----       -----       -----
                                                         (millions)
<S>                                          <C>          <C>         <C>         <C>
Assets:
    Mortgage loans                           $    13.0    $    13.2   $    21.2   $    21.9
Liabilities:
    Investment contract liabilities:
          With a fixed maturity              $ 1,014.1    $ 1,028.8   $   989.1   $ 1,001.2
          Without a fixed maturity             9,649.6      9,427.6     9,511.0     9,298.4
</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 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, price and liquidity
     risks, the fair values of all assets and liabilities should be taken into
     consideration, not only those presented above.

                                      F-16
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

3.   Financial Instruments (Continued)

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

     Mortgage loans: Fair values are 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.

     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 and Other Financial Instruments (including Derivative
     Financial Instruments)

     The Company uses off-balance-sheet and other financial instruments
     primarily to manage portfolio risks, including interest rate,
     prepayment/call, credit, price, and liquidity risks. In 1996, Treasury
     futures contracts were used to manage interest rate risk in the Company's
     bond portfolio and stock index futures contracts were used to manage price
     risk in the Company's equity portfolio. In 1996 and 1995, interest rate
     swaps and forward commitments to enter into interest rate swaps,
     respectively, were also used to manage interest rate risk in the Company's
     bond portfolio.

     Futures Contracts:

     Futures contracts represent commitments to either purchase or sell
     underlying assets at a specified future date. Futures contracts trade on
     organized exchanges and, therefore, have minimal credit risk. Cash
     settlements are made daily based on changes in the prices of the underlying
     assets. There were no futures contracts open as of December 31, 1996 and
     1995.

                                      F-17
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

3.   Financial Instruments (Continued)

     Interest Rate Swaps:

     Under interest rate swaps, the Company agrees with other parties to
     exchange interest amounts calculated by reference to an agreed notional
     principal amount. Generally, no cash is exchanged at the outset of the
     contract and no principal payments are made. A single net payment is
     usually made by one counterparty at each due date or upon termination of
     the contract. The Company would be exposed to credit-related losses in the
     event of nonperformance by counterparties to financial instruments,
     however, the Company controls its exposure to credit risk through credit
     approvals, credit limits and regular monitoring procedures. The credit
     exposure of interest rate swaps is represented by the fair value (market
     value) of contracts with a positive fair value (market value) at the
     reporting date. There were no interest rate swap agreements open as of
     December 31, 1996. At December 31, 1995, the Company had an open forward
     swap agreement with a notional amount of $100.0 million and a fair value of
     $0.1 million.

     During 1995, the Company received $0.4 million for writing call options on
     underlying securities. The Company did not write any call options in 1996.
     As of December 31, 1996 and 1995, there were no option contracts
     outstanding.

     The Company also had investments in certain debt instruments with
     derivative characteristics, including those whose market value is at least
     partially determined by, among other things, levels of or changes in
     domestic and/or foreign interest rates (short or long term), exchange
     rates, prepayment rates, equity markets or credit ratings/spreads. The
     amortized cost and fair value of these securities, included in the debt
     securities portfolio, as of December 31, 1996 was as follows:

                                                          Amortized      Fair
                                                             Cost        Value
                                                             ----        -----
                                                                 (millions)

       Residential collateralized mortgage obligations    $ 2,227.8    $ 2,309.0
            Principal-only strips (included above)             44.5         53.3
            Interest-only strips (included above)              10.3         22.8
       Other structured securities with derivative
            characteristics (1)                               126.3        129.2

     (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.

                                      F-18
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

4.   Net Investment Income

     Sources of net investment income were as follows:
                                                1996         1995         1994
                                                ----         ----         ----
                                                          (millions)

     Debt securities                         $  945.3     $  891.5     $  823.9
     Preferred stock                              5.9          4.2          3.9
     Investment in affiliated mutual funds       14.3         14.9          5.2
     Mortgage loans                               2.2          1.4          1.4
     Policy loans                                18.4         13.7         11.5
     Reinsurance loan to affiliate               44.1         46.5         51.5
     Cash equivalents                            29.4         38.9         29.5
     Other                                        2.1          8.4          6.7
                                             --------     --------     --------
     Gross investment income                  1,061.7      1,019.5        933.6
     Less investment expenses                   (16.1)       (15.2)       (16.4)
                                             --------     --------     --------
     Net investment income                   $1,045.6     $1,004.3     $  917.2
                                             ========     ========     ========

     Net investment income includes amounts allocable to experience rated
     contractholders of $787.6 million, $744.2 million and $677.1 million for
     the years ended December 31, 1996, 1995 and 1994, respectively. Interest
     credited to contractholders is included in Current and Future Benefits.

5.  Dividend Restrictions and Shareholder's Equity

     The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995,
     the Company dividended $2.9 million in the form of two of its subsidiaries,
     Systematized Benefits Administrators, Inc. and Aetna Investment Services,
     Inc., to Aetna Retirement Services, Inc. (the Company's former parent).

     The amount of dividends that may be paid to the shareholder in 1997 without
     prior approval by the Insurance Commissioner of the State of Connecticut is
     $71.1 million.

     The Insurance Department of the State of Connecticut (the "Department")
     recognizes as net income and shareholder's capital and surplus 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
     $57.8 million, $70.0 million and $64.9 million for the years ended December
     31, 1996, 1995 and 1994, respectively. Statutory capital and surplus was
     $713.6 million and $670.7 million as of December 31, 1996 and 1995,
     respectively.

     As of December 31, 1996 the Company does not utilize any statutory
     accounting practices which are not prescribed by state regulatory
     authorities that, individually or in the aggregate, materially affect
     statutory capital and surplus.

                                      F-19
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

6.   Capital Gains and Losses on Investment Operations

     Realized capital gains or losses are the difference between the carrying
     value and sale proceeds of specific investments sold.

     Net realized capital gains on investments were as follows:

                                                  1996        1995        1994
                                                  ----        ----        ----
                                   (millions)

       Debt securities                         $   11.1     $  32.8     $   1.0
       Equity securities                            8.6         8.3         0.2
       Mortgage loans                               --          0.2         0.3
                                               --------     --------    -------
       Pretax realized capital gains           $   19.7     $  41.3     $   1.5
                                               ========     =======     =======
       After tax realized capital gains        $   13.0     $  25.8     $   1.0
                                               ========     =======     =======

     Net realized capital gains of $53.1 million and $61.1 million for 1996 and
     1995, respectively, and net realized capital losses of $29.1 million for
     1994, allocable to experience rated contracts, were deducted from net
     realized capital gains (losses) and an offsetting amount was reflected in
     policyholder funds' left with the Company. Net unamortized gains were $53.3
     million and $7.3 million at December 31, 1996 and 1995, respectively.

     Changes to the mortgage loan valuation reserve and writedowns on debt
     securities for other than temporary declines in value are included in net
     realized capital gains (losses) and amounted to $(3.3) million, $3.1
     million and $1.1 million, of which $(3.2) million, $2.2 million and $0.8
     million were allocable to experience rated contractholders, for the years
     ended December 31, 1996, 1995 and 1994, respectively. There was no
     valuation reserve for mortgage loans at December 31, 1996 or at December
     31, 1995.

     Proceeds from the sale of available for sale debt securities and the
     related gross gains and losses were as follows:

                                           1996          1995            1994
                                           ----          ----            ----
                                                      (millions)

     Proceeds on Sales                   $5,182.2      $4,207.2       $3,593.8
     Gross gains                             24.3          44.6           26.6
     Gross losses                            13.2          11.8           25.6

                                      F-20
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

6.   Capital Gains and Losses on Investment Operations (Continued)

     Changes in shareholder's equity related to changes in unrealized capital
     gains (losses), (excluding those related to experience rated
     contractholders), were as follows:

                                                 1996         1995        1994
                                                 ----         ----        ----
                                                         (millions)

     Debt securities                          $ (100.1)    $  255.9    $ (242.1)
     Equity securities                           (10.5)        27.3       (13.3)
     Limited partnership                           --           1.8        (1.8)
                                              --------     --------    --------
                                                (110.6)       285.0      (257.2)

     Deferred income taxes (See Note 8)          (38.6)       (36.5)       46.3
                                              --------     --------    --------
     Net change in unrealized
        capital gains (losses)                $  (72.0)    $  321.5    $ (303.5)
                                              ========     ========    ========

     Net unrealized capital gains allocable to experience rated contracts of
     $245.2 million and $43.3 million at December 31, 1996 and $515.0 million
     and $104.1 million at December 31, 1995 are reflected on the Consolidated
     Balance Sheets in Policyholders' Funds Left With the Company and Future
     Policy Benefits, respectively, and are not included in shareholder's
     equity.

     Shareholder's equity included the following unrealized capital gains
     (losses), which are net of amounts allocable to experience rated
     contractholders, at December 31:

                                               1996         1995          1994
                                               ----         ----          ----
                                                          (millions)
     Debt securities
       Gross unrealized capital gains         $101.7       $179.3       $  27.4
       Gross unrealized capital losses         (23.8)        (1.3)       (105.2)
                                              ------       ------       --------
                                                77.9        178.0         (77.8)
     Equity securities
       Gross unrealized capital gains           16.3         27.2           6.5
       Gross unrealized capital losses          (0.8)        (1.2)         (7.9)
                                              ------       ------       --------
                                                15.5         26.0          (1.4)
     Limited Partnership                        --           --            --
       Gross unrealized capital gains           --           --            --
       Gross unrealized capital losses          --           --            (1.8)
                                              ------       ------       --------
                                                --           --            (1.8)

     Deferred income taxes (See Note 8)         32.9         71.5         108.0
                                              ------       ------       --------

     Net unrealized capital gains (losses)    $ 60.5       $132.5       $(189.0)
                                              ======       ======       ========

                                      F-21
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

7.   Severance and Facilities Charges

     Severance and facilities charges during 1996, as described below, included
     the following (pretax):
<TABLE>
<CAPTION>

                                                    Vacated
                                          Asset      Leased             Corporate
(Millions)                   Severance  Write-Off   Property     Other  Allocation    Total
- --------------------------------------------------------------------------------------------
<S>                            <C>        <C>        <C>        <C>        <C>        <C>
Financial Services             $ 29.1     $  1.0     $  1.3     $  1.7     $ --       $ 33.1
Individual Life Insurance        12.5        0.4        0.5        0.8       --         14.2
Corporate Allocation             --         --         --         --         14.0       14.0
                             ---------------------------------------------------------------
   Total Company               $ 41.6     $  1.4     $  1.8     $  2.5     $ 14.0     $ 61.3
- --------------------------------------------------------------------------------------------
</TABLE>

     In the third quarter of 1996, the Company recorded a $30.7 million after
     tax ($47.3 million pretax) charge principally related to actions taken or
     expected to be taken to improve its cost structure relative to its
     competitors. The severance portion of the charge is based on a plan to
     eliminate 702 positions (primarily customer service, sales and information
     technology support staff). The facilities portion of the charge is based on
     a plan to consolidate sales/service field offices.

     In addition to the above charge, Aetna recorded a facilities and severance
     charge in the second quarter of 1996, primarily as a result of actions
     taken or expected to be taken to reduce the level of corporate expenses and
     other costs previously absorbed by Aetna's property-casualty operations.
     The cost allocated to the Company associated with this charge was $9.1
     million after tax ($14.0 million pretax).

     The activity during 1996 within the severance and facilities reserve
     (pretax, in millions) and the number of positions eliminated related to
     such actions were as follows:

                                                    Reserve            Positions
     ---------------------------------------------------------------------------
       Beginning of year                           $   --                 --
       Severance and facilities charges               47.3                702
       Corporate Allocation                           14.0                --
       Actions taken (1)                             (13.4)              (178)
                                                 -------------------------------
          End of year                              $  47.9                524
     ---------------------------------------------------------------------------

     (1)  Includes $8.0 million of severance-related actions and $4.1 million of
          corporate allocation-related actions.

     The Company's severance actions are expected to be substantially completed
     by March 31, 1998. The corporate allocation actions and the vacating of the
     leased office space are expected to be substantially completed in 1997.

                                      F-22
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

8.   Income Taxes

     The Company is included in the consolidated federal income tax return and
     combined Connecticut and New York state income tax returns 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 used in the consolidated
     returns.

     Income taxes for the years ended December 31, consist of:

                                                      1996      1995      1994
                                                      ----      ----      ----
                                   (millions)
     Current taxes (benefits):
     Income Taxes:
       Federal                                       $ 50.9    $ 82.9    $ 78.7
       State                                            3.7       3.2       4.4
       Net realized capital gains (losses)             25.3      28.5     (33.2)
                                                     ------    ------    ------
                                                       79.9     114.6      49.9
                                                     ------    ------    ------
     Deferred taxes (benefits):
     Income Taxes:
       Federal                                         (3.5)    (14.4)     (8.0)
       Net realized capital gains (losses)            (18.6)    (12.9)     33.7
                                                     ------    ------    ------
                                                      (22.1)    (27.3)     25.7
                                                     ------    ------    ------
          Total                                      $ 57.8    $ 87.3    $ 75.6
                                                     ======    ======    ======

     Income taxes were different from the amount computed by applying the
     federal income tax rate to income before income taxes for the following
     reasons:

                                                      1996      1995      1994
                                                      ----      ----      ----
                                   (millions)

     Income before income taxes                      $198.9    $263.2    $220.9
     Tax rate                                            35%       35%       35%
                                                     ------    ------    ------
     Application of the tax rate                       69.6      92.1      77.3
                                                     ------    ------    ------
     Tax effect of:
          State income tax, net of federal benefit      2.4       2.1       2.9
          Excludable dividends                         (8.7)     (9.3)     (8.6)
          Other, net                                   (5.5)      2.4       4.0
                                                     ------    ------    ------
            Income taxes                             $ 57.8    $ 87.3    $ 75.6
                                                     ======    ======    ======

                                      F-23
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

8.   Income Taxes (Continued)

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

                                                            1996          1995
                                                            ----          ----
                                                                (millions)
       Deferred tax assets:
            Insurance reserves                            $ 344.6       $ 290.4
            Unrealized gains allocable to
              experience rated contracts                    100.8         216.7
            Investment losses                                 7.5           7.3
            Postretirement benefits other
              than pensions                                  27.0           7.7
            Deferred compensation                            25.0          18.9
            Pension                                           7.6           5.7
            Other                                            29.3           9.2
                                                          -------       -------
       Total gross assets                                   541.8         555.9

       Deferred tax liabilities:
            Deferred policy acquisition costs               482.1         433.0
            Market discount                                   6.8           4.4
            Net unrealized capital gains                    133.7         288.2
            Other                                            (0.3)         (0.1)
                                                          -------       -------
       Total gross liabilities                              622.3         725.5
                                                          -------       -------
       Net deferred tax liability                         $  80.5       $ 169.6
                                                          =======       =======

     Net unrealized capital gains and losses are presented in shareholder's
     equity net of deferred taxes. Valuation allowances are provided when it is
     not considered more likely than not that deferred tax assets will be
     realized. As of December 31, 1996 and 1995, no valuation allowances were
     required for unrealized capital gains and losses.

     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, 1996. 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.

                                      F-24
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

8.   Income Taxes (Continued)

     The Internal Revenue Service ("Service") has completed examinations of the
     consolidated federal income tax returns of Aetna through 1990. Discussions
     are being held with the Service with respect to proposed adjustments.
     Management believes there are adequate defenses against, or sufficient
     reserves to provide for, any such adjustments. The Service has commenced
     its examinations for the years 1991 through 1994.

9.   Benefit Plans

     Employee Pension Plans - The Company, in conjunction with Aetna, has
     noncontributory defined benefit pension plans covering substantially all
     employees. The plans provide pension benefits based on years of service and
     average annual compensation (measured over 60 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 tax-deductible. As of
     December 31, 1996, Aetna's accrued pension cost has been allocated to its
     subsidiaries, including the Company, under an allocation based on eligible
     salaries. Data on a separate company basis regarding the proportionate
     share of the projected benefit obligation and plan assets is not available.
     The accumulated benefit obligation and plan assets are recorded by Aetna.
     As of the measurement date (i.e., September 30), the accumulated plan
     assets exceeded accumulated plan benefits. Allocated pretax charges to
     operations for the pension plan (based on the Company's total salary cost
     as a percentage of Aetna's total salary cost) were $4.3 million, $6.1
     million and $5.5 million for the years ended December 31, 1996, 1995 and
     1994, respectively.

     Employee Postretirement Benefits - In addition to providing pension
     benefits, Aetna currently provides health care and life insurance benefits,
     subject to certain caps, for retired employees. A comprehensive medical and
     dental plan is offered to all full-time employees retiring at age 50 with
     15 years of service or at age 65 with 10 years of service. Retirees are
     generally required to contribute to the plans based on their years of
     service with Aetna. The costs to the Company associated with the Aetna
     postretirement plans for 1996, 1995 and 1994 were $1.8 million, $1.4
     million and $1.0 million, respectively.

     As of December 31, 1996, Aetna transferred to the Company approximately
     $77.7 million of accrued liabilities, primarily related to the pension and
     postretirement benefit plans described above, that had been previously
     recorded by Aetna. The after tax amount of this transfer (approximately
     $50.5 million) is reported as a reduction in retained earnings.

     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. As of the measurement
     date (i.e., September 30), the accumulated plan assets exceeded accumulated
     plan benefits.

                                      F-25
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

9.   Benefit Plans (Continued)

     Agent Postretirement Benefits - The Company, in conjunction with Aetna,
     also provides certain postretirement health care and life insurance
     benefits for certain agents. The costs to the Company associated with the
     agents' postretirement plans for 1996, 1995 and 1994 were $0.7 million,
     $0.8 million and $0.7 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 $5.4 million, $4.9 million and $3.3
     million in 1996, 1995 and 1994, respectively.

     Stock Plans - Aetna has a stock incentive plan that provides for stock
     options, deferred contingent common stock or equivalent cash awards or
     restricted stock to certain key employees. Executive and middle management
     employees may be granted options to purchase common stock of Aetna at or
     above the market price on the date of grant. Options generally become 100%
     vested three years after the grant is made, with one-third of the options
     vesting each year. Aetna does not recognize compensation expense for stock
     options granted at or above the market price on the date of grant under its
     stock incentive plans. In addition, executives may be granted incentive
     units which are rights to receive common stock or an equivalent value in
     cash. The incentive units may vest within a range from 0% to 175% at the
     end of a four year period based on the attainment of performance goals. The
     costs to the Company associated with the Aetna stock plans for 1996, 1995
     and 1994, were $8.1 million, $6.3 million and $1.7 million, respectively.
     As of December 31, 1996, Aetna transferred to the Company approximately
     $1.1 million of deferred tax benefits related to stock options. This amount
     is reported as an increase in retained earnings.

10.  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 .10% to
     1.90% 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 .85% of their average daily net assets. The Company
     also receives fees (expressed as a percentage of the average daily net
     assets) from the variable life and annuity mutual funds and The Aetna
     Series Fund for providing administration services, and from The Aetna
     Series Fund for providing 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
     $185.4 million, $128.1 million and $104.6 million in 1996, 1995 and 1994,
     respectively. The Company may waive advisory fees at its discretion.

                                      F-26
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

10.  Related Party Transactions (Continued)

     The Company acts as an investment adviser for its affiliated mutual funds.
     Since August 1996, Aeltus Investment Management, Inc. ("Aeltus"), a wholly
     owned subsidiary of HOLDCO and an affiliate of the Company, has been acting
     as Subadvisor of all affiliated mutual funds and of most of the General
     Account assets. Fees paid by the Company to Aeltus, included in both
     Charges Assessed Against Policyholders and Net Investment Income, on an
     annual basis, range from .06% to .55% of the average daily net assets under
     management. For the year ended December 31, 1996, the Company paid $16.0
     million in such fees.

     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. An additional $6.1 million commission, paid by
     the Company to Aetna Life in 1996, was capitalized as deferred policy
     acquisition costs. The Company maintained insurance reserves of $628.3
     million and $655.5 million as of December 31, 1996 and 1995, 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 $625.3 million and $663.5 million as of December 31, 1996 and 1995,
     respectively, and is based upon the fair value of the underlying assets.
     Premiums of $25.3 million, $28.0 million and $32.8 million and current and
     future benefits of $39.5 million, $43.0 million and $43.8 million were
     assumed in 1996, 1995 and 1994, respectively.

     Investment income of $44.1 million, $46.5 million and $51.5 million was
     generated from the reinsurance loan to affiliate in 1996, 1995 and 1994,
     respectively. Net income of approximately $8.1 million, $18.4 million and
     $25.1 million resulted from this agreement in 1996, 1995 and 1994,
     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 $28.9 million and
     $28.0 million were maintained for this contract as of December 31, 1996 and
     1995, 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 $5.2
     million, $3.2 million and $1.3 million for 1996, 1995 and 1994,
     respectively.

                                      F-27
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

10.  Related Party Transactions (Continued)

     The Company received a capital contribution of $10.4 million in cash from
     HOLDCO in 1996. The Company received no capital contributions in 1995 or
     1994.

     The Company paid $3.5 million in cash dividends to HOLDCO in 1996. In 1995,
     the Company dividended $2.9 million in the form of two of its subsidiaries,
     Systematized Benefits Administrators, Inc. and Aetna Investment Services,
     Inc., to Aetna Retirement Services, Inc. (the Company's former parent).

     Premiums due and other receivables include $2.8 million and $5.7 million
     due from affiliates in 1996 and 1995, respectively. Other liabilities
     include $10.7 million and $12.4 million due to affiliates for 1996 and
     1995, 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.

11.  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-28
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

11.  Reinsurance (Continued)

     The following table includes premium amounts ceded/assumed to/from
     affiliated companies as discussed in Note 10 above.

                                                Ceded to    Assumed
                                        Direct    Other    from Other      Net
                                        Amount  Companies   Companies     Amount
                                        ------  ---------   ---------     ------
                                                    (millions)
     1996
 Premiums:
   Life Insurance                      $  34.6   $  11.2     $  25.3     $  48.7
   Accident and Health Insurance           6.3       6.3        --          --
   Annuities                              84.3      --           0.6        84.9
                                       =======   =======     =======     =======
    Total earned premiums              $ 125.2   $  17.5     $  25.9     $ 133.6
                                       =======   =======     =======     =======
     1995
 Premiums:
   Life Insurance                      $  28.8   $   8.6     $  28.0     $  48.2
   Accident and Health Insurance           7.5       7.5        --          --
   Annuities                             164.0      --           0.5       164.5
                                       =======   =======     =======     =======
    Total earned premiums              $ 200.3   $  16.1     $  28.5     $ 212.7
                                       =======   =======     =======     =======
     1994
 Premiums:
   Life Insurance                      $  27.3   $   6.0     $  32.8     $  54.1
   Accident and Health Insurance           9.3       9.3        --          --
   Annuities                             137.3      --           0.2       137.5
                                       =======   =======     =======     =======
    Total earned premiums              $ 173.9   $  15.3     $  33.0     $ 191.6
                                       =======   =======     =======     =======

12.  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 the value
     of the securities underlying the commitments. At December 31, 1996, the
     Company had commitments to purchase investments of $17.9 million. The fair
     value of the investments at December 31, 1996 approximated $18.3 million.

                                      F-29
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

12.  Commitments and Contingent Liabilities (Continued)

     Litigation

     The Company is involved in numerous lawsuits arising, for the most part, in
     the ordinary course of its business operations. While the ultimate outcome
     of litigation against the Company cannot be determined at this time, after
     consideration of the defenses available to the Company and any related
     reserves established, it is not expected to result in liability for amounts
     material to the financial condition of the Company, although it may
     adversely affect results of operations in future periods.

                                      F-30
<PAGE>

            AETNA LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
         (A wholly owned subsidiary of Aetna Retirement Holdings, Inc.)

             Notes to Consolidated Financial Statements (Continued)

13.  Segment Information (1)

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

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

    (Millions)                                    1996        1995        1994
- --------------------------------------------------------------------------------
Revenue:
    Financial Services                         $ 1,195.1   $ 1,211.3   $ 1,013.5
    Individual Life Insurance                      445.7       407.9       386.1
                                               ---------------------------------
      Total revenue                            $ 1,640.8   $ 1,619.2   $ 1,399.6
- --------------------------------------------------------------------------------
Income before income taxes: (2)
    Financial Services                         $   129.9   $   160.1   $   122.5
    Individual Life Insurance                       83.0       103.1        98.4
                                               ---------------------------------
     Total income before income taxes          $   212.9   $   263.2   $   220.9
- --------------------------------------------------------------------------------
Net income: (2)
    Financial Services                         $    94.3   $   113.8   $    85.5
    Individual Life Insurance                       55.9        62.1        59.8
                                               ---------------------------------
Net income                                     $   150.2   $   175.9   $   145.3
- --------------------------------------------------------------------------------

Assets under management: (3)
    Financial Services                         $27,268.1   $22,534.4   $18,122.9
    Individual Life Insurance                    2,830.5     2,590.9     2,220.5
- --------------------------------------------------------------------------------
       Total assets under management           $30,098.6   $25,125.3   $20,343.4
- --------------------------------------------------------------------------------

(1)  The 1996 results include severance and facilities charges of $30.7 million,
     after tax. Of this charge $21.5 million related to the Financial Services
     segment and $9.2 million related to the Individual Life Insurance segment.

(2)  Excludes any effect of the corporate facilities and severance charge
     recorded in 1996 which is not directly allocable to the Financial Services
     and Individual Life Insurance segments. (Refer to Note 7).

(3)  Excludes net unrealized capital gains (losses) of $366.4 million, $797.1
     million and $(386.4) million at December 31, 1996, 1995 and 1994,
     respectively.

                                      F-31

<PAGE>












- --------------------------------------------------------------------------------
Form No.  SAI.75974-97                                        ALIAC Ed. MAY 1997
- --------------------------------------------------------------------------------

<PAGE>

                           VARIABLE ANNUITY ACCOUNT C
                           PART C - OTHER INFORMATION

Item 24. Financial Statements and Exhibits
     (a) Financial Statements:
         (1)      Included in Part A:
                  Condensed Financial Information
         (2)      Included in Part B:
                  Financial Statements of Variable Annuity Account C:
                  -   Statement of Assets and Liabilities as of December 31,
                      1996
                  -   Statements of Operations and Changes in Net Assets for the
                      years ended December 31, 1996 and 1995
                  -   Notes to Financial Statements
                  -   Independent Auditors' Report
                  Financial Statements of the Depositor:
                  -   Independent Auditors' Report
                  -   Consolidated Statements of Income for the years ended
                      December 31, 1996, 1995 and 1994
                  -   Consolidated Balance Sheets as of December 31, 1996 and
                      1995
                  -   Consolidated Statements of Changes in Shareholder's Equity
                      for the years ended December 31, 1996, 1995 and 1994
                  -   Consolidated Statements of Cash Flows for the years ended
                      December 31, 1996, 1995 and 1994
                  -   Notes to Consolidated Financial Statements

     (b) Exhibits
         (1)      Resolution of the Board of Directors of Aetna Life Insurance
                  and Annuity Company establishing Variable Annuity Account C(1)
         (2)      Not applicable
         (3.1)    Form of Broker-Dealer Agreement(2)
         (3.2)    Alternative Form of Wholesaling Agreement and Related Selling
                  Agreement(2)
         (4.1)    Form of Variable Annuity Contract (HR10-DUA-GIA)(3)
         (4.2)    Form of Variable Annuity Contract (GA-UPA-GO)(3)
         (5)      Not applicable
         (6.1)    Certificate of Incorporation and By-Laws of Aetna Life
                  Insurance and Annuity Company(4)
         (6.2)    Amendment of Certificate of Incorporation of Aetna Life
                  Insurance and Annuity Company(5)
         (7)      Not applicable
         (8)      Fund Participation Agreement between Aetna Life Insurance and
                  Annuity Company, Investors Research Corporation and TCI
                  Portfolios, Inc. dated July 29, 1992 and amended December 22,
                  1992 and June 1, 1994(2)
         (9)      Opinion of Counsel(6)
<PAGE>

         (10.1)   Consent of Independent Auditors
         (10.2)   Consent of Counsel
         (11)     Not applicable
         (12)     Not applicable
         (13)     Schedule for Computation of Performance Data
         (14)     Not applicable
         (15.1)   Powers of Attorney(7)
         (15.2)   Authorization for Signatures(2)
         (27)     Financial Data Schedule

1.   Incorporated by reference to Post-Effective Amendment No. 6 to Registration
     Statement on Form N-4 (File No. 33-75986), as filed electronically on April
     22, 1996.

2.   Incorporated by reference to Post-Effective Amendment No. 5 to Registration
     Statement on Form N-4 (File No. 33-75986) filed electronically on April 12,
     1996.

3.   Incorporated by reference to Post-Effective Amendment No. 6 to Registration
     Statement on Form N-4 (File No. 33-75974) filed electronically on February
     28, 1997.

4.   Incorporated by reference to Post-Effective Amendment No. 1 to Registration
     Statement on Form S-1 (File No. 33-60477), as filed electronically on April
     15, 1996.

5.   Incorporated by reference to Post-Effective Amendment No. 12 to
     Registration Statement on Form N-4 (File No. 33-75964), as filed
     electronically on February 11, 1997.

6.   Incorporated by reference to Registrant's 24f-2 Notice for the fiscal year
     ended December 31, 1996, as filed electronically with the Securities and
     Exchange Commission on February 28, 1997.

7.   Incorporated by reference to Registration Statement on Form S-2 (File No.
     33-60477), as filed electronically on April 4, 1997.

<PAGE>

Item 25. Directors and Officers of the Depositor
- ------------------------------------------------

Name and Principal
Business Address*            Positions and Offices with Depositor
- -----------------            ------------------------------------

Daniel P. Kearney            Director and President

Timothy A. Holt              Director, Senior Vice President and Chief Financial
                             Officer

Christopher J. Burns         Director and Senior Vice President

Laura R. Estes               Director and Senior Vice President

J. Scott Fox                 Director and Senior Vice President

Gail P. Johnson              Director and Vice President

John Y. Kim                  Director and Senior Vice President

Shaun P. Mathews             Director and Vice President

Glen Salow                   Director and Vice President

Creed R. Terry               Director and Vice President

Deborah Koltenuk             Vice President and Treasurer, Corporate Controller

Frederick D. Kelsven         Vice President and Chief Compliance Officer

Kirk P. Wickman              Vice President, General Counsel and Secretary

*    The principal business address of all directors and officers listed is 151
     Farmington Avenue, Hartford, Connecticut 06156.

Item 26. Persons Controlled by or Under Common Control with the Depositor or
- ----------------------------------------------------------------------------
Registrant
- ----------

     Incorporated herein by reference to Item 26 of Post-Effective Amendment No.
2 to the Registration Statement on Form N-4 (File No. 33-61897), as filed
electronically on April 11, 1997.

Item 27. Number of Contract Owners
- ----------------------------------

<PAGE>

     As of February 28, 1997, there were 606,945 individuals holding interests
in variable annuity contracts funded through Variable Annuity Account C.

Item 28. Indemnification
- ------------------------
Reference is hereby made to Section 33-771(f) of the Connecticut General
Statutes ("C.G.S.") regarding indemnification of directors and Section 33-776(4)
regarding indemnification of officers, employees and agents of Connecticut
corporations. These statutes provide in general that Connecticut corporations
incorporated prior to January 1, 1997 shall indemnify their officers, directors,
employees and agents against "liability" (defined as the obligation to pay a
judgment, settlement, penalty, fine, excise tax in the case of an employee
benefit plan or reasonable expenses incurred with respect to a proceeding). In
the case of a proceeding by or in the right of the corporation, indemnification
is limited to reasonable expenses incurred in connection with the proceeding
against the corporation to which the individual was named a party. The
corporation's obligation to provide such indemnification does not apply unless
(1) the individual has met the standard of conduct set forth in Section 33-771;
and (2) a determination is made (by majority vote of a quorum of the board of
directors who were not parties to the proceeding, or if a quorum cannot be
obtained, by a committee of the board selected as described in Section
33-775(b)(2); by special legal counsel selected by the board of directors or
members thereof as described in Section 33-775(b)(3); by shareholders) that the
individual met the standard set forth in Section 33-771; or (3) the court, upon
application by the individual, determines in view of all the circumstances that
such person is reasonably entitled to be indemnified. Also, unless limited by
its Certificate of Incorporation, a corporation must indemnify an individual who
was wholly successful on the merits or otherwise against reasonable expenses
incurred by him in connection with a proceeding to which he was a party because
of his relationship as director, officer, employee or agent of the corporation.

The statute does specifically authorize a corporation to procure indemnification
insurance on behalf of an individual who is or was a director, officer, employer
or agent of the corporation. Consistent with the statute, Aetna Inc. has
procured insurance from Lloyd's of London and several major United States excess
insurers for its directors and officers and the directors and officers of its
subsidiaries, including the Depositor.

Item 29. Principal Underwriter

     (a) In addition to serving as the principal underwriter and depositor for
         the Registrant, Aetna Life Insurance and Annuity Company (Aetna) also
         acts as the principal underwriter and investment adviser for Aetna
         Variable Encore Fund, Aetna Variable Fund, Aetna Series Fund, Inc.,
         Aetna Generation Portfolios, Inc., Aetna Income Shares, Aetna
         Investment Advisers Fund, Inc., Aetna GET Fund, and Aetna Variable
         Portfolios, Inc. (all management investment companies registered under
         the Investment Company Act of 1940 (1940 Act)). Additionally, Aetna
         acts as the principal underwriter and depositor for Variable Life
         Account B of Aetna, Variable Annuity Account B of Aetna and Variable
         Annuity Account G of Aetna (separate accounts of Aetna registered as
         unit investment trusts under the 1940 Act). Aetna is also the principal
         underwriter for Variable Annuity

<PAGE>

         Account I of Aetna Insurance Company of America (AICA) (a separate
         account of AICA registered as a unit investment trust under the 1940
         Act).

     (b) See Item 25 regarding the Depositor.

     (c) Compensation as of December 31, 1996:

      (1)              (2)             (3)             (4)             (5)
                  Net
Name of           Underwriting    Compensation on
Principal         Discounts and   Redemption or     Brokerage
Underwriter       Commissions     Annuitization     Commissions   Compensation*
- -----------       -----------     -------------     -----------   -------------
Aetna Life                        $1,325,661                     $96,924,599
Insurance and
Annuity Company

*    Compensation shown in column 5 includes deductions for mortality and
     expense risk guarantees and contract charges assessed to cover costs
     incurred in the sales and administration of the contracts issued under
     Variable Annuity Account C.

Item 30. Location of Accounts and Records
- -----------------------------------------

     All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules under it relating to the securities
described in and issued under this Registration Statement are located at the
home office of the Depositor as follows:

                      Aetna Life Insurance and Annuity Company
                      151 Farmington Avenue
                      Hartford, Connecticut  06156

Item 31. Management Services
- ----------------------------

     Not applicable

Item 32. Undertakings
- ---------------------

     Registrant hereby undertakes:

     (a) to file a post-effective amendment to this registration statement on
         Form N-4 as frequently as is necessary to ensure that the audited
         financial statements in the registration statement are never more than
         sixteen months old for as long as payments under the variable annuity
         contracts may be accepted;
<PAGE>

     (b) to include as part of any application to purchase a contract offered by
         a prospectus which is part of this registration statement on Form N-4,
         a space that an applicant can check to request a Statement of
         Additional Information; and

     (c) to deliver any Statement of Additional Information and any financial
         statements required to be made available under this Form N-4 promptly
         upon written or oral request.

     (d) The Company hereby represents that it is relying upon and complies with
         the provisions of Paragraphs (1) through (4) of the SEC Staff's
         No-Action Letter dated November 22, 1988 with respect to language
         concerning withdrawal restrictions applicable to plans established
         pursuant to Section 403(b) of the Internal Revenue Code. See American
         Counsel of Life Insurance; SEC No-Action Letter, [1989 Transfer Binder]
         Fed. SEC. L. Rep. (CCH) [Paragraph] 78,904 at 78,523 (November 22,
         1988).

     (e) Insofar as indemnification for liability arising under the Securities
         Act of 1933 may be permitted to directors, officers and controlling
         persons of the Registrant pursuant to the foregoing provisions, or
         otherwise, the Registrant has been advised that in the opinion of the
         Securities and Exchange Commission such indemnification is against
         public policy as expressed in the Act and is, therefore, unenforceable.
         In the event that a claim for indemnification against such liabilities
         (other than the payment by the Registrant of expenses incurred or paid
         by a director, officer or controlling person of the Registrant in the
         successful defense of any action, suit or proceeding) is asserted by
         such director, officer or controlling person in connection with the
         securities being registered, the Registrant will, unless in the opinion
         of its counsel the matter has been settled by controlling precedent,
         submit to a court of appropriate jurisdiction the question of whether
         such indemnification by it is against public policy as expressed in the
         Act and will be governed by the final adjudication of such issue.

     (f) Aetna Life Insurance and Annuity Company represents that the fees and
         charges deducted under the contracts covered by this registration
         statement, in the aggregate, are reasonable in relation to the services
         rendered, the expenses expected to be incurred, and the risks assumed
         by the insurance company.

<PAGE>

                                   SIGNATURES

     As required by the Securities Act of 1933, and the Investment Company Act
of 1940, the Registrant, Variable Annuity Account C of Aetna Life Insurance and
Annuity Company, certifies that it meets the requirements of Securities Act Rule
485(b) for effectiveness of this Post-Effective Amendment No. 7 to its
Registration Statement on Form N-4 (File No. 33-75974) and has duly caused this
Post-Effective Amendment No. 7 to its Registration Statement on Form N-4 (File
No. 33-75974) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Hartford, State of Connecticut, on the 24th day of
April, 1997.

                                     VARIABLE ANNUITY ACCOUNT C OF AETNA
                                     LIFE INSURANCE AND ANNUITY COMPANY
                                         (Registrant)

                               By:   AETNA LIFE INSURANCE AND ANNUITY COMPANY
                                         (Depositor)

                               By:   Daniel P. Kearney*
                                     -------------------------------------------
                                     Daniel P. Kearney
                                     President

     As required by the Securities Act of 1933, this Post-Effective Amendment
No. 7 to the Registration Statement on Form N-4 (File No. 33-75974) has been
signed by the following persons in the capacities and on the dates indicated.

Signature               Title                                      Date
- ---------               -----                                      ----

Daniel P. Kearney*       Director and President                  )
- ----------------------- (principal executive officer)            )
Daniel P. Kearney                                                )
                                                                 )
Timothy A. Holt*         Director and Chief Financial Officer    )    April
- -----------------------                                          )
Timothy A. Holt                                                  )    24, 1997
                                                                 )
Christopher J. Burns*    Director                                )
- -----------------------                                          )
Christopher J. Burns                                             )
                                                                 )
Laura R. Estes*          Director                                )
- -----------------------                                          )
Laura R. Estes                                                   )
                                                                 )
J. Scott Fox*            Director                                )
- -----------------------                                          )
J. Scott Fox                                                     )

<PAGE>

Gail P. Johnson*          Director                               )
- -----------------------                                          )
Gail P. Johnson                                                  )
                                                                 )
John Y. Kim*              Director                               )
- -----------------------                                          )
John Y. Kim                                                      )
                                                                 )
Shaun P. Mathews*         Director                               )
- -----------------------                                          )
Shaun P. Mathews                                                 )
                                                                 )
Glen Salow*               Director                               )
- -----------------------                                          )
Glen Salow                                                       )
                                                                 )
Creed R. Terry*           Director                               )
- -----------------------                                          )
Creed R. Terry                                                   )
                                                                 )
Deborah Koltenuk*        Vice President and Treasurer,           )
- -----------------------  Corporate Controller                    )
Deborah Koltenuk                                                 )

By: /s/Julie E. Rockmore
    ---------------------
      *Julie E. Rockmore
       Attorney-in-Fact

<PAGE>

                                            VARIABLE ANNUITY ACCOUNT C
                                                   EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit No.            Exhibit                                                                        Page
- -----------            -------                                                                        ----

<S>                    <C>                                                                              <C>
99-B.1                 Resolution of the Board of Directors of Aetna Life Insurance and Annuity         *
                       Company establishing Variable Annuity Account C

99-B.3.1               Form of Broker-Dealer Agreement                                                  *

99-B.3.2               Alternative Form of Wholesaling Agreement and Related Selling Agreement          *

99-B.4.1               Form of Variable Annuity Contract (HR10-DUA-GIA)                                 *

99-B.4.2               Form of Variable Annuity Contract (GA-UPA-GO)                                    *

99-B.6.1               Certificate of Incorporation and By-Laws of Depositor                            *

99-B.6.2               Amendment of Certificate of Incorporation of Depositor                           *

99-B.8                 Fund Participation Agreement between Aetna Life Insurance and Annuity            *
                       Company, Investors Research Corporation and TCI Portfolios, Inc. dated July
                       29, 1992 and amended December 22, 1992 and June 1, 1994

99-B.9                 Opinion of Counsel                                                               *

99-B.10.1              Consent of Independent Auditors
                                                                                                       ---

99-B.10.2              Consent of Counsel
                                                                                                       ---

99-B.13                Schedule for Computation of Performance Data
                                                                                                       ---

99-B.15.1              Powers of Attorney                                                               *

99-B.15.2              Authorization for Signatures                                                     *

27                     Financial Data Schedule
                                                                                                       ---
</TABLE>

*Incorporated by reference



                         CONSENT OF INDEPENDENT AUDITORS

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

We consent to the use of our reports dated February 4, 1997 and February 14,
1997 included herein and to the references to our Firm under the captions
"Condensed Financial Information" in the Prospectus and "Independent Auditors"
in the Statement of Additional Information.

                                            /s/ KPMG Peat Marwick LLP

Hartford, Connecticut
April 24, 1997



                                                151 Farmington Avenue
                                                Hartford, CT 06156

April 24, 1997                                  Susan E. Bryant
                                                Counsel
                                                Law Division, RE4A
                                                Investments & Financial Services
                                                (860) 273-7834
                                                Fax:  (860) 273-0356

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC  20549

Re:    Variable Annuity Account C of Aetna Life Insurance and Annuity Company
       Group Variable Retirement Annuity Contracts for Tax-Deferred Annuity
       Plans (Section 403(b)), Qualified 401 Plans, and HR 10 Plans
       Post-Effective Amendment No. 7 to Registration Statement on Form N-4 File
       No. 33-75974 and 811-2513

Dear Sir or Madam:

As Counsel of Aetna Life Insurance and Annuity Company (the "Company"), I hereby
consent to the use of my opinion dated February 28, 1997 (incorporated herein by
reference to the 24f-2 Notice for the fiscal year ended December 31, 1996 filed
on behalf of Variable Annuity Account C of Aetna Life Insurance and Annuity
Company on February 28, 1997) as an exhibit to this Post-Effective Amendment No.
7 to Registration Statement on Form N-4 (File No.
33-75974).

Sincerely,

/s/ Susan E. Bryant
Susan E. Bryant
Counsel
Aetna Life Insurance and Annuity Company



                           VARIABLE ANNUITY ACCOUNT C

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

              SCHEDULE FOR COMPUTATION OF TOTAL RETURN CALCULATIONS
              -----------------------------------------------------

Total Return Calculation (Standardized)
- ---------------------------------------

The standardized rate represents fund performance for the most recent 1-year,
5-year and 10-year periods. The "1-year rate" represents fund performance for
the period January 1, 1996 through December 31, 1996. The "5-year rate" is for
the period January 1, 1992 through December 31, 1996. The "10-year rate" is for
the period January 1, 1987 through December 31, 1996. If the results are not
available for the full period indicated, the rate since inception is used.

The formula used in the computation of the total return calculations is as
follow:

          1/n
T=((ERV/P)    - 1) where:

     T   =   average annual total return
     P   =   a hypothetical initial payment of $1,000
     n   =   1 for the "1-year rate," 5 for the "5-year rate," and 10 for
             the "10-year rate" (or fractional period thereof)
     ERV =   ending redeemable value of a hypothetical $1,000 payment made
             at the beginning of each of the periods

The unit values used in the calculation reflect the deduction of all recurring
charges during each period (e.g., the mortality and expense risk charges, and
administrative charge (if applicable)). For calculating the redeemable value,
the termination fee and front-end load are taken into consideration.

Total Return Calculation (Non-Standardized)
- -------------------------------------------

The non-standardized rate represents fund performance for the most recent
1-year, 3-year, 5-year and 10-year periods. The 1-year rate is for the period
January 1, 1996 through December 31, 1996; the 3-year rate is for period January
1, 1994 through December 31,1996; the 5-year rate is for the period January 1,
1992 through December 31, 1996; and the 10-year rate is for the period January
1, 1987 through December 31, 1996.

The non-standardized figures will be calculated in a manner similar to the one
discussed above for the standardized figures, except that non-standardized
figures will not reflect the deduction of any applicable termination fee (which
would decrease the level of performance shown if reflected in these
calculations).

For an illustration of the Computation of the Total Return Quotations, both
Standardized and Non-Standardized, see attached.



Aetna Variable Fund (75974403)                                    75974403.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       940.00
                                Redeemable Value
                      --------------------------------------------------------
                                VARACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%     1155.32   15.53%   15.53%
      3        0.0%     1475.60   13.85%   13.85%
      5        0.0%     1639.22   10.39%   10.39%
     10        0.0%     3137.45   12.11%   12.11%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  VARACE-2
                 VARACE-2.UV
12-99-86          50.767505
12-99-91          97.168391
12-99-93         107.943061
12-99-95         137.867594
12-99-96         169.447517

(Day = 99 means end-of-month.)

<PAGE>

Aetna Income Shares (75974403: ACES)                               75974403.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       940.00
                                Redeemable Value
                      --------------------------------------------------------
                                AISACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%      961.60   -3.84%   -3.84%
      3        0.0%     1065.91    2.15%    2.15%
      5        0.0%     1225.28    4.15%    4.15%
     10        0.0%     1934.30    6.82%    6.82%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  AISACE-2
                 AISACE-2.UV
12-99-86          23.322246
12-99-91          36.817918
12-99-93          42.322560
12-99-95          46.913791
12-99-96          47.991699

(Day = 99 means end-of-month.)

<PAGE>

Aetna Encore Fund (75974403: ACES)                                75974403.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       940.00
                                Redeemable Value
                      --------------------------------------------------------
                                ENCACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%      978.10   -2.19%   -2.19%
      3        0.0%     1052.47    1.72%    1.72%
      5        0.0%     1098.45    1.90%    1.90%
     10        0.0%     1497.57    4.12%    4.12%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  ENCACE-2
                 ENCACE-2.UV
12-99-86          24.811045
12-99-91          33.826086
12-99-93          35.303868
12-99-95          37.988302
12-99-96          39.527962

(Day = 99 means end-of-month.)

<PAGE>

AIAF (75974403: ACES)                                             75974403.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       940.00
                                Redeemable Value
                      --------------------------------------------------------
                                AIFACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%     1069.08    6.91%    6.91%
      3        0.0%     1320.55    9.71%    9.71%
      5        0.0%     1506.34    8.54%    8.54%
From 04-03-89  0.0%     1954.85    9.04%    9.04%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  AIFACE-2
                 AIFACE-2.UV
04-03-89           9.818684 i
12-99-91          12.742197
12-99-93          14.534905
12-99-95          17.953801
12-99-96          20.419229 i

(Unit values marked 'i' are used for from-inception calculations.)
(Day = 99 means end-of-month.)

<PAGE>

Twentieth Century (75974403: ACES)                                75974403.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       940.00
                                Redeemable Value
                      --------------------------------------------------------
                                TCIACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%      888.13  -11.19%  -11.19%
      3        0.0%     1122.44    3.93%    3.93%
      5        0.0%     1191.47    3.57%    3.57%
From 11-20-87  0.0%     2139.29    8.70%    8.70%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  TCIACE-2
                 TCIACE-2.UV
11-20-87           5.483556 i
12-99-91           9.845769
12-99-93          10.451275
12-99-95          13.208495
12-99-96          12.479677 i

(Unit values marked 'i' are used for from-inception calculations.)
(Day = 99 means end-of-month.)

<PAGE>

Aetna Variable Fund (75974403)                                    75974403.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       940.00
                                Redeemable Value
                      --------------------------------------------------------
                                VARACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        2.0%     1132.21   13.22%   13.22%
      3        2.0%     1446.09   13.08%   13.08%
      5        0.0%     1639.22   10.39%   10.39%
     10        0.0%     3137.45   12.11%   12.11%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  VARACE-2
                 VARACE-2.UV
12-99-86          50.767505
12-99-91          97.168391
12-99-93         107.943061
12-99-95         137.867594
12-99-96         169.447517

(Day = 99 means end-of-month.)

<PAGE>

Aetna Income Shares (75974403: ACES)                              75974403.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       940.00
                                Redeemable Value
                      --------------------------------------------------------
                                AISACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        2.0%      942.37   -5.76%   -5.76%
      3        2.0%     1044.60    1.47%    1.47%
      5        0.0%     1225.28    4.15%    4.15%
     10        0.0%     1934.30    6.82%    6.82%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  AISACE-2
                 AISACE-2.UV
12-99-86          23.322246
12-99-91          36.817918
12-99-93          42.322560
12-99-95          46.913791
12-99-96          47.991699

(Day = 99 means end-of-month.)

<PAGE>

Aetna Encore Fund (75974403: ACES)                                75974403.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       940.00
                                Redeemable Value
                      --------------------------------------------------------
                                ENCACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        2.0%      958.54   -4.15%   -4.15%
      3        2.0%     1031.42    1.04%    1.04%
      5        0.0%     1098.45    1.90%    1.90%
     10        0.0%     1497.57    4.12%    4.12%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  ENCACE-2
                 ENCACE-2.UV
12-99-86          24.811045
12-99-91          33.826086
12-99-93          35.303868
12-99-95          37.988302
12-99-96          39.527962

(Day = 99 means end-of-month.)

<PAGE>

AIAF (75974403: ACES)                                             75974403.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       940.00
                                Redeemable Value
                      --------------------------------------------------------
                                AIFACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        2.0%     1047.70    4.77%    4.77%
      3        2.0%     1294.14    8.98%    8.98%
      5        0.0%     1506.34    8.54%    8.54%
From 04-03-89  0.0%     1954.85    9.04%    9.04%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  AIFACE-2
                 AIFACE-2.UV
04-03-89           9.818684 i
12-99-91          12.742197
12-99-93          14.534905
12-99-95          17.953801
12-99-96          20.419229 i

(Unit values marked 'i' are used for from-inception calculations.)
(Day = 99 means end-of-month.)

<PAGE>

Twentieth Century (75974403: ACES)                                75974403.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       940.00
                                Redeemable Value
                      --------------------------------------------------------
                                TCIACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        2.0%      870.37  -12.96%  -12.96%
      3        2.0%     1099.99    3.23%    3.23%
      5        0.0%     1191.47    3.57%    3.57%
From 11-20-87  0.0%     2139.29    8.70%    8.70%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  TCIACE-2
                 TCIACE-2.UV
11-20-87           5.483556 i
12-99-91           9.845769
12-99-93          10.451275
12-99-95          13.208495
12-99-96          12.479677 i

(Unit values marked 'i' are used for from-inception calculations.)
(Day = 99 means end-of-month.)




Aetna Variable Fund (75974401)                                    75974401.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       950.00
                                Redeemable Value
                      --------------------------------------------------------
                                VARACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%     1168.31   16.83%   16.83%
      3        0.0%     1493.98   14.32%   14.32%
      5        0.0%     1661.64   10.69%   10.69%
     10        0.0%     3189.86   12.30%   12.30%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  VARACE-2
                 VARACE-1.UV
12-99-86          66.247873
12-99-91         127.176441
12-99-93         141.448372
12-99-95         180.877762
12-99-96         222.443773

(Day = 99 means end-of-month.)

<PAGE>

Aetna Income Shares (75974401: ACES)                              75974401.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       950.00
                                Redeemable Value
                      --------------------------------------------------------
                                AISAC-1
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%      972.42   -2.76%   -2.76%
      3        0.0%     1079.20    2.57%    2.57%
      5        0.0%     1242.04    4.43%    4.43%
     10        0.0%     1966.63    7.00%    7.00%

                             Accumulation Unit Values
            ------------------------------------------------------------
                   AISAC-1
                 AISACE-1.UV
12-99-86          23.440008
12-99-91          37.114626
12-99-93          42.714825
12-99-95          47.405513
12-99-96          48.524067

(Day = 99 means end-of-month.)

<PAGE>

Aetna Encore Fund (75974401: ACES)                                 75974401.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       950.00
                                Redeemable Value
                      --------------------------------------------------------
                                ENCACE-1
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%      989.10   -1.09%   -1.09%
      3        0.0%     1065.59    2.14%    2.14%
      5        0.0%     1113.48    2.17%    2.17%
     10        0.0%     1522.62    4.29%    4.29%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  ENCACE-1
                 ENCACE-1.UV
12-99-86          25.000247
12-99-91          34.186341
12-99-93          35.722845
12-99-95          38.485273
12-99-96          40.069290

(Day = 99 means end-of-month.)

<PAGE>

AIAF (75974401: ACES)                                             75974401.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       950.00
                                Redeemable Value
                      --------------------------------------------------------
                              AIFACE-1.UV
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%     1081.11    8.11%    8.11%
      3        0.0%     1337.01   10.17%   10.17%
      5        0.0%     1526.94    8.83%    8.83%
From 04-03-89  0.0%     1984.84    9.25%    9.25%

                             Accumulation Unit Values
            ------------------------------------------------------------
                 AIFACE-1.UV
                 AIFACE-1.UV
04-03-89           9.817363 i
12-99-91          12.761397
12-99-93          14.574275
12-99-95          18.024015
12-99-96          20.511471 i

(Unit values marked 'i' are used for from-inception calculations.)
(Day = 99 means end-of-month.)

<PAGE>

Twentieth Century (75974401: ACES)                                75974401.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       950.00
                                Redeemable Value
                      --------------------------------------------------------
                                TCIACE-1
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%      898.12  -10.19%  -10.19%
      3        0.0%     1136.42    4.35%    4.35%
      5        0.0%     1207.77    3.85%    3.85%
From 11-20-87  0.0%     2173.88    8.90%    8.90%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  TCIACE-1
                 TCIACE-1.UV
11-20-87           4.120121 i
12-99-91           7.415889
12-99-93           7.881442
12-99-95           9.972635
12-99-96           9.428054 i

(Unit values marked 'i' are used for from-inception calculations.)
(Day = 99 means end-of-month.)

<PAGE>

Aetna Variable Fund (75974401)                                    75974401.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       950.00
                                Redeemable Value
                      --------------------------------------------------------
                                VARACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        5.0%     1109.90   10.99%   10.99%
      3        3.0%     1449.16   13.16%   13.16%
      5        1.0%     1645.02   10.47%   10.47%
     10        0.0%     3189.86   12.30%   12.30%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  VARACE-2
                 VARACE-1.UV
12-99-86          66.247873
12-99-91         127.176441
12-99-93         141.448372
12-99-95         180.877762
12-99-96         222.443773

(Day = 99 means end-of-month.)

<PAGE>

Aetna Income Shares (75974401: ACES)                              75974401.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       950.00
                                Redeemable Value
                      --------------------------------------------------------
                                AISAC-1
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        5.0%      923.79   -7.62%   -7.62%
      3        3.0%     1046.82    1.54%    1.54%
      5        1.0%     1229.62    4.22%    4.22%
     10        0.0%     1966.63    7.00%    7.00%

                             Accumulation Unit Values
            ------------------------------------------------------------
                   AISAC-1
                 AISACE-1.UV
12-99-86          23.440008
12-99-91          37.114626
12-99-93          42.714825
12-99-95          47.405513
12-99-96          48.524067

(Day = 99 means end-of-month.)

<PAGE>

Aetna Encore Fund (75974401: ACES)                                75974401.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       950.00
                                Redeemable Value
                      --------------------------------------------------------
                                ENCACE-1
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        5.0%      939.65   -6.04%   -6.04%
      3        3.0%     1033.62    1.11%    1.11%
      5        1.0%     1102.35    1.97%    1.97%
     10        0.0%     1522.62    4.29%    4.29%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  ENCACE-1
                 ENCACE-1.UV
12-99-86          25.000247
12-99-91          34.186341
12-99-93          35.722845
12-99-95          38.485273
12-99-96          40.069290

(Day = 99 means end-of-month.)

<PAGE>

AIAF (75974401: ACES)                                             75974401.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       950.00
                                Redeemable Value
                      --------------------------------------------------------
                              AIFACE-1.UV
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        5.0%     1027.05    2.71%    2.71%
      3        3.0%     1296.90    9.05%    9.05%
      5        1.0%     1511.67    8.62%    8.62%
From 04-03-89  0.0%     1984.84    9.25%    9.25%

                             Accumulation Unit Values
            ------------------------------------------------------------
                 AIFACE-1.UV
                 AIFACE-1.UV
04-03-89           9.817363 i
12-99-91          12.761397
12-99-93          14.574275
12-99-95          18.024015
12-99-96          20.511471 i

(Unit values marked 'i' are used for from-inception calculations.)
(Day = 99 means end-of-month.)

<PAGE>

Twentieth Century (75974401: ACES)                                75974401.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       950.00
                                Redeemable Value
                      --------------------------------------------------------
                                TCIACE-1
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        5.0%      853.22  -14.68%  -14.68%
      3        3.0%     1102.33    3.30%    3.30%
      5        1.0%     1195.69    3.64%    3.64%
From 11-20-87  0.0%     2173.88    8.90%    8.90%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  TCIACE-1
                 TCIACE-1.UV
11-20-87           4.120121 i
12-99-91           7.415889
12-99-93           7.881442
12-99-95           9.972635
12-99-96           9.428054 i

(Unit values marked 'i' are used for from-inception calculations.)
(Day = 99 means end-of-month.)




Aetna Variable Fund (75974HR)                                      75974HR.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       982.50
                                                        Redeemable Value
                      --------------------------------------------------------
                                VARACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%     1207.55   20.76%   20.76%
      3        0.0%     1542.31   15.54%   15.54%
      5        0.0%     1713.34   11.37%   11.37%
     10        0.0%     3279.31   12.61%   12.61%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  VARACE-2
                 VARACE-2.UV
12-99-86          50.767505
12-99-91          97.168391
12-99-93         107.943061
12-99-95         137.867594
12-99-96         169.447517

(Day = 99 means end-of-month.)

<PAGE>

Aetna Income Shares (75974HR: ACES)                                75974HR.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       982.50
                                                        Redeemable Value
                      --------------------------------------------------------
                                AISACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%     1005.07    0.51%    0.51%
      3        0.0%     1114.11    3.67%    3.67%
      5        0.0%     1280.68    5.07%    5.07%
     10        0.0%     2021.75    7.29%    7.29%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  AISACE-2
                 AISACE-2.UV
12-99-86          23.322246
12-99-91          36.817918
12-99-93          42.322560
12-99-95          46.913791
12-99-96          47.991699

(Day = 99 means end-of-month.)

<PAGE>

Aetna Encore Fund (75974HR: ACES)                                  75974HR.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       982.50
                                                        Redeemable Value
                      --------------------------------------------------------
                                ENCACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%     1022.32    2.23%    2.23%
      3        0.0%     1100.06    3.23%    3.23%
      5        0.0%     1148.11    2.80%    2.80%
     10        0.0%     1565.28    4.58%    4.58%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  ENCACE-2
                 ENCACE-2.UV
12-99-86          24.811045
12-99-91          33.826086
12-99-93          35.303868
12-99-95          37.988302
12-99-96          39.527962

(Day = 99 means end-of-month.)

<PAGE>

AIAF (75974HR: ACES)                                               75974HR.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       982.50
                                                        Redeemable Value
                      --------------------------------------------------------
                                AIFACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%     1117.42   11.74%   11.74%
      3        0.0%     1380.26   11.34%   11.34%
      5        0.0%     1574.45    9.50%    9.50%
From 04-03-89  0.0%     2043.24    9.66%    9.66%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  AIFACE-2
                 AIFACE-2.UV
04-03-89           9.818684 i
12-99-91          12.742197
12-99-93          14.534905
12-99-95          17.953801
12-99-96          20.419229 i

(Unit values marked 'i' are used for from-inception calculations.)
(Day = 99 means end-of-month.)

<PAGE>

Twentieth Century (75974HR: ACES)                                  75974HR.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       982.50
                                                        Redeemable Value
                      --------------------------------------------------------
                                TCIACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        0.0%      928.29   -7.17%   -7.17%
      3        0.0%     1173.19    5.47%    5.47%
      5        0.0%     1245.34    4.49%    4.49%
From 11-20-87  0.0%     2236.01    9.23%    9.23%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  TCIACE-2
                 TCIACE-2.UV
11-20-87           5.483556 i
12-99-91           9.845769
12-99-93          10.451275
12-99-95          13.208495
12-99-96          12.479677 i

(Unit values marked 'i' are used for from-inception calculations.)
(Day = 99 means end-of-month.)

<PAGE>

Aetna Variable Fund (75974HR)                                      75974HR.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       982.50
                                                        Redeemable Value
                      --------------------------------------------------------
                                VARACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        2.0%     1183.40   18.33%   18.33%
      3        2.0%     1511.47   14.76%   14.76%
      5        0.0%     1713.34   11.37%   11.37%
     10        0.0%     3279.31   12.61%   12.61%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  VARACE-2
                 VARACE-2.UV
12-99-86          50.767505
12-99-91          97.168391
12-99-93         107.943061
12-99-95         137.867594
12-99-96         169.447517

(Day = 99 means end-of-month.)

<PAGE>

Aetna Income Shares (75974HR: ACES)                                75974HR.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       982.50
                                                        Redeemable Value
                      --------------------------------------------------------
                                AISACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        2.0%      984.97   -1.51%   -1.51%
      3        2.0%     1091.82    2.97%    2.97%
      5        0.0%     1280.68    5.07%    5.07%
     10        0.0%     2021.75    7.29%    7.29%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  AISACE-2
                 AISACE-2.UV
12-99-86          23.322246
12-99-91          36.817918
12-99-93          42.322560
12-99-95          46.913791
12-99-96          47.991699

(Day = 99 means end-of-month.)

<PAGE>

Aetna Encore Fund (75974HR: ACES)                                  75974HR.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       982.50
                                                        Redeemable Value
                      --------------------------------------------------------
                                ENCACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        2.0%     1001.87    0.18%    0.18%
      3        2.0%     1078.05    2.54%    2.54%
      5        0.0%     1148.11    2.80%    2.80%
     10        0.0%     1565.28    4.58%    4.58%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  ENCACE-2
                 ENCACE-2.UV
12-99-86          24.811045
12-99-91          33.826086
12-99-93          35.303868
12-99-95          37.988302
12-99-96          39.527962

(Day = 99 means end-of-month.)

<PAGE>

AIAF (75974HR: ACES)                                               75974HR.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       982.50
                                                        Redeemable Value
                      --------------------------------------------------------
                                AIFACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        2.0%     1095.07    9.50%    9.50%
      3        2.0%     1352.65   10.59%   10.59%
      5        0.0%     1574.45    9.50%    9.50%
From 04-03-89  0.0%     2043.24    9.66%    9.66%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  AIFACE-2
                 AIFACE-2.UV
04-03-89           9.818684 i
12-99-91          12.742197
12-99-93          14.534905
12-99-95          17.953801
12-99-96          20.419229 i

(Unit values marked 'i' are used for from-inception calculations.)
(Day = 99 means end-of-month.)

<PAGE>

Twentieth Century (75974HR: ACES)                                  75974HR.WWO
- ------------------------------------------------------------------------------
Gross Deposit:    1000.00
Net Deposit:       982.50
                                                        Redeemable Value
                      --------------------------------------------------------
                                TCIACE-2
                        Nom.  0.00 M.F. (0.000%)
 # of Years           ---------------------------
Ending 12-96    DSC      Value      IRR    MF IRR
- ------------   ----   ---------   ------   ------
      1        2.0%      909.72   -9.03%   -9.03%
      3        2.0%     1149.72    4.76%    4.76%
      5        0.0%     1245.34    4.49%    4.49%
From 11-20-87  0.0%     2236.01    9.23%    9.23%

                             Accumulation Unit Values
            ------------------------------------------------------------
                  TCIACE-2
                 TCIACE-2.UV
11-20-87           5.483556 i
12-99-91           9.845769
12-99-93          10.451275
12-99-95          13.208495
12-99-96          12.479677 i

(Unit values marked 'i' are used for from-inception calculations.)
(Day = 99 means end-of-month.)



<TABLE> <S> <C>


<ARTICLE>                     6
<CIK>                         0000103007
<NAME>                        Variable Annuity Account C
       
<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                   DEC-31-1996
<PERIOD-START>                      JAN-01-1996
<PERIOD-END>                        DEC-31-1996
<INVESTMENTS-AT-COST>             7,952,811,278
<INVESTMENTS-AT-VALUE>            8,565,202,363
<RECEIVABLES>                                 0
<ASSETS-OTHER>                                0
<OTHER-ITEMS-ASSETS>                          0
<TOTAL-ASSETS>                    8,565,202,363
<PAYABLE-FOR-SECURITIES>                      0
<SENIOR-LONG-TERM-DEBT>                       0
<OTHER-ITEMS-LIABILITIES>                     0
<TOTAL-LIABILITIES>                           0
<SENIOR-EQUITY>                               0
<PAID-IN-CAPITAL-COMMON>                      0
<SHARES-COMMON-STOCK>                         0
<SHARES-COMMON-PRIOR>                         0
<ACCUMULATED-NII-CURRENT>                     0
<OVERDISTRIBUTION-NII>                        0
<ACCUMULATED-NET-GAINS>                       0
<OVERDISTRIBUTION-GAINS>                      0
<ACCUM-APPREC-OR-DEPREC>                      0
<NET-ASSETS>                      8,565,202,363
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