10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-K

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2002

Commission File Number 001-16095

Aetna Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania		23-2229683
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
151 Farmington Avenue, Hartford, Connecticut	06156	(860) 273-0123
(Address of principal executive offices)	(ZIP Code)	(Registrant’s telephone number, including area code)
Title of each class		Name of each exchange on which registered
Common Stock, $.01 par value		New York Stock Exchange

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

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

Yes [X] No [   ]

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b2 of the Exchange Act).

Yes [X] No [   ]

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28, 2002 was $7,206,127,849.

As of January 31, 2003, 150,351,776 shares of the registrant’s Common Stock $.01 par value were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s 2002 Annual Report, Financial Report to Shareholders (the “Annual Report”). (Parts I, II and IV)

Portions of the registrant’s proxy statement for its 2003 Annual Meeting to be filed on or about March 14, 2003 (the “Proxy Statement”). (Parts III and IV)

TABLE OF CONTENTS

PART I
	Item 1. Business.
		A. Organization of Business
		B. Financial Information about Segments
		C. Description of the Business
			1. Health Care
			2. Group Insurance
			3. Large Case Pensions
			4. Other Matters.
				a. Website Access to Reports
				b. Regulation
				c. NAIC IRIS Ratios
				d. Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
				e. Trademarks
				f. Ratings
				g. Miscellaneous
	Item 2. Properties.
	Item 3. Legal Proceedings.
	Item 4. Submission of Matters to a Vote of Security Holders.
EXECUTIVE OFFICERS OF AETNA INC.*
PART II
	Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.
	Item 6. Selected Financial Data.
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
	Item 8. Financial Statements and Supplementary Data.
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
PART III
	Item 10. Directors and Executive Officers of the Registrant.
	Item 11. Executive Compensation.
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
	Item 13. Certain Relationships and Related Transactions.
PART IV
	Item 14. Controls and Procedures.
	Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.*
SIGNATURES
CERTIFICATION
CREDIT AGREEMENT
THREE YEAR CREDIT AGREEMENT
MEMORANDUM
EMPLOYMENT AGREEMENT
STATEMENT RE: CALCULATION
ANNUAL REPORT TO SECURITY HOLDERS
SUBSIDIARIES
CONSENT OF EXPERTS AND COUNSEL
POWERS OF ATTORNEY
POWERS OF ATTORNEY
AETNA INC, CODE OF CONDUCT

TABLE OF CONTENTS

				Page
PART I
Item 1. Business.
	A. Organization of Business.				3
	B. Financial Information about Segments.				3
	C. Description of the Business.
		1. Health Care.			3
		2. Group Insurance.			10
		3. Large Case Pensions.			12
		4. Other Matters.
			a. Website Access to Reports.		12
			b. Regulation.		12
			c. NAIC IRIS Ratios.		12
			d. Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.		13
			e. Trademarks.		13
			f. Ratings.		14
			g. Miscellaneous.		14
Item 2. Properties.					14
Item 3. Legal Proceedings.					15
Item 4. Submission of Matters to a Vote of Security Holders.					16
Executive Officers of Aetna Inc.					17
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.					18
Item 6. Selected Financial Data.					18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.					18
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.					18
Item 8. Financial Statements and Supplementary Data.					18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.					18
PART III
Item 10. Directors and Executive Officers of the Registrant.					19
Item 11. Executive Compensation.					19
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.					19
Item 13. Certain Relationships and Related Transactions.					20
PART IV
Item 14. Controls and Procedures.					20
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.					20
Index to Financial Statement Schedules.					24
Signatures.					32
Certifications.					33

Page 2

PART I

Item 1. Business.

A. Organization of Business

Aetna Inc. (a Pennsylvania corporation) and its subsidiaries (collectively, the “Company”) constitute one of the nation’s largest health benefits companies, based on membership as of December 31, 2002. Prior to December 13, 2000, the Company (formerly Aetna U.S. Healthcare Inc.) was a subsidiary of a Connecticut corporation named Aetna Inc. (“former Aetna”). On December 13, 2000, former Aetna spun the Company off to its shareholders and, as part of the same transaction, the remaining entity, which contained former Aetna’s financial services and international businesses, was merged with a subsidiary of ING Groep N.V. (“ING”) (collectively, the “Transaction”). Refer to Note 21 of Notes to Consolidated Financial Statements (which is incorporated herein by reference to the Annual Report) for further information. Aetna Inc. was incorporated in Pennsylvania in 1982 under the name of United States Health Care Systems, Inc.

At December 31, 2002, the Company’s operations included three business segments: Health Care, Group Insurance and Large Case Pensions. The principal products included in these segments are:

Health Care:
     Health and dental benefit products (including health maintenance organization, point-of-service, preferred provider organization and
     indemnity products)

Group Insurance:
     Group insurance products (including life, disability and long-term care insurance products)

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

B. Financial Information about Segments

Required financial information by business segment is set forth in Note 19 of Notes to Consolidated Financial Statements, which is incorporated herein by reference to the Annual Report. Segment financial information for 2000 has been restated to reflect the Company’s current business segments as discussed above. Refer to Note 2 of Notes to Consolidated Financial Statements, which is incorporated herein by reference to the Annual Report, for information concerning certain allocations used in preparing such information for 2000 due to the Transaction.

C. Description of the Business

1. Health Care

Products and Services

Health Care consists of health and dental plans offered on both a risk basis (where the Company assumes all or a majority of the financial risk for health and dental care costs) (“Risk”) and an employer-funded basis (where the plan sponsor under an administrative services contract, and not the Company, assumes all or a majority of this risk) (“ASC”). Health plans include health maintenance organization (“HMO”), point-of-service (“POS”), preferred provider organization (“PPO”) and indemnity benefit products (“Indemnity”).

Page 3

The principal commercial health products, offered both on a risk and employer-funded basis, are described below:

HMO plans offer comprehensive managed care benefits generally through contracts with participating network physicians, hospitals and other providers. When an individual enrolls in one of the Company’s HMOs, he or she generally selects a primary care physician (“PCP”) from among the physicians participating in our network. PCPs generally are family practitioners, internists, general practitioners or pediatricians who provide necessary preventive and primary medical care, and are generally responsible for coordinating other necessary health care, including making referrals to participating network specialists. Preventive care is emphasized in these plans. Commencing January 1, 2001, the Company began offering an open access HMO plan in certain markets that provides for the full range of benefits available to HMO members without the requirements of PCP selection or PCP referrals. The Company offers HMO plans with differing benefit designs and varying levels of copayments that result in different levels of premium rates, including to federal government employee groups under the Federal Employees Health Benefits Program. Commercial HMO membership totaled 4.2 million as of December 31, 2002, 6.3 million as of December 31, 2001 and 6.7 million as of December 31, 2000. Refer to MD&A - HealthCare - Outlook in the Annual Report for information concerning anticipated declines in medical membership levels.

POS plans blend the characteristics of HMO and indemnity plans. Members can have comprehensive HMO-style benefits for services received from participating network providers with minimum out-of-pocket expense (copayments) and also can go directly, without a referral, to any provider they choose, subject to, among other things, certain deductibles and coinsurance, with member cost sharing for covered services limited by annual out-of-pocket maximums. Commencing January 1, 2001, the Company began offering an open access POS plan in certain markets that provides these HMO-style benefits without PCP selection or referral. POS membership totaled 3.7 million as of December 31, 2002, 4.5 million as of December 31, 2001 and 5.6 million as of December 31, 2000.

PPO plans offer the member the ability to select any health care provider, with benefits paid at a higher level when care is received from a participating network provider. Coverage typically is subject to deductibles and copayments or coinsurance, with member cost sharing for covered services limited by annual out-of-pocket maximums. PPO membership totaled 3.9 million as of December 31, 2002, 4.1 million as of December 31, 2001 and 4.0 million as of December 31, 2000.

During 2001, the Company also introduced Aetna Health Fund, a consumer-directed health plan that combines traditional coverage after a deductible with an accumulating benefit account, allowing members greater flexibility in utilizing a portion of their benefit dollars.

Indemnity plans offer the member the ability to select any health care provider for covered services. Some managed care features may be included in these plans, such as inpatient precertification, disease management programs and benefits for preventive services. Coverage is subject to deductibles and coinsurance, with member cost sharing limited by out-of-pocket maximums. Indemnity membership totaled 1.6 million as of December 31, 2002, 1.9 million as of December 31, 2001 and 2.2 million as of December 31, 2000.

In connection with the administration of ASC plans, the Company offers full-risk stop loss coverage for selected employers. This coverage transfers to Aetna the costs associated with large individual claims and/or aggregate loss experience within the ASC plan above a pre-set annual threshold.

In addition to Commercial health products, in select markets the Company also offers HMO-based coverage for Medicare beneficiaries, participates in a subsidized children’s health insurance program (“CHIP”) and has a Medicaid and a CHIP ASC arrangement. Such coverages include the following:

Page 4

Through annual contracts with the Centers for Medicare and Medicaid Services (“CMS”), the Company’s HMOs offer coverage for Medicare-eligible individuals in certain geographic areas through the Medicare+Choice program. Generally, services must be obtained through participating network providers, with the exception of emergency and urgent care. Members historically have received enhanced benefits over standard Medicare fee-for-service coverage, including vision and pharmacy coverage. These Medicare plans are offered on a Risk basis. Medicare membership totaled .1 million as of December 31, 2002, .3 million as of December 31, 2001 and .5 million as of December 31, 2000.

In September 2002, the Company notified CMS of its intent to reduce certain service areas under its Medicare+Choice contracts for individuals for 2003, affecting approximately 9,000 members at December 31, 2002. As part of a new CMS Medicare+Choice Demonstration Project, the Company is offering an open access Medicare+Choice plan (the “Aetna Golden Choice™ plan”) for 2003 in certain service areas, including certain areas where the Company reduced the service areas under its Medicare+Choice contracts for individuals. This new Aetna Golden Choice plan will not require referrals or the selection of a primary care physician. Refer to MD&A - Medicare HMO in the Annual Report for additional information.

In 2002, the Company had contracts with two state agencies to offer coverage for individuals eligible for Medicaid and subsidized children’s health insurance programs. Benefits are determined by the contracting agencies. The Company’s participation in the State of Washington’s Medicaid program and CHIP ceased on July 1, 2002. This coverage is offered on a Risk basis. The Company also has a Medicaid and a CHIP ASC arrangement. Membership in these programs totaled .1 million as of December 31, 2002 and .2 million as of December 31, 2001 and 2000.

The Company offers a variety of other health care coverages either as supplements to health products or as stand-alone products. Such coverages, which are offered on a Risk or employer-funded basis, include indemnity and managed dental plans, prescription drug, vision and behavioral health programs. The Company is one of the nation’s largest providers of dental coverage, based on membership at December 31, 2002. Dental membership totaled 11.8 million as of December 31, 2002, 13.5 million as of December 31, 2001 and 14.3 million as of December 31, 2000.

In October 2002, the Company announced that, following a review of strategic options related to its pharmacy benefits management operations, the Company decided to retain and expand upon its existing capabilities. In February 2003, the Company completed the purchase of a mail order pharmacy facility from Eckerd Health Services. The Company also expects to expand its existing clinical and sales capabilities relating to its pharmacy benefits management operations.

Provider Networks

General

The Company contracts with physicians, hospitals and other health care providers for services provided to its health plan members. The participating providers in the Company’s networks are independent contractors and are neither employees nor agents of the Company, except for the Company’s new mail order pharmacy facility.

The Company uses a variety of techniques designed to help reduce inappropriate utilization of medical resources and maintain affordability of quality coverage. In addition to contracts with health care providers for negotiated rates of reimbursement, these techniques include the development and implementation of standards for the appropriate utilization of health care resources and working with health care providers to review data in order to help them improve consistency and quality. The Company also offers, directly or in cooperation with third parties, a variety of disease management programs related to specific conditions such as asthma, diabetes, congestive heart failure and lower back pain.

Page 5

At December 31, 2002, the Company had approximately 552,000 health care providers participating in its networks nationwide, including more than 332,000 physicians and more than 3,300 hospitals.

Contracting

Primary Care Physicians

The Company compensates PCPs on both a capitated and fee-for-service basis, with capitation generally limited to HMO products. In recent years, the Company has eliminated or reduced the use of capitation arrangements in many areas. Under a capitation arrangement, physicians receive a monthly fixed fee for each member, regardless of the medical services provided to the member. In a fee-for-service arrangement, network physicians are paid for health care services provided to the member based upon a fee schedule.

Hospitals

The Company typically enters into contracts with hospitals that provide for all-inclusive per diem and per case rates, with fixed rates for ambulatory surgery and emergency room services. The Company has some hospital contracts that pay a percentage of billed charges.

The Company’s plans generally require notification of elective hospital admissions, and the Company monitors the length of hospital stays. Participating physicians generally admit their HMO and POS patients to participating hospitals using referral procedures that direct the hospital to contact the Company’s patient management unit, which confirms the patient’s membership status while obtaining pertinent data. This unit also assists members and providers with related activities, including the subsequent transition to the home environment and home care, if necessary. Case management assistance for complex or “catastrophic” cases is provided by a special case unit.

Specialist and Ancillary Services

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

The Company’s HMO and POS plans typically employ capitated payment arrangements for most mental and behavioral health, substance abuse and freestanding laboratory services. These services are generally reimbursed on a contracted, fee-for-service basis under the Company’s other products.

Integrated Delivery Systems and Delegated Arrangements

The Company has developed contractual relationships with independent practice associations, integrated delivery systems and other third parties for the provision of certain health care services. Under some of these arrangements, the Company pays a fixed, per member fee or a percentage of premium and may delegate to the third party associated claim processing, utilization management and/or provider relations activities. Most providers participating in these arrangements have agreed to look solely to the third party for payment, but if the third party fails to pay, the Company may be exposed to demands for reimbursement. The majority of mental and behavioral health services utilized by the Company’s members are provided under such arrangements.

Quality Assessment

The Company’s quality assessment programs begin with the initial review of healthcare practitioners. Each practitioner’s license and education are verified and work history is collected by the Company or in some cases the practitioner’s affiliated group or organization. A committee of participating practitioners in each region reviews this information before the practitioner can participate in the network. Participating practitioners also periodically undergo a recredentialing process. Participating hospitals are required to have CMS and Joint Commission on Accreditation of Healthcare Organizations accreditation or undergo a detailed site assessment by the Company’s quality management staff.

Page 6

Recredentialing of practitioners may include an analysis of member grievances filed with the Company, interviews, member surveys, and analysis of drug prescription and other utilization patterns. Committees composed of a peer group of participating practitioners review participating practitioners being considered for recredentialing.

The Company also offers quality and outcome measurement programs, quality improvement programs and health care data analysis systems to providers and purchasers of health care.

The Company seeks accreditation for most of its HMO plans from the National Committee for Quality Assurance (the “NCQA”), a national organization established to review the quality and medical management systems of HMOs and other managed care plans. NCQA accreditation is a nationally recognized standard. As of December 31, 2002, approximately 97% of the Company’s HMO members participated in HMOs that had received accreditation by the NCQA.

The Company seeks accreditation for its PPO-based and other products from the American Accreditation HealthCare Commission (also known as “URAC”), a national organization founded in 1990 to establish standards for the managed care industry. Purchasers and consumers look to URAC’s accreditation as an indication that a managed care organization has the necessary structures and processes to promote high quality care and preserve patient rights. In addition, regulators in over half of the states recognize URAC’s accreditation standards in the regulatory process. Aetna Inc. and Aetna Life Insurance Company (“ALIC”) have received URAC accreditation extending through May 1, 2004.

Principal Markets and Sales

Total Commercial, Medicare and Medicaid HMO, POS, PPO and Indemnity medical membership (“Medical membership”) is dispersed throughout the United States. The Company offers a wide array of benefit plans, many of which are available in all 50 states. ASC products are available in all 50 states. Depending on the product, the Company markets to a range of customers from small employer groups to large, multi-site national accounts.

The following table presents total Health membership by region and funding arrangement, at December 31:

	2002						2001 (1)						2000 (2)
(Thousands)	Risk		ASC		Total		Risk		ASC		Total		Risk		ASC		Total
Northeast		1,126		1,267		2,393		1,709		1,275		2,984		2,180		1,348		3,528
Mid-Atlantic		942		1,506		2,448		1,512		1,491		3,003		1,848		1,613		3,461
Southeast		847		1,395		2,242		1,373		1,443		2,816		1,676		1,569		3,245
North Central		487		2,032		2,519		1,065		2,165		3,230		1,251		2,317		3,568
Southwest		669		1,247		1,916		1,179		1,228		2,407		1,350		1,320		2,670
West		888		1,201		2,089		1,365		1,286		2,651		1,579		1,223		2,802
Other		66		5		71		73		6		79		63		—		63
Total Medical Membership		5,025		8,653		13,678		8,276		8,894		17,170		9,947		9,390		19,337

(1)	Membership in thousands includes 95 Medicare members affected by the Company’s exit of a number of Medicare service areas, effective January 1, 2002.
(2)	Membership in thousands includes 260 Medicare members affected by the Company’s exit of a number of Medicare service areas, effective January 1, 2001 and 878 Prudential ASC members, which the Company agreed to service.

For membership composition of Health Care’s products by funding arrangement, refer to MD&A - Health Care - Membership in the Annual Report.

Both Risk and ASC products and services are marketed primarily to employers for the benefit of employees and their dependents. Frequently, employers offer employees a choice of coverages, from which the employee makes his or her selection during a designated annual open enrollment period. Employers pay all of the monthly premiums to the Company and, through payroll deductions, obtain reimbursement from employees for a percentage, as determined by the employer, of such monthly premium.

Page 7

Within Risk products, Medicare coverage is sold on an individual basis as well as through employer groups to their retirees. Medicaid and subsidized children’s health insurance programs are marketed to individuals rather than employer groups.

Health Care products are sold primarily through the Company’s sales personnel, who frequently work with independent consultants and brokers who assist in the production and servicing of business. Sales representatives also sell to employers on a direct basis. For large plan sponsors, independent consultants and brokers are frequently involved in employer health plan selection decisions and sales. Marketing and sales efforts are promoted by an advertising program which includes television, radio, billboards and print media, supported by market research and direct marketing efforts.

Health Pricing

For Risk Commercial plans, customer contracts are generally established in advance of the policy period, typically for a duration of one year. In determining the premium rates to be charged to the customer, prospective, experience-rated and retrospective rating methodologies may be used. Some states may prohibit the use of one or more of these rating methods, including for particular business segments, such as small employer groups.

Under prospective rating, a fixed premium rate is determined at the beginning of the policy period. Unanticipated increases in medical costs cannot be recovered in the current policy year; however, prior experience for a product in the aggregate may be considered, among other factors, in determining premium rates for future periods. Where required by law, the Company establishes premium rates prior to contract inception without regard to actual utilization of services incurred by individual members, using one of three approved community rating methods. These rates may vary from account to account to reflect projected family size and contract mix, benefit levels, renewal date, and other factors. Under the “traditional community rating” method, a plan establishes premium rates based on its revenue requirements for its entire enrollment in a given community. Under the “community rating by class” method, a plan establishes premium rates based on its revenue requirements for broad classes of membership distinguished by factors such as age and gender. Under the “group specific community rating” method, a plan establishes premium rates based in part on its revenue requirements for providing services to the group. State laws, in some of the states in which the Company operates plans, require the filing with and approval by the state of plan premium rates. In addition to reviewing anticipated medical costs, some states also review anticipated administrative costs as part of the approval process. Future results of the Company could be affected if the premium rates requested by the Company are not approved or are adjusted downward by state regulators.

Under retrospective rating, a premium rate is determined at the beginning of the policy period. After the policy period has ended, the actual experience is reviewed. If the experience is positive (i.e., actual claim costs and other expenses are less than those expected) then a refund may be credited to the policy. If the experience is negative, then the resulting deficit may, in certain instances, be recovered through contractual provisions; otherwise the deficit is considered in setting future premium levels. If a customer elects to terminate coverage, these deficits generally cannot be recovered. Retrospective rating is often used for employer-funded POS, PPO and Indemnity plans that cover more than 300 lives.

Premium rates generally for “experience-rated” plans give consideration to the individual plan sponsor’s historical and anticipated claim experience. With regard to smaller employer groups, however, the group may not be large enough for the use of experience rating to be appropriate, and another rating method is used.

Page 8

The Company has contracts with CMS to provide HMO Medicare+Choice coverage to Medicare beneficiaries who choose health care coverage through an HMO. Under these annual contracts, CMS pays the HMO at a capitated rate based on membership and adjusted for demographic factors. Inflation, changes in utilization patterns and benefit plans, demographic factors such as age and gender, and both local county and national fee for service average per capita Medicare costs are considered in the rate calculation process. Amounts payable under Medicare+Choice arrangements are subject to annual revision by CMS, and the Company elects to participate in each Medicare service area on an annual basis. In addition to premiums received from CMS, most of the Medicare products offered by the Company require a supplemental premium to be paid by the member. Under Medicare+Choice arrangements, the Company assumes the risk of higher than expected medical expenses. Medicare contracts generate higher per member per month revenues, but also generate higher per member per month medical expenses, than typical Commercial plans.

The Company also has HMO contracts to serve a variety of federal government employee groups under the Federal Employees Health Benefit Program. Premium rates are subject to federal government review and audit, which can result in retroactive and prospective premium adjustments.

In 2002, the Company had contracts with some state agencies, primarily in Washington and Pennsylvania, to provide Risk health benefits to persons eligible for children’s health insurance program benefits. The Company receives a fixed monthly payment based on membership in return for the coverage of health care services. The rates are subject to periodic unilateral revision by the contracting agencies. The Company assumes the risk of higher than expected medical expenses. The Company’s Washington state Medicaid membership was sold and transferred to another health plan on July 1, 2003 and the Company no longer participates in the Washington state Medicaid program. The Company continues to participate in the Pennsylvania children’s health insurance program.

Contracts with plan sponsors to provide administrative services for employer-funded plans are generally for a period of one year. Some of the Company’s contracts include guarantees with respect to certain functions such as customer service response time, claim processing accuracy and claim processing turnaround time as well as certain guarantees that claim expenses to be incurred by plan sponsors will fall within a certain range. With any of these guarantees, the Company is financially at risk if the conditions of the arrangements are not met, although the maximum at risk is typically 10% - 30% of fees for the customer involved.

Competition

Competition in the health care industry is intense, primarily due to a large number of competitors, aggressive marketing and pricing, and a proliferation of competing products, including new products that are continually being introduced into the market. New entrants into the marketplace as well as significant consolidation within the industry have contributed to the intense competitive environment.

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

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

Page 9

With regard to ASC plans, the Company competes primarily with other commercial insurance companies, Blue Cross/Blue Shield plans and third party administrators.

Factors Affecting Forward-Looking Information

Information regarding certain important factors that may materially affect Health Care’s business is incorporated herein by reference to the MD&A - Forward-Looking Information/Risk Factors and the MD&A-Health Care-Outlook in the Annual Report.

2. Group Insurance

Principal Products

Group Insurance consists primarily of the following:

Group Life Insurance consists principally of renewable term coverage, the amounts of which may be fixed or linked to individual employee wage levels. Basic and supplemental term coverage and spouse and dependent coverages are available. Group universal life and accidental death benefit coverages are also available. Group life insurance is offered on an insured basis. Group life insurance membership totaled 9.3 million as of December 31, 2002, 9.2 million as of December 31, 2001 and 9.4 million as of December 31, 2000.

Group Disability Insurance provides coverage for disabled employees’ income replacement benefits for both short-term disability and long-term disability. The Company also offers disability products with additional case management features. Group disability insurance is offered on both an insured and employer-funded basis. Group disability insurance membership totaled 2.2 million as of December 31, 2002 and 2.1 million as of December 31, 2001 and 2000.

Long-Term Care Insurance provides coverage for long-term care expenses in a nursing home, adult day care or home setting. Long-term care insurance is offered primarily on an insured basis. Coverage is available on both a service reimbursement and indemnity basis. Long-term care insurance membership totaled .2 million as of December 31, 2002 and .1 million as of December 31, 2001 and 2000.

Group insurance members may utilize more than one Company product and in such cases have been counted in membership totals for each.

Principal Markets and Sales

Products offered by Group Insurance are available in 49 states (Group Insurance products are not offered in New Mexico) as well as Guam, Puerto Rico and Canada. Depending on the product, the Company markets to a range of customers from small employer groups to large, multi-site national accounts.

Group Insurance products and services are marketed primarily to employers for the benefit of employees and their dependents. Frequently, employers offer employees a choice of coverages, from which the employee makes his or her selection during a designated annual open enrollment period. Employers pay all of the monthly premiums to the Company and, through payroll deductions, obtain reimbursement from employees for a percentage, as determined by the employer, of such monthly premium.

Group Insurance products are sold primarily through the Company’s sales personnel, who frequently work with independent consultants and brokers who assist in the production and servicing of business. Sales representatives also sell to employers on a direct basis. For large plan sponsors, independent consultants and brokers are frequently involved in employer plan selection decisions and sales. Marketing and sales efforts are promoted by an advertising program that may include television, radio, billboards and print media, supported by market research and direct marketing efforts.

Page 10

Pricing

For risk Group Insurance Plans, customer contracts are generally established in advance of the policy period, for a duration of one, two or three years. In determining the premium rates to be charged to the customer, prospective and retrospective rating methodologies are used.

Under prospective rating, a fixed premium rate is determined at the beginning of the policy period. Unanticipated increases in mortality or morbidity costs cannot be recovered in the current policy period; however, prior experience for the specific customer and/or the product in aggregate is considered, among other factors, in determining premium rates for future policy periods.

Under retrospective rating, a premium rate is determined at the beginning of a policy period. After the policy period has ended, the actual experience is reviewed. If the experience is positive (i.e., actual claim costs and other expenses are less than expected) then a refund may be credited to the policy. If the experience is negative, then the resulting deficit is considered in setting future premium levels; otherwise, in certain circumstances, the deficit may be recovered through contractual provisions. Such deficits may be used as offsets against refund credits that develop for future policy periods. If a customer elects to terminate coverage, these deficits generally cannot be recovered. Retrospective rating is most often used for insured employer funded plans that cover more than 300 lives.

Competition

For the group insurance industry, the Company believes that the most significant factors which distinguish competing companies are price, quality of service, comprehensiveness of coverage, and product array and design. Specialty carriers have increased market penetration in the life and disability business. The deeply penetrated group life market remains highly competitive.

Reinsurance

The Company uses reinsurance agreements with nonaffiliated insurers to control its exposure to large losses and certain other risks for Group Insurance products. The Company maintains catastrophic life reinsurance (covering life, accidental death and dismemberment and disability products) that generally provides protection against catastrophic events involving five or more covered lives. However, the catastrophic reinsurance contains exclusions for terrorist acts and California earthquakes, and the insurance policies issued by the Company do not contain similar exclusions. For life products, there is an excess individual amount arrangement that provides protection against large claims. For disability products, certain reinsurance arrangements have been established to reflect the circumstances of the specific disability risks. These include an overall excess individual amount arrangement, quota share treaties on selective large cases, and facultative treaties on a case by case basis. In addition, the Company carries excess professional liability insurance.

Group Life Insurance In Force and Other Statistical Data

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

(Dollars in Millions)	2002		2001		2000
In force, end of year	$	407,942	$	424,030	$	391,734
Terminations (lapses and all other)	$	61,628	$	55,033	$	37,561
Number of policies and contracts in force, end of year:
Group Life Contracts (1)		11,510		13,350		14,354
Group Conversion Policies (2)		25,546		26,687		27,349

(1)	Due to the diversity of coverages and size of covered groups, statistics are not provided for average size of policies in force.
(2)	Reflects conversion privileges exercised by insureds under group life policies to replace those policies with individual life policies.

Page 11

Factors Affecting Forward-Looking Information

Information regarding certain important factors that may materially affect Group Insurance’s business is incorporated herein by reference to the MD&A - Forward-Looking Information/Risk Factors and the MD&A-Group Insurance-Outlook in the Annual Report.

3. Large Case Pensions

Principal Products

Large Case Pensions manages a variety of retirement products (including pension and annuity products) offered to IRC Section 401 qualified defined benefit and defined contribution plans. Contracts provide nonguaranteed, experience-rated and guaranteed investment options through general and separate account products. Large Case Pensions’ products that use separate accounts provide contractholders with a vehicle for investments under which the contractholders assume the investment risk. Large Case Pensions earns a management fee on these separate accounts.

In 1993, the Company discontinued its fully guaranteed Large Case Pension products. Information regarding these products is incorporated herein by reference to the MD&A - Large Case Pensions - Discontinued Products in the Annual Report.

Factors Affecting Forward-Looking Information

Information regarding certain important factors that may materially affect Large Case Pensions’ business is incorporated herein by reference to the MD&A - Forward-Looking Information/Risk Factors and the MD&A -Large Case Pensions-Outlook in the Annual Report.

4. Other Matters

a. Website Access to Reports

Aetna’s reports to the Securities and Exchange Commission, including its annual report on Form 10-K, reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, if any, are available free of charge on the Company’s website at http://www.aetna.com.

b. Regulation

Information regarding significant regulations affecting the Company is incorporated herein by reference to MD&A - Regulatory Environment in the Annual Report.

c. NAIC IRIS Ratios

The National Association of Insurance Commissioners’ (“NAIC”) Insurance Regulatory Information System (“IRIS”) ratios cover 12 categories of financial data with defined usual ranges for each category. The ratios are intended to provide insurance regulators with “early warnings” as to when a given company might warrant special attention. An insurance company may fall out of the usual range for one or more ratios, and such variances may result from specific transactions that are themselves immaterial or eliminated at the consolidated level. In certain states, insurers with more than three IRIS ratios outside of the NAIC usual ranges are subject to increased regulatory oversight.

Management does not expect that any of the Company’s significant insurance subsidiaries will have more than three IRIS ratios outside of the NAIC usual ranges for 2002, although final calculation by the NAIC is not expected to be completed until the end of the first quarter of 2003.

Refer to MD&A - Liquidity and Capital Resources and Regulatory Environment in the Annual Report for additional discussion regarding solvency regulation.

Page 12

d. Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends

The following table sets forth the Company’s ratios of earnings to fixed charges and ratios of earnings to combined fixed charges and preferred stock dividends for the years ended December 31:

Aetna Inc.	2002		2001			2000		1999		1998
Ratio of Earnings to Fixed Charges		4.06		(0.73	)		0.89		3.31		3.89
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (1)		4.06		(0.73	)		0.89		2.81		2.87

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

For purposes of computing both the ratio of earnings to fixed charges and the ratio of earnings to combined fixed charges and preferred stock dividends, “earnings” represent consolidated earnings from continuing operations before income taxes, cumulative effect adjustments and extraordinary items plus fixed charges. “Fixed charges” consists of interest expense (and the portion of rental expense deemed representative of the interest factor).

Pretax loss from continuing operations used in calculating the ratio for 2001 reflects a severance and facilities charge of $193 million. The ratio for 2000 reflects a goodwill write-off of $310 million, a severance and facilities charge of $143 million and $58 million of change-in control related payments and other costs required to effect the spin-off of the Company from former Aetna. Additional pretax income from continuing operations necessary to achieve both a ratio of earnings to fixed charges of 1.0 and a ratio of earnings to combined fixed charges and preferred stock dividends of 1.0, was approximately $379 million and $39 million in 2001 and 2000, respectively.

e. Trademarks

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

Page 13

f. Ratings

Information regarding the Company's ratings is incorporated herein by reference to the ratings table in MD&A-Liquidity and Capital Resources-Financings, Financing Capacity and Capitalization.

g. Miscellaneous

The Company had approximately 28,000 domestic employees at December 31, 2002. Refer to Note 11 of Notes to Consolidated Financial Statements, which is incorporated herein by reference to the Annual Report, for a discussion of workforce reductions announced in 2002.

The federal government is a significant customer of the Health Care segment and the Company, with premiums and fees accounting for approximately 9.9% of the Health Care segment’s revenue in 2002. Contracts with CMS for coverage of Medicare-eligible individuals accounted for 54.2% of these premiums and fees, with the balance from federal employee related benefit programs. No individual customer accounted for 10% or more of the Health Care segment or the Company’s consolidated revenues in 2002. The Company’s segments are not dependent upon a single customer or a few customers, the loss of which would have a significant effect on the earnings of a segment. The loss of business from any one, or a few, independent brokers or agents would not have a material adverse effect on the earnings of the Company or any of its segments. Refer to Note 19 of Notes to Consolidated Financial Statements, which is incorporated herein by reference to the Annual Report, regarding segment information.

Item 2. Properties.

The home office of the Company is a building complex located at 151 Farmington Avenue, Hartford, Connecticut, with approximately 1.2 million square feet. The Company also owns or leases other space in the greater Hartford area; Blue Bell, Pennsylvania; Fairfield, New Jersey and Roseland, New Jersey; as well as various field locations throughout the country. The Company believes its properties are adequate and suitable for its business as presently conducted.

The foregoing does not include numerous investment properties held by the Company in its General and Separate Accounts.

Page 14

Item 3. Legal Proceedings.

Managed Care Class Action Litigation
Since 1999, the Company has been involved in purported class action lawsuits that are part of a wave of similar actions targeting the health care payor industry and, in particular, the conduct of business by managed care companies (the “Managed Care Class Action Litigation”).

The Judicial Panel on Multi-district Litigation has transferred all of the federal actions, including several actions originally filed in state courts, to the United States District Court for the Southern District of Florida (the “Florida Federal Court”) for consolidated pretrial proceedings. The Florida Federal Court has divided these cases into two tracks - one for cases brought on behalf of subscribers (collectively, the “Subscriber Cases”) and the other for cases brought on behalf of health care providers (collectively, the “Provider Cases”).

Twelve Subscriber Cases currently are pending in the Florida Federal Court. The Subscriber Cases seek various forms of relief, including unspecified damages, treble damages, injunctive relief and restitutionary relief for unjust enrichment, for alleged violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and the Employee Retirement Income Security Act of 1974 (“ERISA”), and seek similar relief under common law theories and/or state unfair trade statutes. Each of former Aetna, the Company (including certain health maintenance organizations that Aetna acquired from The Prudential Insurance Company of America (“Prudential”)), and Richard L. Huber (the former chairman of former Aetna) are named as defendants in one or more of the Subscriber Cases. The Subscriber Case complaints allege generally that defendants failed to adequately inform members about defendants’ managed care practices, including capitated payments to providers and utilization management practices. Certain Subscriber Cases also contain charges relating to the disclosure and determination of usual, customary and reasonable charges for claims and related claims payment practices.

On September 26, 2002, the Florida Federal Court denied the plaintiffs’ motion to certify a class for the Subscriber Cases. Merits discovery on the Subscriber Cases commenced in September 2002, and the Florida Federal Court has scheduled trial for the Subscriber Cases commencing September 22, 2003. The Company intends to continue to defend the Subscriber Cases vigorously.

Eleven Provider Cases currently are pending in the Florida Federal Court, and a similar action is pending in Louisiana state court. The Provider Cases allege generally that the Company and each of the other defendant managed care organizations employ coercive economic power to force physicians to enter into economically unfavorable contracts, impose unnecessary administrative burdens on providers and improperly deny claims in whole or in part, and that the defendants do not pay claims timely or do not pay claims at proper rates. The Provider Cases further charge that the Company and the other defendant managed care organizations conspired and aided and abetted one another in the alleged wrongdoing. In addition, a Provider Case brought on behalf of the American Dental Association alleges improper disclosure and determination of usual, customary and reasonable charges for dental claims and related claims payment practices. The Provider Cases allege violations of RICO, ERISA, state unfair trade statutes, state consumer fraud statutes, state laws regarding the timely payment of claims, and various common law doctrines. The Provider Cases seek various forms of relief, including unspecified damages, treble damages, punitive damages and injunctive relief.

The plaintiffs in the Provider Cases generally seek to represent purported nationwide classes and subclasses of physicians and other providers who currently or formerly provided services to members of the Company and/or Prudential. Certain Provider Cases also purport to bring class actions on behalf of physicians and/or other providers in a particular state, and plaintiffs in cases originally filed in state courts seek to have those cases remanded to state courts for separate trial. On September 26, 2002, the Florida Federal Court issued an order certifying a global RICO class and certain sub-classes in the matter it has designated as the lead Provider Case. That order is the subject of a pending appeal before the United States Court of Appeals for the Eleventh Circuit. Merits discovery on the Provider Cases commenced in September 2002, and the Florida Federal Court has scheduled the Provider Cases for trial commencing December 8, 2003. The Company intends to continue to defend vigorously the Provider Cases and similar state court actions.

Page 15

In addition to the Subscriber and Provider Cases consolidated before the Florida Federal Court, a complaint was filed in the Superior Court of the State of California, County of San Diego (the “California Superior Court”) on November 5, 1999 by Linda Ross and The Stephen Andrew Olsen Coalition for Patients Rights, purportedly on behalf of the general public of the State of California (the “Ross Complaint”). The Ross Complaint, as amended, seeks injunctive relief against former Aetna, Aetna, Aetna Health of California Inc. and additional unnamed “John Doe” defendants for alleged violations of California Business and Professions Code Sections 17200 and 17500. The Ross Complaint alleges that defendants are liable for alleged misrepresentations and omissions relating to advertising, marketing and member materials directed to the Company’s HMO members and the general public and for alleged unfair practices relating to contracting of doctors. This action is in the discovery phase, and trial currently is scheduled to begin on December 5, 2003. Defendants intend to continue to defend this action vigorously.

Securities Class Action Litigation
Laborers Tri-County Pension Fund, Goldplate Investment Partners Ltd. and Sheila Shafran filed a consolidated and amended purported class action complaint (“Securities Complaint”) on June 7, 2002 in the United States District Court for the Southern District of New York. The Securities Complaint supplanted several complaints, filed beginning November 6, 2001, which have been voluntarily dismissed or consolidated. Plaintiffs contend that the Company and two of its current or former officers and directors, William H. Donaldson and John W. Rowe, M.D., violated federal securities laws. Plaintiffs allege misrepresentations and omissions regarding, among other things, the Company’s ability to manage and control medical costs and the appropriate reserve for medical costs as of December 31, 2000, for which they seek unspecified damages, among other remedies. On October 15, 2002, the Court heard argument on defendants’ motion to dismiss the Securities Complaint. Defendants intend to continue vigorously defending this action, which is in its preliminary stages.

The Company is unable to predict at this time the ultimate outcome of the Managed Care Class Action Litigation or Securities Class Action Litigation. It is reasonably possible that their outcome could be material to the Company.

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

In addition, the Company’s current and past business practices are subject to review by various state insurance and health care regulatory authorities and other state and federal authorities. There continues to be heightened review by these authorities of the managed health care industry’s business practices, including utilization management, delegated arrangements and claim payment practices. As a leading national managed care organization, the Company regularly is the subject of such reviews. These reviews may result in changes to or clarifications of the Company’s business practices, and may result in fines, penalties or other sanctions.

While the ultimate outcome of this other litigation and these regulatory proceedings cannot be determined at this time, after consideration of the defenses available to the Company, applicable insurance coverage and any related reserves established, they are not expected to result in liability for amounts material to the financial condition of the Company, although they may adversely affect results of operations in future periods.

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

None.

Page 16

EXECUTIVE OFFICERS OF AETNA INC.*

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

Name of Officer	Principal Position	Age *
John W. Rowe, M.D.	Chairman and Chief Executive Officer		58
Ronald A. Williams	President		53
Alan M. Bennett	Senior Vice President and Chief Financial Officer		52
David B. Kelso	Executive Vice President, Strategy and Finance		50
William C. Popik, M.D.	Senior Vice President and Chief Medical Officer		57
L. Edward Shaw, Jr.	Executive Vice President and General Counsel		58

* As of February 28, 2003

Executive Officers’ Business Experience During Past Five Years

John W. Rowe, M. D. became Chairman of the Company on April 1, 2001 and became Chief Executive Officer of the Company on September 15, 2000. He served as President of the Company from September 15, 2000 to May 27, 2002. Dr. Rowe also served as an executive officer of former Aetna from September 15, 2000 until the spin-off. Prior to joining Aetna, Dr. Rowe served as President and Chief Executive Officer of Mount Sinai NYU Health, a position he assumed in 1998 after overseeing the 1998 merger of the Mount Sinai and NYU Medical Centers. Dr. Rowe joined The Mount Sinai Hospital and the Mount Sinai School of Medicine as President in 1988.

Ronald A. Williams became President of Aetna Inc. on May 27, 2002, having served as Executive Vice President and Chief of Health Operations since March 15, 2001. Prior to joining Aetna, he served as Group President of the Large Group Division of WellPoint Health Networks, Inc., a position Mr. Williams assumed in 1999, in addition to serving as President of WellPoint’s Blue Cross of California subsidiary beginning in 1995.

Alan M. Bennett became Senior Vice President and Chief Financial Officer of the Company on September 28, 2001. He served as Vice President and Corporate Controller from December 2000 to November 2001. He became Vice President and Corporate Controller of former Aetna in March 1998 having served as Vice President and Director of Internal Audit from March 1997 to March 1998 and as Chief Financial Officer of Aetna Business Resources from July 1995 to March 1997.

Page 17

David B. Kelso became Executive Vice President, Strategy and Finance on September 17, 2001. Prior to joining Aetna, he served as Executive Vice President, Managing Director and Chief Financial Officer of the Chubb Corporation. From 1994 to June 1996, he served as Executive Vice President, Chief Financial Officer and Personal Segment Leader of First Commerce Corporation.

William C. Popik, M.D., became Senior Vice President and Chief Medical Officer on March 5, 2001. Prior to joining Aetna, he served as Senior Vice President and National Medical Director of Cigna Corporation, a position he assumed in February 1996. He served as Senior Vice President and Chief Medical Officer of Health Net HMO from 1994 to 1996.

L. Edward Shaw, Jr. became General Counsel of the Company on May 30, 2000 and Executive Vice President of the Company on August 28, 2000, having served as General Counsel of former Aetna since May 1999 and Senior Vice President from May 24, 1999 to June 30, 2000, when he became Executive Vice President of former Aetna. From January 1998 to May 1999, he served as Chief Corporate Officer for North America of NatWest Group.

PART II

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

Aetna Inc.’s common shares are listed on the New York Stock Exchange. They trade under the symbol AET. As of January 31, 2003, there were 14,241 record holders of Aetna Inc.’s common shares.

Information regarding restrictions on the Company’s present and future ability to pay dividends is incorporated herein by reference to Note 17 of Notes to Consolidated Financial Statements and MD&A - Liquidity and Capital Resources in the Annual Report. Information regarding quarterly common stock prices is incorporated herein by reference to the unaudited Quarterly Data included in the Annual Report.

Item 6. Selected Financial Data.

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

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

The information contained in MD&A in the Annual Report is incorporated herein by reference.

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

The information contained in MD&A-Total Investments in the Annual Report is incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data.

The Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors’ Report and unaudited Quarterly Data are incorporated herein by reference to the Annual Report.

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

None.

Page 18

PART III

Item 10. Directors and Executive Officers of the Registrant.

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

Information concerning Directors, concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 and concerning the Company’s Code of Conduct, its written code of ethics, and related matters is incorporated herein by reference to the Proxy Statement.

Item 11. Executive Compensation.

The information under the captions “Director Compensation in 2002”, “Other Information Regarding Directors” and “Executive Compensation” in the Proxy Statement is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

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

The following table gives information about the Company’s common shares that may be issued upon the exercise of options, warrants and rights under all of the Company’s equity compensation plans as of December 31, 2002.

					Number of securities
	Number of		Weighted-average		remaining available
	securities to be		exercise		for future issuance
	issued upon		price of		under equity
	exercise of outstanding		outstanding		compensation plans
	options, warrants		options, warrants		(excluding securities
	and rights		and rights		reflected in column (a))
		(a)		(b)		(c)
Equity compensation plans approved by security holders (1)		27,115,090	$	32.41		11,068,397	(3)
Equity compensation plans not approved by security holders (2)		1,223,361	$	35.78		6,516,365
Total		28,338,451	$	32.55		17,584,762

(1)	Includes 2000 Stock Incentive Plan and Employee Stock Purchase Plan.
(2)	Includes 2002 Stock Incentive Plan and Non-Employee Director Compensation Plan.
(3)	Includes 6,364,459 shares of common stock available for future issuance as of December 31, 2002 for the Company’s Employee Stock Purchase Plan.

2002 Stock Incentive Plan
On January 25, 2002 the Company’s Board of Directors approved the 2002 Stock Incentive Plan to promote the interests of the Company and its shareholders and to further align the interests of shareholders and employees by tying awards to total return to shareholders, enabling plan participants to acquire additional equity interests in the Company and providing compensation opportunities dependent upon the Company’s performance. The plan has not been submitted to shareholders for approval.

Page 19

Under the plan, eligible participants may be granted stock options to purchase shares of common stock, stock appreciation rights, time vesting and/or performance vesting Incentive Stock or Incentive Units and other stock-based awards. The maximum number of shares of common stock that may be awarded under the plan is 7.5 million shares, subject to adjustment for corporate transactions. If an award is paid solely in cash, no shares shall be deducted from the number of shares available for issuance.

Non-employee Director Compensation Plan
On January 25, 2002 the Company’s Board of Directors amended the Non-employee Director Compensation Plan adopted on September 29, 2000. The plan permits eligible directors of the Company to receive shares of common stock in recognition of their contributions to the Company. The plan has not been submitted to shareholders for approval.

Item 13. Certain Relationships and Related Transactions.

The information under the captions “Other Information Regarding Directors” and “Certain Transactions and Relationships” in the Proxy Statement is incorporated herein by reference.

PART IV

Item 14. Controls and Procedures.

The Company maintains disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In February 2003, an evaluation of the effectiveness of the Company’s disclosure controls and procedures was conducted under the supervision of, and reviewed by, the Company’s Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were adequate and designed to ensure that material information relating to Aetna Inc. and its consolidated subsidiaries would be made known to the Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the periods when periodic reports under the Exchange Act are being prepared. Furthermore, there have been no significant changes in the Company’s internal controls or in other factors (including any corrective actions with regard to significant deficiencies or material weaknesses in the Company’s internal controls) that could significantly affect those controls subsequent to the February 2003 evaluation. Refer to the Certifications by the Company’s Chief Executive Officer and Chief Financial Officer following the signature page of this report.

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.*

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

1. Financial statements:

The Consolidated Financial Statements, Notes to Consolidated Financial Statements and Independent Auditors’ Report are incorporated herein by reference to the Annual Report.

2. Financial statement schedules:

The supporting schedules of the consolidated entity are included in this Item 15. Refer to Index to Financial Statement Schedules below.

Page 20

3.	Exhibits: *
(3)	Articles of Incorporation and By-Laws.
3.1	Form of Amended and Restated Articles of Incorporation of Aetna Inc. (formerly Aetna U.S. Healthcare Inc.), incorporated herein by reference to Exhibit 3.1 to Aetna Inc.’s Amendment No. 2 to Registration Statement on Form 10 filed on December 1, 2000.
3.2	Form of Amended and Restated By-Laws of Aetna Inc., incorporated herein by reference to Exhibit 3.2 to Aetna Inc.’s Amendment No. 2 to Registration Statement on Form 10 filed on December 1, 2000.
(4)	Instruments defining the rights of security holders, including indentures.
4.1	Form of Aetna Inc. Common Share certificate, incorporated herein by reference to Exhibit 4.1 to Aetna Inc.’s Amendment No. 2 to Registration Statement on Form 10 filed on December 1, 2000.
4.2	Form of Rights Agreement between Aetna Inc. and EquiServe Trust Company, N.A., as Rights Agent, incorporated herein by reference to Exhibit 4.2 to Aetna Inc.’s Amendment No. 2 to Registration Statement on Form 10 filed on December 1, 2000.
4.3	Amendment No. 1 to Rights Agreement between Aetna Inc. and EquiServe Trust Company, N.A., as Rights Agent, incorporated herein by reference to Exhibit 4.1 to Aetna Inc.’s Form 10-Q filed on October 31, 2002.
4.4	Form of Senior Indenture between Aetna Inc. and State Street Bank and Trust Company, incorporated herein by reference to Exhibit 4.1 to Aetna Inc.’s Registration Statement on Form S-3 filed on January 19, 2001.
4.5	Form of Subordinated Indenture between Aetna Inc. and State Street Bank and Trust Company, incorporated herein by reference to Exhibit 4.2 to Aetna Inc.’s Registration Statement on Form S-3 filed on January 19, 2001.
4.6	Form of Subordinated Indenture between Aetna Inc. and State Street Bank and Trust Company, incorporated herein by reference to Exhibit 4.1 to Aetna Inc.’s Form 10-Q filed on March 31, 2001.
(10)	Material contracts.
10.1	Form of Distribution Agreement between former Aetna and Aetna Inc. incorporated herein by reference to Annex C to former Aetna’s definitive proxy statement on Schedule 14A filed on October 18, 2000.
10.2	Term Sheet for Agreement between former Aetna and Aetna Inc. in respect of the CityPlace property, situated at 185 Asylum Avenue, Hartford, Connecticut, 06103, incorporated herein by reference to Exhibit 10.10 to Aetna Inc.’s Registration Statement on Form 10 filed on September 1, 2000.
10.3	364-Day Credit Agreement dated as of November 27, 2002, among Aetna Inc., the Banks listed on the signature pages thereto, and JPMorgan Chase Bank, as Administrative Agent.
10.4	Three-Year Credit Agreement dated as of November 27, 2002, among Aetna Inc., the Banks listed on the signature pages thereto, and JPMorgan Chase Bank, as Administrative Agent.
10.5	Amended and Restated Aetna Inc. 2000 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.17 to Aetna Inc.’s Form 10-K filed on February 25, 2002.**

Page 21

10.6	Aetna Inc. 2002 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.1 to Aetna Inc.’s Form 10-Q filed on April 29, 2002.**
10.7	Form of Aetna Inc. 2001 Annual Incentive Plan, incorporated herein by reference to Annex H to former Aetna’s definitive proxy statement on Schedule 14A filed on October 18, 2000.**
10.8	Amended Aetna Inc. Non-Employee Director Compensation Plan, incorporated herein by reference to Exhibit 10.2 to Aetna Inc.’s Form 10-Q filed on April 29, 2002.**
10.9	1999 Director Charitable Award Program, incorporated herein by reference to Exhibit 10.1 to former Aetna’s Form 10-Q filed on April 28, 1999. **
10.10	Employment Agreement dated as of September 6, 2000 by and between former Aetna and John W. Rowe, M.D., incorporated herein by reference to Exhibit 10.23 to Aetna Inc.’s Amendment No. 1 to Registration Statement on Form 10 filed on October 18, 2000. **
10.11	Memorandum dated December 6, 2002, from Elease E. Wright to John W. Rowe, M.D.**
10.12	Employment Agreement dated as of September 28, 2001 between Aetna Inc. and Alan M. Bennett.**
10.13	Employment Agreement dated as of September 13, 2001 by and between Aetna Inc. and David B. Kelso, incorporated herein by reference to Exhibit 10.26 to Aetna Inc.’s Form 10-K filed on February 25, 2002. **
10.14	Memorandum dated September 30, 2002, from Elease E. Wright to David B. Kelso, incorporated herein by reference to Exhibit 10.1 to Aetna Inc.’s Form 10-Q filed on October 31, 2002.**
10.15	Letter Agreement dated April 28, 1999 between former Aetna and L. Edward Shaw, Jr., incorporated herein by reference to Exhibit 10.20 to Aetna Inc.’s Amendment No. 1 to Registration Statement on Form 10 filed on October 18, 2000. **
10.16	Restrictive Covenant Agreement dated April 28, 1999 between former Aetna and L. Edward Shaw, Jr., incorporated herein by reference to Exhibit 10.21 to Aetna Inc.’s Amendment No. 1 to Registration Statement on Form 10 filed on October 18, 2000. **
10.17	Letter Agreement dated November 17, 2000 between former Aetna and L. Edward Shaw, Jr., incorporated herein by reference to Exhibit 10.24 to Aetna Inc.’s Amendment No. 2 to Registration Statement on Form 10 filed on December 1, 2000. **
10.18	Memorandum dated November 16, 2000 from James H. Gould to L. Edward Shaw, Jr., incorporated herein by reference to Exhibit 10.25 to Aetna Inc.’s Amendment No. 2 to Registration Statement on Form 10 filed on December 1, 2000. **
10.19	Employment Agreement dated as of March 14, 2001 by and between Aetna Inc. and Ronald Williams, incorporated herein by reference to Exhibit 10.31 to Aetna Inc.’s Form 10-K filed on February 25, 2002.**
10.20	Description of certain arrangements not embodied in formal documents, as described under the headings “Nonemployee Director Compensation in 2002” and “Other Information Regarding Directors” are incorporated herein by reference to the Proxy Statement.**
*	Exhibits other than those listed are omitted because they are not required to be listed or are not applicable. Copies of exhibits will be furnished without charge upon written request to the Office of the Corporate Secretary, Aetna Inc., 151 Farmington Avenue, Hartford, Connecticut 06156.
**	Management contract or compensatory plan or arrangement.

Page 22

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

Incorporated herein by reference to Note 5 of Notes to Consolidated Financial Statements in the Annual Report.

(12) Statement re: computation of ratios.

Statement re: computation of ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the Company for the years ended December 31, 2002, 2001, 2000, 1999 and 1998.

(13) Annual Report to security holders.

Management’s Discussion and Analysis of Financial Condition and Results of Operations, Selected Financial Data, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors’ Report and unaudited Quarterly Data are incorporated herein by reference to the Annual Report and filed herewith in electronic format.

(21) Subsidiaries of the registrant.

A listing of subsidiaries of Aetna Inc.

(23) Consents of experts and counsel.

Consent of independent auditors to incorporation of their report dated February 10, 2003 by reference in Aetna Inc.’s Registration Statements on Form S-3 and Form S-8.

(24) Powers of attorney.

24.1 Power of attorney.

24.2 Power of attorney.

(99) Additional Exhibits.

99.1 Aetna Inc. Code of Conduct.

(b) Reports on Form 8-K.

None.

Page 23

INDEX TO FINANCIAL STATEMENT SCHEDULES
AETNA INC.

		Page
Independent Auditors’ Report			25
I   Condensed Financial Information of the Registrant:
	Balance Sheet of Aetna Inc. as of December 31, 2002 and 2001 and the related Statements of Income, Shareholders’ Equity and Cash Flows for the years ended December 31, 2002, 2001 and 2000.		26
II  Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2002, 2001 and 2000.			31

Certain information has been omitted from the schedules filed because the information is not applicable.

Page 24

INDEPENDENT AUDITORS’ REPORT

The Shareholders and Board of Directors
Aetna Inc.:

Under date of February 10, 2003, we reported on the consolidated balance sheets of Aetna Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2002, as contained in the 2002 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2002. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.

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

/s/ KPMG LLP

Hartford, Connecticut
February 10, 2003

Page 25

AETNA INC.

SCHEDULE I – Condensed Statements of Income

		For the years ended December 31,
(Millions)		2002			2001			2000
Service fees – affiliates		$	1,090.7		$	1,487.3		$	1,531.5
Net investment income			6.8			15.6			27.7
Net realized capital gains			35.1			44.7			81.9
	Total revenue		1,132.6			1,547.6			1,641.1
Operating expenses			1,476.0			1,704.1			1,793.9
Interest expense			119.5			142.8			248.2
	Total expenses		1,595.5			1,846.9			2,042.1
Loss before income tax benefit and equity in earnings of affiliates, net			(462.9	)		(299.3	)		(401.0	)
Income tax benefit			155.2			111.8			107.7
Equity in earnings (loss) of affiliates, net (1)			700.9			(92.1	)		420.4
Income (loss) from continuing operations			393.2			(279.6	)		127.1
Income from discontinued operations			50.0			—			—
Cumulative effect adjustment, net of tax			(2,965.7	)		—			—
Net income (loss)		$	(2,522.5	)	$	(279.6	)	$	127.1

(1) Includes parent company amortization of other acquired intangible assets of $85.0 million after tax for 2002 and amortization of goodwill and other acquired intangible assets of $337.5 million after tax and $347.6 million after tax during 2001 and 2000, respectively.

See Notes to Aetna Inc. Condensed Financial Statements.

Page 26

AETNA INC.

SCHEDULE I – Condensed Balance Sheets

	As of December 31,
(Millions, except share data)	2002			2001
Cash and cash equivalents	$	614.1		$	310.8
Investment securities		409.5			167.6
Other receivables		305.5			390.8
Other assets		111.1			150.3
Total current assets		1,440.2			1,019.5
Long-term investments		—			1.2
Property and equipment		.1			.3
Investment in affiliates (1)		9,625.3			12,442.2
Deferred tax assets		406.6			—
Other assets		47.8			5.4
Total assets	$	11,520.0		$	13,468.6
Short-term debt	$	—		$	109.7
Accrued expenses and other liabilities		1,115.2			1,233.3
Total current liabilities		1,115.2			1,343.0
Long-term debt		1,633.2			1,591.3
Accrued pension benefit liability		1,204.2			—
Other liabilities		587.4			644.0
Total liabilities		4,540.0			3,578.3
Common stock ($.01 par value, 756,277,772 shares authorized, 149,966,082 issued and outstanding in 2002 and $.01 par value, 759,900,000 shares authorized, 144,265,912 issued and outstanding in 2001)		4,070.9			3,913.8
Accumulated other comprehensive income		(470.4	)		68.5
Retained earnings		3,379.5			5,908.0
Total shareholders’ equity		6,980.0			9,890.3
Total liabilities and shareholders’ equity	$	11,520.0		$	13,468.6

(1) Includes parent company goodwill and other acquired intangible assets of $4.1 billion and $7.2 billion as of December 31, 2002 and 2001, respectively.

See Notes to Aetna Inc. Condensed Financial Statements.

Page 27

AETNA INC.

SCHEDULE I - Condensed Statements of Shareholders’ Equity

													Accumulated Other
							Common			Comprehensive Income (Loss)
							Stock and
							Additional			Unrealized									Minimum
							Paid-in			Gains (Losses)			Foreign						Pension			Retained
(Millions, except share data)				Total			Capital			On Securities			Currency			Derivatives			Liability			Earnings
Balances at December 31, 1999				$	10,703.2		$	3,719.3		$	(206.1	)	$	(449.5	)	$	—		$	—		$	7,639.5
Comprehensive income:
	Net income				127.1																		127.1
	Other comprehensive income, net of tax:
			Unrealized gains on securities ($486.5 pretax)(1)		316.2						316.2
			Foreign currency ($(50.9) pretax)		(39.9	)								(39.9	)
	Other comprehensive income				276.3
Total comprehensive income					403.4
Capital contributions from former Aetna					118.9			118.9
Dividends to former Aetna					(216.0	)																	(216.0	)
Outstanding shares cancelled (1,100 shares)					—			—
Sale and spin-off related transaction (141,670,551 shares issued)					(904.2	)		38.7			(80.7	)		495.1									(1,357.3	)
Stock options exercised (948,000 shares issued)					21.8			21.8
Balances at December 31, 2000					10,127.1			3,898.7			29.4			5.7			—			—			6,193.3
Comprehensive income:
	Net loss				(279.6	)																	(279.6	)
	Other comprehensive income, net of tax:
			Unrealized gains on securities ($57.2 pretax) (1)		37.2						37.2
			Foreign currency ($(1.1) pretax)		(.7	)								(.7	)
			Derivative losses ($(4.8) pretax) (1)		(3.1	)											(3.1	)
	Other comprehensive income				33.4
Total comprehensive loss					(246.2	)
Common shares issued for benefit plans (4,247,361 shares)					110.7			110.7
Repurchase of common shares (2,600,000 shares)					(95.6	)		(95.6	)
Common stock dividends					(5.7	)																	(5.7	)
Balances at December 31, 2001					9,890.3			3,913.8			66.6			5.0			(3.1	)		—			5,908.0
Comprehensive income:
	Net loss				(2,522.5	)																	(2,522.5	)
		Other comprehensive loss, net of tax:
			Unrealized gains on securities ($331.4 pretax) (1)		215.4						215.4
			Foreign currency ($.7 pretax)		.5									.5
			Derivative gains ($.6 pretax) (1)		.4												.4
			Minimum pension liability adjustment ($(1,161.8) pretax)		(755.2	)														(755.2	)
	Other comprehensive loss				(538.9	)
Total comprehensive loss					(3,061.4	)
Common shares issued for benefit plans (9,320,601 shares)					322.3			322.3
Repurchase of common shares (3,620,431 shares)					(165.2	)		(165.2	)
Common stock dividends					(6.0	)																	(6.0	)
Balances at December 31, 2002				$	6,980.0		$	4,070.9		$	282.0		$	5.5		$	(2.7	)	$	(755.2	)	$	3,379.5

(1) Net of reclassification adjustments.

See Notes to Aetna Inc. Condensed Financial Statements.

Page 28

AETNA INC.

SCHEDULE I – Condensed Statements of Cash Flows

				For the years ended December 31,
(Millions)				2002			2001			2000
Cash Flows from Operating Activities:
		Net income (loss)		$	(2,522.5	)	$	(279.6	)	$	127.1
		Adjustments to reconcile net income (loss) to net cash used for operating activities:
			Cumulative effect adjustment		2,965.7			—			—
			Income from discontinued operations		(50.0	)		—			—
			Equity in (earnings) loss of affiliates, net (1)		(700.9	)		92.1			(420.4	)
			Net realized capital gains		(35.1	)		(44.7	)		(81.9	)
		Changes in assets and liabilities:
			Net change in other assets and accrued expenses and other liabilities		274.4			(115.8	)		(395.6	)
Net cash used for operating activities					(68.4	)		(348.0	)		(770.8	)
Cash Flows from Investing Activities:
		Proceeds (costs) from sales (purchases) of investments			(205.7	)		(28.7	)		460.8
		Decrease (increase) in property and equipment			—			1.7			(1.1	)
		Dividends received from affiliates, net			624.8			251.0			688.0
Net cash provided by investing activities					419.1			224.0			1,147.7
Cash Flows from Financing Activities:
		Repayment of short-term debt			(109.7	)		(1,482.5	)		(279.7	)
		Issuance of long-term debt			—			1,566.1			—
		Common shares issued under benefit plans			233.5			98.1			21.8
		Common shares repurchased			(165.2	)		(95.6	)		—
		Dividends paid to shareholders			(6.0	)		(5.7	)		—
		Net transfers to former Aetna			—			—			(97.1	)
Net cash provided by (used for) financing activities					(47.4	)		80.4			(355.0	)
Net increase (decrease) in cash and cash equivalents					303.3			(43.6	)		21.9
Cash and cash equivalents, beginning of year					310.8			354.4			332.5
Cash and cash equivalents, end of year				$	614.1		$	310.8		$	354.4
Supplemental disclosure of cash flow information:
	Interest paid			$	118.7		$	117.6		$	333.4
	Income taxes paid (refunded), net			$	(65.0	)	$	106.0		$	195.5

(1) Includes parent company amortization of other acquired intangible assets of $85.0 million after tax for 2002 and amortization of goodwill and other acquired intangible assets of $337.5 million after tax and $347.6 million after tax during 2001 and 2000, respectively.

See Notes to Aetna Inc. Condensed Financial Statements.

Page 29

AETNA INC.

SCHEDULE I — Notes to Condensed Financial Statements

1. Background of Organization

The condensed parent company only financial information reflects Aetna Inc. (a Pennsylvania corporation) (the “Parent Company”). Prior to December 13, 2000, the Parent Company (formerly Aetna U.S. Healthcare Inc. and Aetna Services, Inc.) was a subsidiary of a Connecticut corporation, Aetna Inc. (“former Aetna”). On December 13, 2000, former Aetna spun-off shares of the Parent Company to shareholders of former Aetna as part of the same transaction which also resulted in the sale of former Aetna’s financial services business and international business to ING Groep N.V. The Parent Company was renamed Aetna Inc. Refer to “Item 1. Business – Organization of Business” for more details regarding this transaction. The condensed financial information presented herein includes the balance sheet of Aetna Inc. as of December 31, 2002 and 2001 and the related statements of income, shareholders’ equity and cash flows for the years ended December 31, 2002, 2001 and 2000. The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Annual Report. Certain reclassifications have been made to the 2001 and 2000 financial information to conform to the 2002 presentation.

2. New Accounting Standards

Refer to Note 2 of Notes to Consolidated Financial Statements in the Annual Report for a description of new accounting standards and the impairment of goodwill of approximately $3 billion which is recorded as a cumulative effect adjustment.

3. Dispositions

Refer to Note 3 of Notes to Consolidated Financial Statements in the Annual Report for a description of dispositions.

4. Discontinued Products

Refer to Note 12 of Notes to Consolidated Financial Statements in the Annual Report for a description of discontinued products.

5. Income Taxes

Refer to Note 13 of Notes to Consolidated Financial Statements in the Annual Report for a description of income taxes.

6. Additional Minimum Pension Liability

As of December 31, 2002, the Company recognized an additional minimum pension liability. Refer to Note 14 of Notes to Consolidated Financial Statements in the Annual Report for further information.

7. Debt

Refer to Note 15 of Notes to Consolidated Financial Statements in the Annual Report for a description of debt and Note 2 for a discussion of the allocation of interest expense to businesses presented as discontinued operations for the year ended December 31, 2000.

8. Service Arrangement

During the periods presented, the Parent Company had service arrangements with certain of its affiliates, under which the Parent Company provided certain administrative services, including accounting and processing of premiums and claims.

Page 30

AETNA INC. AND SUBSIDIARIES

SCHEDULE II

Valuation and Qualifying Accounts and Reserves

				Additions
						Charged
		Balance at		Charged		(credited) to					Balance
For the years ended December 31,		beginning		(credited) to costs		other accounts-		Deductions-			at end of
(Millions)		of period		and expenses(1)		describe(2)		describe(3)			period
2002
Asset valuation
Reserves:
	Mortgage loans	$	32.6	$	.3	$	.3	$	(21.8	)	$	11.4
	Real estate		65.3		14.7		13.6		(20.3	)		73.3
		$	97.9	$	15.0	$	13.9	$	(42.1	)	$	84.7
2001
Asset valuation
Reserves:
	Mortgage loans	$	44.0	$	1.1	$	4.5	$	(17.0	)	$	32.6
	Real estate		83.5		.7		11.4		(30.3	)		65.3
		$	127.5	$	1.8	$	15.9	$	(47.3	)	$	97.9
2000
Asset valuation
Reserves:
	Mortgage loans	$	45.9	$	—	$	—	$	(1.9	)	$	44.0
	Real estate		93.1		.2		1.4		(11.2	)		83.5
	Other		2.8		—		—		(2.8	)		—
		$	141.8	$	.2	$	1.4	$	(15.9	)	$	127.5

(1)	Charged (credited) to net realized capital (gains) losses in the Consolidated Statements of Income.
(2)	Reflects additions to (reductions of) reserves related to assets supporting experience-rated contracts and discontinued products for which a corresponding reduction was included in Policyholders’ funds and Future Policy Benefits in the Consolidated Balance Sheets, respectively.
(3)	Reduction in reserves is primarily a result of related asset write-downs (including foreclosures of real estate) and sales.

Page 31

SIGNATURES

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

Date: February 28, 2003	AETNA INC.
	By /s/ Ronald M. Olejniczak      Ronald M. Olejniczak      Vice President and Controller

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 28, 2003.

* /s/ John W. Rowe, M.D.	* /s/ Ellen M. Hancock
John W. Rowe, M.D., Chairman, Chief Executive Officer and Director (Principal Executive Officer)	Ellen M. Hancock, Director
	* /s/ Michael H. Jordan
* /s/ Betsy Z. Cohen Betsy Z. Cohen, Director	Michael H. Jordan, Director
	* /s/ Jack D. Kuehler
* /s/ Barbara H. Franklin Barbara Hackman Franklin, Director	Jack D. Kuehler, Director
	* /s/ Joseph P. Newhouse
* /s/ Jeffrey E. Garten Jeffrey E. Garten, Director	Joseph P. Newhouse, Director
	* /s/ Judith Rodin
* /s/ Earl G. Graves Earl G. Graves, Director	Judith Rodin, Director
	* /s/ Ronald A. Williams
* /s/ Gerald Greenwald Gerald Greenwald, Director	Ronald A. Williams, President and Director
	* /s/ R. David Yost
/s/ Alan M. Bennett Alan M. Bennett, Senior Vice President and Chief Financial Officer (Principal Financial Officer)	R. David Yost, Director * /s/ Ronald M. Olejniczak Ronald M. Olejniczak Vice President and Controller (Principal Accounting Officer)
*By /s/ Alan M. Bennett
(Attorney-in-Fact)

Page 32

CERTIFICATION

I, John W. Rowe, M.D., certify that:

1.     I have reviewed this annual report on Form 10-K of Aetna Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 28, 2003	/s/ John W. Rowe
	John W. Rowe, M.D. Chairman and Chief Executive Officer

Page 33

CERTIFICATION

I, Alan M. Bennett, certify that:

1.     I have reviewed this annual report on Form 10-K of Aetna Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.     Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:	February 28, 2003	/s/ Alan M. Bennett
		Alan M. Bennett Chief Financial Officer

Page 34

INDEX TO EXHIBITS

Exhibit Number	Description of Exhibit	Filing Method
10	Material Contracts.
10.3	364-Day Credit Agreement dated as of November 27, 2002, among Aetna Inc., the Banks listed on the signature pages thereto, and JPMorgan Chase Bank, as Administrative Agent.	Electronic
10.4	Three-Year Credit Agreement dated as of November 27, 2002, among Aetna Inc., the Banks listed on the signature pages thereto, and JPMorgan Chase Bank, as Administrative Agent.	Electronic
10.11	Memorandum dated December 6, 2002, from Elease E. Wright to John W. Rowe, M.D.	Electronic
10.12	Employment Agreement dated as of September 28, 2001, between Aetna Inc. and Alan M. Bennett.	Electronic
12	Statement re: computation of ratios.	Electronic
	Statement re: computation of ratio of earnings to fixed charges and ratio of earnings to combined fixed charges and preferred stock dividends for the Company for the years ended December 31, 2002, 2001, 2000, 1999 and 1998.
13	Annual Report to security holders.	Electronic
	Management’s Discussion and Analysis of Financial Condition and Results of Operations, Selected Financial Data, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors’ Report, and unaudited Quarterly Data sections of the Annual Report.
21	Subsidiaries of the registrant.	Electronic
	A listing of subsidiaries of Aetna Inc.
23	Consents of experts and counsel.	Electronic
	Consent of independent auditors to incorporation of their report dated February 10, 2003 by reference in Aetna Inc.’s Registration Statements on Form S-3 and Form S-8.
24.1	Power of attorney.	Electronic
24.2	Power of attorney.	Electronic
99.1	Aetna Inc. Code of Conduct	Electronic

Page 35 EX-10.3 3 y83806exv10w3.htm CREDIT AGREEMENT

Exhibit 10.3

EXECUTION COPY

$300,000,000

364-DAY CREDIT AGREEMENT

Dated as of November 27, 2002

among

AETNA INC.,

as Borrower,

The Banks Listed Herein

and

JPMORGAN CHASE BANK,
as Administrative Agent

J.P. MORGAN SECURITIES INC.,
as Lead Arranger and Sole Bookrunner,

and

CITIBANK, N.A.,
DEUTSCHE BANK SECURITIES INC.,
FLEET BANK,
and
BANK OF AMERICA, N.A.,
as Co-Syndication Agents

TABLE OF CONTENTS */

		Page
	ARTICLE I
	Definitions
SECTION 1.01.	Definitions	1
SECTION 1.02.	Accounting Terms and Determinations	13
SECTION 1.03.	Classifications of Borrowings	14
	ARTICLE II
	The Credits
SECTION 2.01.	Commitments to Lend	14
SECTION 2.02.	Notice of Committed Borrowings	14
SECTION 2.03.	Money Market Borrowings	15
SECTION 2.04.	Notice to Banks; Funding of Loans	18
SECTION 2.05.	Evidence of Debt	19
SECTION 2.06.	Maturity of Loans	20
SECTION 2.07.	Termination or Reduction of Commitments	20
SECTION 2.08.	Increase in Commitments	20
SECTION 2.09.	Interest Rates	21
SECTION 2.10.	Fees	24
SECTION 2.11.	Method of Electing Interest Rates	25
SECTION 2.12.	Prepayments	26
SECTION 2.13.	General Provisions as to Payments	27
SECTION 2.14.	Funding Losses	28
SECTION 2.15.	Computation of Interest and Fees	28
SECTION 2.16.	Regulation D Compensation	28
SECTION 2.17.	Term-Out Option	29

ii

	ARTICLE III
	Conditions
SECTION 3.01.	Effectiveness	29
SECTION 3.02.	Borrowings	30
	ARTICLE IV
	Representations and Warranties
SECTION 4.01.	Corporate Existence and Power	31
SECTION 4.02.	Corporate and Governmental Authorization; No Contravention	31
SECTION 4.03.	Binding Effect	31
SECTION 4.04.	Financial Information	32
SECTION 4.05.	Litigation	32
SECTION 4.06.	Compliance with ERISA	32
SECTION 4.07.	Compliance with Laws and Agreements	33
SECTION 4.08.	Investment Company Act; Public Utility Holding Company Act	33
SECTION 4.09.	Full Disclosure	33
SECTION 4.10.	Taxes	33
	ARTICLE V
	Covenants
SECTION 5.01.	Information	34
SECTION 5.02.	Conduct of Business and Maintenance of Existence and Insurance	35
SECTION 5.03.	Minimum Adjusted Consolidated Net Worth	35
SECTION 5.04.	Leverage Ratio	35
SECTION 5.05.	Liens	35
SECTION 5.06.	Consolidations, Mergers and Sales of Assets	37
SECTION 5.07.	Use of Proceeds	37
SECTION 5.08.	Compliance with Laws	37

iii

SECTION 5.09.	Inspection of Property, Books and Records	37
SECTION 5.10.	Payment of Obligations	37
	ARTICLE VI
	Defaults
SECTION 6.01.	Events of Default	38
SECTION 6.02.	Notice of Default	40
	ARTICLE VII
	The Agent
SECTION 7.01.	Appointment and Authorization	41
SECTION 7.02.	Agent and Affiliates	41
SECTION 7.03.	Action by Agent	41
SECTION 7.04.	Consultation with Experts	41
SECTION 7.05.	Liability of Agent	41
SECTION 7.06.	Indemnification	42
SECTION 7.07.	Credit Decision	42
SECTION 7.08.	Successor Agent	42
SECTION 7.09.	Agent’s Fees	42
	ARTICLE VIII
	Change in Circumstances
SECTION 8.01.	Basis for Determining Interest Rate Inadequate or Unfair	43
SECTION 8.02.	Illegality	43
SECTION 8.03.	Increased Cost and Reduced Return	44
SECTION 8.04.	Taxes	45
SECTION 8.05.	Base Rate Loans Substituted for Affected Euro-Dollar Loans	47
SECTION 8.06.	Substitution of Bank	48
SECTION 8.07.	Election to Terminate	48

iv

	ARTICLE IX
	Miscellaneous
SECTION 9.01.	Notices	49
SECTION 9.02.	No Waivers	49
SECTION 9.03.	Expenses; Indemnification	50
SECTION 9.04.	Amendments and Waivers	50
SECTION 9.05.	Successors and Assigns	50
SECTION 9.06.	New York Law	53
SECTION 9.07.	Counterparts; Integration	53
SECTION 9.08.	WAIVER OF JURY TRIAL	53

Schedules and Exhibits

Schedule 2.01 - Commitments to Lend

Exhibit A - Form of Note

Exhibit B - Form of Money Market Quote Request

Exhibit C - Form of Invitation for Money Market Quotes

Exhibit D - Form of Money Market Quote

Exhibit E-1 - Opinion of William C. Baskin III, Esq.

Exhibit E-2 - Opinion of Davis Polk & Wardwell

Exhibit E-3 - Opinion of Drinker Biddle & Reath LLP

Exhibit F - Form of Assignment and Assumption

     364-DAY CREDIT AGREEMENT dated as of November 27, 2002 among AETNA INC., the BANKS listed on the signature pages hereof, and JPMORGAN CHASE BANK, as Administrative Agent.

          The parties hereto agree as follows:

ARTICLE I

Definitions

          SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings:

          “Absolute Rate Auction” means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03.

          “Adjusted Consolidated Net Worth” means at any date the total shareholders’ equity of the Borrower and its Consolidated Subsidiaries determined as of such date, adjusted to exclude net unrealized capital gains and losses.

          “Administrative Questionnaire” means, with respect to each Bank, the administrative questionnaire in the form submitted to such Bank by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank.

          “Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

          “Agent” means JPMorgan Chase Bank in its capacity as administrative agent for the Banks hereunder, and its successors in such capacity.

          “Applicable Lending Office” means, with respect to any Bank, (i) in the case of its Base Rate Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office.

          “Applicable Percentage” means, with respect to any Bank, the percentage of the total Commitments represented by such Bank’s Commitment.

          “Assignment and Assumption” means an assignment and assumption entered into by a Bank and an assignee (with the consent of any party whose consent is required by Section 9.05), and accepted by the Agent, in the form of Exhibit F or any other form approved by the Agent.

          “Bank” means each bank listed on the signature pages hereof, and its successors and assignees.

2

          “Base Rate” means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day.

          “Base Rate Loan” means (i) a Committed Loan which bears interest at the Base Rate pursuant to the applicable Notice of Committed Borrowing or a Notice of Interest Rate Election or the provisions of Article VIII or (ii) an overdue amount which was a Base Rate Loan immediately before it became overdue.

          “Base Rate Margin” has the meaning set forth in Section 2.09(a).

          “Borrower” means Aetna Inc., a Pennsylvania corporation, and its successors.

          “Borrowing” means a borrowing hereunder consisting of Loans made to the Borrower at the same time by the Banks pursuant to Article II. A Borrowing is a “Base Rate Borrowing” if such Loans are Base Rate Loans, a “Euro-Dollar Borrowing” if such Loans are Euro-Dollar Loans and a “Money Market Borrowing” if such Loans are Money Market Loans.

          “Commitment” means, with respect to each Bank, the amount set forth opposite the name of such Bank on Schedule 2.01 hereto, as such amount may be terminated or reduced from time to time pursuant to Section 2.07, increased pursuant to Section 2.08, terminated pursuant to Section 8.07 or changed pursuant to Section 9.05.

          “Committed Loan” means a loan made by a Bank pursuant to Section 2.01; provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term “Committed Loan” shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be.

          “Consolidated EBITDA” means, for any period, Consolidated Net Income for such period plus, without duplication, to the extent deducted in determining such Consolidated Net Income, the sum of (a) consolidated interest expense for such period, (b) consolidated income tax expense for such period and (c) all amounts attributable to depreciation, amortization and other similar non-cash charges for such period; provided that, for purposes of determining Consolidated EBITDA for any period, Consolidated Net Income for such period shall be adjusted to exclude, without duplication, the effect on Consolidated Net Income for such period of (i) the aggregate after-tax amount of any nonrecurring charges taken on or before December 31, 2003, during such period (up to an aggregate amount of $150,000,000 during such period), including, but not limited to, charges incurred to restructure operations and/or exit certain activities, including employee termination benefits and other costs, (ii) any extraordinary gains or losses for such period, and (iii) the amount of any cumulative effect adjustment associated with the Borrower’s adoption of SFAS 142.

3

          “Consolidated Net Income” means, for any period, the consolidated net income (or loss) of the Borrower and its Consolidated Subsidiaries for such period, determined in accordance with GAAP.

          “Consolidated Subsidiary” means, at any date, any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date.

          “Continuing Director” means, at any time, a director who (i) was a director of the Borrower on the Effective Date or (ii) was nominated or elected as a director by vote of a majority of the persons who were Continuing Directors at the time of such nomination or election.

          “Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.

          “Default” means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default.

          “Disclosure Documents” means (a) the Confidential Bank Memorandum dated October 22, 2002 and/or the Confidential Information Memorandum dated October 2002, previously delivered to the Banks; (b) the Borrower’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the period ended December 31, 2001; (c) the Borrower’s Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission for the periods ended March 31, 2002, June 30, 2002, and September 30, 2002; and (d) the Borrower’s Current Reports on Form 8-K filed with the Securities and Exchange Commission on or before October 30, 2002.

          “Domestic Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close.

          “Domestic Lending Office” means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent.

          “Effective Date” means the date this Agreement becomes effective in accordance with Section 3.01.

          “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

4

          “ERISA Group” means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code.

          “Euro-Dollar Business Day” means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London.

          “Euro-Dollar Lending Office” means, as to each Bank, its office, branch or Affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or Affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent.

          “Euro-Dollar Loan” means (i) a Committed Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or a Notice of Interest Rate Election or (ii) an overdue amount which was a Euro-Dollar Loan immediately before it became overdue.

          “Euro-Dollar Margin” has the meaning set forth in Section 2.09(b).

          “Euro-Dollar Rate” means a rate of interest determined pursuant to Section 2.09(b) on the basis of the London Interbank Offered Rate.

          “Euro-Dollar Reserve Percentage” means, for any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor), for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of “Eurocurrency liabilities” (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents).

          “Event of Default” has the meaning set forth in Section 6.01.

          “Existing Credit Agreements” means (a) the $300,000,000 amended and restated 364-day revolving credit agreement dated as of November 30, 2001, among the Borrower, the banks party thereto and JPMorgan Chase Bank, as administrative agent, and (b) the $500,000,000 three-year revolving credit agreement dated as of December 13, 2000, among the Borrower, the banks party thereto and JPMorgan Chase Bank, as administrative agent.

5

          “Federal Funds Rate” means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day; provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to JPMorgan Chase Bank on such day on such transactions as calculated by the Agent, such calculation to be supplied to the Borrower upon the Borrower’s request.

          “Fitch” means Fitch, Inc.

          “Fixed Rate Loans” means Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate for the reason stated in Section 8.01) or any combination of the foregoing.

          “GAAP” means generally accepted accounting principles in the United States of America.

          “Group of Loans” or “Group” means at any time a group of Loans consisting of (i) all Committed Loans which are Base Rate Loans at such time or (ii) all Committed Loans which are Euro-Dollar Loans having the same Interest Period at such time; provided that, if Committed Loans of any particular Bank are converted to or made as Base Rate Loans pursuant to Article VIII, such Loans shall be included in the same Group or Groups of Loans from time to time as they would have been in if they had not been so converted or made.

          “Guarantee” of or by any Person (the “guarantor”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment thereof, including pursuant to any “synthetic” lease arrangement, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness; provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business.

6

          “Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (d) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable and accrued obligations incurred in the ordinary course of business), (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (f) all Guarantees by such Person of Indebtedness of others, (g) all obligations of such Person as an account party to reimburse amounts drawn under any letter of credit or letter of guaranty that constituted Indebtedness of such Person under clause (f) above prior to drawing thereunder and (h) all obligations of such Person in respect of leases required to be accounted for as capital leases under GAAP.

          “Interest Period” means:

     (a) with respect to each Base Rate Borrowing, the period commencing on the date of such Borrowing and ending on the next succeeding Quarterly Date; provided that any Interest Period which would otherwise end after the Termination Date (or, in the case of an Interest Period for Term Loans, the Term-Out Maturity Date) shall end on the Termination Date (or the Term-Out Maturity Date, as applicable);

     (b) with respect to each Euro-Dollar Loan, a period commencing on the date of Borrowing specified in the applicable Notice of Committed Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice or such longer period as mutually agreed to by the Borrower and all of the Banks; provided that:

     (i) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (iii) below, be extended to the next succeeding Euro-Dollar Business Day;

     (ii) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and

     (iii) any Interest Period which would otherwise end after the Termination Date (or, in the case of an Interest Period for Term Loans, the Term-Out Maturity

7

     Date) shall end on the Termination Date (or the Term-Out Maturity Date, as applicable).

     (c) with respect to each Money Market LIBOR Loan, the period commencing on the date of Borrowing and ending such whole number of months thereafter as the Borrower may elect in accordance with Section 2.03; provided that:

     (i) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (iii) below, be extended to the next succeeding Euro-Dollar Business Day;

     (ii) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (d) below, end on the last Euro-Dollar Business Day of a calendar month; and

     (iii) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date;

     (d) with respect to each Money Market Absolute Rate Loan, the period commencing on the date of Borrowing and ending such number of days thereafter (but not less than seven days) as the Borrower may elect in accordance with Section 2.03; provided that:

     (i) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (ii) below, be extended to the next succeeding Euro-Dollar Business Day; and

     (ii) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date.

          “Internal Revenue Code” means the Internal Revenue Code of 1986, as amended, or any successor statute.

          “Invitation for Money Market Quotes” means an invitation from the Agent to the Banks to submit Money Market Quotes pursuant to Section 2.03(c).

          “Level I Period” means any period during which any long-term Senior Unsecured Debt of the Borrower has ratings that are better than or equal to at least two of the following three ratings: (i) A by S&P and/or (ii) A2 by Moody’s and/or (iii) A by Fitch; provided that if S&P or Moody’s or Fitch changes its rating system after the date hereof, the new rating of such rating agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level.

8

          “Level II Period” means any period (other than a Level I Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings that are better than or equal to at least two of the following three ratings: (i) A- by S&P and/or (ii) A3 by Moody’s and/or (iii) A- by Fitch; provided that if S&P or Moody’s or Fitch changes its rating system after the date hereof, the new rating of such rating agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level.

          “Level III Period” means any period (other than a Level I Period or a Level II Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings which are better than or equal to at least two of the following three ratings: (i) BBB+ by S&P and/or (ii) Baa1 by Moody’s and/or (iii) BBB+ by Fitch; provided that if S&P or Moody’s or Fitch changes its rating system after the date hereof, the new rating of such agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level.

          “Level IV Period” means any period (other than a Level I Period, Level II Period or Level III Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings which are better than or equal to at least two of the following three ratings: (i) BBB by S&P and/or (ii) Baa2 by Moody’s and/or (iii) BBB by Fitch; provided that if S&P or Moody’s or Fitch changes its rating system after the date hereof, the new rating of such agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level.

          “Level V Period” means any period (other than a Level I Period, Level II Period, Level III Period or Level IV Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings which are better than or equal to at least two of the following three ratings: (i) BBB- by S&P and/or (ii) Baa3 by Moody’s and/or (iii) BBB- by Fitch; provided that if S&P or Moody’s or Fitch changes its rating system after the date hereof, the new rating of such agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level.

          “Level VI Period” means any period (other than a Level I Period, Level II Period, Level III Period, Level IV Period or Level V Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings which are better than or equal to at least two of the following three ratings: (i) BB+ by S&P and/or (ii) Ba1 by Moody’s and/or (iii) BB+ by Fitch; provided that if S&P or Moody’s or Fitch changes its rating system after the date hereof, the new rating of such agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level.

          “Level VII Period” means any period other than a Level I Period, Level II Period, Level III Period, Level IV Period, Level V Period or Level VI Period.

9

          “Leverage Ratio” means, as of the end of any fiscal quarter of the Borrower, the ratio of (a) Total Debt as of such date to (b) Consolidated EBITDA for the period of four consecutive fiscal quarters of the Borrower then ended.

          “LIBOR Auction” means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03.

          “Lien” means, with respect to any asset, any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset.

          “Loan” means a Base Rate Loan, a Euro-Dollar Loan or a Money Market Loan and “Loans” means any combination of the foregoing.

          “London Interbank Offered Rate” has the meaning set forth in Section 2.09(b).

          “Material Subsidiary” means a Consolidated Subsidiary of the Borrower that, as of the time of determination of whether such Consolidated Subsidiary is a “Material Subsidiary”, accounted on a consolidated basis for 10% or more of the total assets of the Borrower and its Consolidated Subsidiaries (i) as of September 30, 2002, until the first consolidated financial statements of the Borrower are delivered to the Agent pursuant to Section 5.01(a) or (b) and, thereafter, (ii) as of the most recent date for which a consolidated balance sheet of the Borrower has been delivered to the Agent pursuant to Section 5.01(a) or (b); provided that, for purposes of Article VI, if any event or combination of events described in clauses (g) and (h) of Section 6.01 occur with respect to any one or more Consolidated Subsidiaries that are not Material Subsidiaries but in the aggregate would constitute a Material Subsidiary if such Consolidated Subsidiaries constituted a single Consolidated Subsidiary, then such Consolidated Subsidiaries shall be deemed collectively to constitute a Material Subsidiary for purposes of such clauses.

          “Minimum Adjusted Consolidated Net Worth” means, as of the end of any fiscal quarter of the Borrower, the sum of (a) $5,000,000,000 plus (b) in the case of any determination as of the end of any fiscal quarter ending after December 31, 2002, the amount equal to 50% of Consolidated Net Income in respect of each fiscal quarter of the Borrower as to which Consolidated Net Income is a positive amount and that ends after December 31, 2002, and on or prior to such date of determination; provided that the amount of “Minimum Adjusted Consolidated Net Worth” as of any date shall be reduced on a dollar-for-dollar basis by the aggregate after-tax amount of any nonrecurring charges (up to an aggregate amount of $150,000,000) taken after September 30, 2002, and on or before December 31, 2003, including, but not limited to, charges incurred to restructure operations and/or exit certain activities, including employee termination benefits and other costs.

10

          “Money Market Absolute Rate” has the meaning set forth in Section 2.03(d).

          “Money Market Absolute Rate Loan” means a loan made or to be made by a Bank pursuant to an Absolute Rate Auction.

          “Money Market Lending Office” means, as to each Bank, its Domestic Lending Office or such other office or branch of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Agent; provided that any Bank may from time to time by notice to the Borrower and the Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require.

          “Money Market LIBOR Loan” means a loan made or to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate for the reason stated in Section 8.01).

          “Money Market Loan” means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan.

          “Money Market Margin” has the meaning set forth in Section 2.03(d).

          “Money Market Quote” means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03.

          “Money Market Quote Request” means a request by the Borrower to the Banks to make Money Market Loans in accordance with Section 2.03(b).

          “Moody’s” means Moody’s Investors Service, Inc.

          “Notes” means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and “Note” means any one of such promissory notes issued hereunder.

          “Notice of Borrowing” means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)).

          “Notice of Interest Rate Election” has the meaning set forth in Section 2.11.

          “Other Taxes” has the meaning set forth in Section 8.04(a).

          “Participant” has the meaning set forth in Section 9.05(e).

11

          “PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.

          “Person” means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

          “Plan” means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and is either (i) maintained by a member of the ERISA Group for employees of a member of the ERISA Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions.

          “Prime Rate” means the rate of interest publicly announced by JPMorgan Chase Bank in New York City from time to time as its Prime Rate.

          “Quarterly Date” means the last Domestic Business Day of each March, June, September and December.

          “Regulation U” means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time.

          “Reportable Event” means any reportable event as defined in Section 4043(c) of ERISA or the regulations issued thereunder (other than a Reportable Event as to which the 30-day notice requirement has been waived by applicable regulation) with respect to a Plan (other than a Plan maintained by a member of an applicable ERISA Group that is considered a member of such ERISA Group only pursuant to subsection (m) or (o) of Section 414 of the Internal Revenue Code).

          “Required Banks” means at any time Banks having at least 51% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding at least 51% of the aggregate unpaid principal amount of the Loans.

          “Required Capital” has the meaning set forth in Section 8.03(b).

          “Responsible Financial Officer” means chief financial officer, treasurer, chief accounting officer or senior corporate finance officer.

          “Revolving Credit Period” means the period from the Effective Date to and including the Termination Date.

          “S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc.

12

          “Senior Unsecured Debt” means indebtedness for borrowed money that is not subordinated to any other indebtedness for borrowed money and is not secured or supported by a guarantee, letter of credit or other form of credit enhancement.

          “SFAS 142” means Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles.

          “Subsidiary” means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Borrower.

          “Taxes” has the meaning set forth in Section 8.04(a).

          “Termination Date” means November 26, 2003, or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day.

          “Term Loan” means a Committed Loan that remains outstanding after the Termination Date as a result of the exercise by the Borrower of its rights under Section 2.17.

          “Term-Out Maturity Date” means the date that is one year after the Termination Date or, if such day is not a Euro-Dollar Business Day, the next day thereafter that is a Euro-Dollar Business Day.

          “Three-Year Credit Agreement” means the three-year credit agreement dated as of the date hereof among the Borrower, the banks party thereto and JPMorgan Chase Bank, as administrative agent.

          “Total Debt” means, as of any date, the aggregate principal amount of Indebtedness of the Borrower and its Consolidated Subsidiaries as of such date (whether or not such Indebtedness would be reflected on a consolidated balance sheet prepared as of such date in accordance with GAAP), determined on a consolidated basis.

          “Trigger Event” has the meaning set forth in Section 8.03(c).

          “Usage” means at any date the percentage equivalent of a fraction (i) the numerator of which is the sum of (a) the aggregate outstanding principal amount of the Loans (including Money Market Loans) at such date, and (b) the aggregate outstanding principal amount of all “Loans” (including “Money Market Loans”) and the aggregate undrawn amount of all outstanding “Letters of Credit” and all unreimbursed drawings thereunder at such date, in each case under and as defined in the Three-Year Credit Agreement, and (ii) the denominator of which is the sum of (a) the aggregate amount of the Commitments at such date, after giving effect to any reduction or increase in the Commitments on such date, and (b) the aggregate amount of the “Commitments” on such date under and as defined in the Three-Year

13

Credit Agreement, after giving effect to any reduction or increase in the “Commitments” on such date, under and as defined in the Three-Year Credit Agreement; provided that if the Commitments have terminated but the Borrower has exercised the term-out option described in Section 2.17, then for the purposes of clause (ii)(a) above the Commitments shall be deemed to remain in effect in an amount equal to the aggregate principal amount of any outstanding Term Loans at the time.

          SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower’s independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Agent notifies the Borrower that the Required Banks request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change in GAAP shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith.

          SECTION 1.03. Classifications of Borrowings. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a “Euro-Dollar Borrowing” is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article II under which participation therein is determined (i.e., a “Committed Borrowing” is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a “Money Market Borrowing” is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids).

ARTICLE II

The Credits

          SECTION 2.01. Commitments to Lend. On the terms and conditions set forth in this Agreement, each Bank severally agrees to lend to the Borrower, from time to time during the Revolving Credit Period, amounts not to exceed in the aggregate at any one time outstanding the amount of such Bank’s Commitment. Each Borrowing under this Section 2.01 shall be in an aggregate principal amount of $15,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the

14

aggregate amount of the unused Commitments) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.12, prepay Loans and reborrow at any time during the Revolving Credit Period under this Section. Failure by any Bank to make Loans as required under the terms of this Agreement will not relieve any other Bank of its obligations hereunder. Notwithstanding the foregoing, any Money Market Loans made by a Bank shall be deemed usage of the total Commitments for the purpose of availability, but shall not reduce such Bank’s obligation to lend its pro rata share of its Commitment.

          SECTION 2.02. Notice of Committed Borrowings. The Borrower shall give the Agent notice (a “Notice of Committed Borrowing”) not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate Borrowing and (y) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying:

     (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing and a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing,

     (b) the aggregate amount of such Borrowing,

     (c) whether the Loans comprising such Borrowing are to be Base Rate Loans or Euro-Dollar Loans, and

     (d) in the case of a Euro-Dollar Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period.

          SECTION 2.03. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Loans pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Banks from time to time during the Revolving Credit Period to make offers to make Money Market Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section.

          (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received no later than 10:00 A.M. (New York City time) on (x) the fourth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed upon and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or

15

Absolute Rate Auction for which such change is to be effective) specifying:

     (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction,

     (ii) the aggregate amount of such Borrowing, which shall be $15,000,000 or a larger multiple of $1,000,000,

     (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and

     (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate.

The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or following notice to each of the Banks, such other number of days as the Borrower and the Agent may agree upon) of any other Money Market Quote Request.

          (c) Invitation for Money Market Quotes. Promptly upon receipt of a Money Market Quote Request, the Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section.

          (d) Submission and Contents of Money Market Quotes. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.01 not later than (x) 9:30 A.M. (New York City time) on the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction, or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Agent (or any Affiliate of the Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Agent or such Affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) 9:15 A.M. (New York City time) on the third Euro-Dollar Business Day prior to the proposed date of Borrowing,

16

in the case of a LIBOR Auction or (y) 9:15 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction. Subject to Articles III and VI, any Money Market Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the Borrower.

(ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify:
	(A) the proposed date of Borrowing,
	(B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (x) may be greater than or less than the Commitment of the quoting Bank, (y) must be $15,000,000 or a larger multiple of $1,000,000 and (z) may not exceed the principal amount of Money Market Loans for which offers were requested,
	(C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the “Money Market Margin”) offered for each such Money Market Loan, expressed as a percentage (rounded to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate,
	(D) in the case of an Absolute Rate Auction, the rate of interest per annum (rounded to the nearest 1/10,000th of 1%) (the “Money Market Absolute Rate”) offered for each such Money Market Loan, and
	(E) the identity of the quoting Bank.

A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes.

                         (iii) Any Money Market Quote shall be disregarded if it:

     (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii);

     (B) contains qualifying, conditional or similar language;

     (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or

     (D) arrives after the time set forth in subsection (d)(i).

                         (e) Notice to Borrower. The Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and

17

(y)  of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Agent’s notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered (including the names of the Banks) and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote for any Interest Period may be accepted.

          (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed upon and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a “Notice of Money Market Borrowing”) shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote for any Interest Period in whole or in part; provided that:

     (i)  the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request,

     (ii)  the principal amount of each Money Market Borrowing must be $15,000,000 or a larger multiple of $1,000,000,

     (iii)  acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and

     (iv)  the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement.

          (g) Allocation by Agent. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Agent among such Banks as nearly as possible (in multiples of such number, not greater than

18

$1,000,000 as the Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Agent of the pro rata amounts of Money Market Loans shall be conclusive in the absence of manifest error.

          SECTION 2.04. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank’s share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower.

          (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank participating therein shall make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address specified in or pursuant to Section 9.01. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make the funds so received from the Banks available to the Borrower at the Agent’s aforesaid address.

          (c) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank’s share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.04 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.09 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank’s Loan included in such Borrowing for purposes of this Agreement.

          SECTION 2.05. Evidence of Debt. (a) Each Bank shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Bank resulting from each Loan made by such Bank, including the amounts of principal and interest payable and paid to such Bank from time to time hereunder.

          (b) The Agent shall maintain accounts in which it shall record (i) the Commitment of each Bank and the amount of each Loan made hereunder by such Bank, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Bank hereunder and (iii) the amount of any sum received by the Agent hereunder for the accounts of the Banks and each Bank’s share thereof.

19

          (c) The entries made in the accounts maintained pursuant to paragraph (b) of this Section 2.05 shall be evidence of the existence and amounts of the obligations recorded therein and shall be presumptively correct absent demonstrable error; provided that the failure of the Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement.

          (d) Any Bank may request in writing that Loans made by it be evidenced by a Note. In such event, the Borrower shall prepare, execute and deliver to such Bank a Note payable to the order of such Bank in the form of Exhibit A. Thereafter, the Loans evidenced by such Note and interest thereon shall at all times (including after assignment pursuant to Section 9.05) be represented by one or more Notes in such form payable to the order of the payee named therein.

          (e) Each Bank agrees that it will cancel and return to the Borrower all Notes then held by it upon the earlier of (i) the Termination Date (or, in the case of any Note or Notes evidencing Term Loans, the Term-Out Maturity Date); provided that no Default shall have then occurred and be continuing or (ii) the date such Bank’s Commitment has been terminated and there are no Loans outstanding to or accrued interest owing to such Bank.

          SECTION 2.06. Maturity of Loans. (a) The Committed Loans of each Bank shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the Termination Date (or, in the case of Term Loans, the Term-Out Maturity Date).

          (b) Each Money Market Loan shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the last day of the Interest Period applicable to such Money Market Loan.

          SECTION 2.07. Termination or Reduction of Commitments. (a) The Commitments of each Bank shall terminate on the Termination Date.

          (b) During the Revolving Credit Period the Borrower may, upon at least three Domestic Business Days’ notice to the Agent, terminate the Commitments at any time, if no Loans are outstanding at such time.

          (c) During the Revolving Credit Period the Borrower may, upon at least three Domestic Business Days’ notice to the Agent, ratably reduce the Commitments from time to time by an aggregate amount of $10,000,000 or any larger multiple of $1,000,000, but only to the extent that the aggregate amount of the Commitments exceeds the aggregate outstanding principal amount of the Loans.

          SECTION 2.08. Increase in Commitments. (a) During the Revolving Credit Period, the Borrower may, by written notice to the Agent (which shall promptly deliver a copy to each of the

20

Banks), request at any time or from time to time that the total Commitments be increased; provided that (i) the aggregate amount of all such increases pursuant to this Section shall not exceed $75,000,000, (ii) the Borrower shall offer each Bank the opportunity to increase its Commitment by its Applicable Percentage of the proposed increased amount, and (iii) each Bank, in its sole discretion, may either (A) agree to increase its Commitment by all or a portion of the offered amount or (B) decline to increase its Commitment. Any such notice shall set forth the amount of the requested increase in the total Commitments and the date on which such increase is requested to become effective. In the event that the Banks shall have agreed to increase their Commitments by an aggregate amount less than the increase in the total Commitments requested by the Borrower, the Borrower may arrange for one or more banks or other financial institutions (any such bank or other financial institution being called an “Augmenting Bank”), which may include any Bank, to extend Commitments or increase its existing Commitments in an aggregate amount equal to the unsubscribed amount; provided that (i) each Augmenting Bank, if not already a Bank hereunder, shall be subject to the approval of the Agent (which approval shall not be unreasonably withheld) and (ii) each Augmenting Bank, if not already a Bank hereunder, shall become a party to this Agreement by completing and delivering to the Agent a duly executed accession agreement in a form satisfactory to the Agent and the Borrower. Increases and new Commitments created pursuant to this paragraph (a) shall become effective on the date specified in the notice delivered by the Borrower pursuant to the first sentence of this paragraph. Notwithstanding the foregoing, no increase in the total Commitments (or in the Commitment of any Bank) shall become effective under this paragraph unless, (i) on the date of such increase, the conditions set forth in clauses (b) and (d) of Section 3.02 shall be satisfied (as though a Borrowing were being made on such date) and the Agent shall have received a certificate to that effect dated such date and executed by a Responsible Financial Officer of the Borrower, and (ii) the Agent shall have received (to the extent requested by the Agent reasonably in advance of such date) documents consistent with those delivered under clauses (c) and (d) of Section 3.01 as to the corporate power and authority of the Borrower to borrow hereunder and as to the enforceability of this Agreement after giving effect to such increase.

          (b) At the time that any increase in the total Commitments pursuant to paragraph (a) above (a “Commitment Increase”) becomes effective, if any Committed Loans are outstanding, the Borrower shall prepay in accordance with Section 2.12 the aggregate principal amount of all Committed Loans outstanding (the “Initial Loans”); provided that (i) nothing in this Section shall prevent the Borrower from funding the prepayment of Initial Loans with concurrent Borrowings hereunder in accordance with the provisions of this Agreement, giving effect to the Commitment Increase, and (ii) no such prepayment shall be required if, after giving effect to the Commitment Increase, each Bank has the same Applicable Percentage as immediately prior to such Commitment Increase.

21

          SECTION 2.09. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate Margin plus the Base Rate for such day. Such interest shall be payable for each Interest Period on the earlier of (i) the last day of the Interest Period applicable thereto or (ii) the Termination Date (or, in the case of Term Loans, the Term-Out Maturity Date). Any overdue principal of and, to the extent permitted by law, overdue interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate Margin plus the Base Rate for such day.

          The “Base Rate Margin” applicable to any Base Rate Loan outstanding on any day, subject to paragraph (c) of this Section, means:

     (i)    if such day falls within a Level I Period, Level II Period, Level III Period or Level IV Period, then 0%;

     (ii)   if such day falls within a Level V Period, then 0.400%;

     (iii)  if such day falls within a Level VI Period, then 0.700%; and

     (iv)  if such day falls within a Level VII Period, then 1.250%.

          (b) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin plus the applicable London Interbank Offered Rate. Such interest shall be payable for each Interest Period on the earlier of (i) the last day thereof, (ii) three months after the initial date thereof and, if such Interest Period is longer than three months, at intervals of three months thereafter or (iii) the Termination Date (or, in the case of Term Loans, the Term-Out Maturity Date).

          “Euro-Dollar Margin” applicable to any Euro-Dollar Loan outstanding on any day, subject to paragraph (c) of this Section, means: (A) if Usage on such day is less than or equal to 33%:

     (i)    if such day falls within a Level I Period, then 0.400%;

     (ii)   if such day falls within a Level II Period, then 0.500%;

     (iii)  if such day falls within a Level III Period, then 0.725%;

     (iv)  if such day falls within a Level IV Period, then 0.825%;

22

     (v)   if such day falls within a Level V Period, then 1.150%;

     (vi)  if such day falls within a Level VI Period, then 1.450%; and

     (vii) if such day falls within a Level VII Period, then 2.000%; or

     (B)   if Usage on such day is greater than 33%:

     (i)    if such day falls within a Level I Period, then 0.525%;

     (ii)   if such day falls within a Level II Period, then 0.625%;

     (iii)  if such day falls within a Level III Period, then 0.850%;

     (iv)  if such day falls within a Level IV Period, then 1.075%;

     (v)   if such day falls within a Level V Period, then 1.400%;

     (vi)  if such day falls within a Level VI Period, then 1.700%; and

     (vii) if such day falls within a Level VII Period, then 2.250%.

          The “London Interbank Offered Rate” applicable to any Interest Period means the rate per annum (rounded upwards, if necessary, to the nearest 1/32 of 1%) appearing on the Moneyline Telerate Screen page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period for a period equal to such Interest Period; provided that, if for any reason such rate is not available, the term “London Interbank Offered Rate” applicable to any Interest Period shall mean the rate per annum (rounded upwards, if necessary, to the nearest 1/32 of 1%) appearing on Reuters Screen LIBO Page (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period for a period equal to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page (or any successor page), the applicable rate shall be the arithmetic mean of all such rates.

          (c) After the Termination Date, the Base Rate Margin or Euro-Dollar Margin applicable to any Term Loan shall be increased by either (i) 0.500%, during any period that the Borrower’s commercial paper is rated A-2 or better by S&P and P-3 or better by Moody’s, or (ii) 1.000%, during any period that the

23

Borrower’s commercial paper is not rated A-2 or better by S&P and P-3 or better by Moody’s; provided that if S&P or Moody’s changes its rating system after the date hereof, the new rating of such rating agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level.

          (d) Any overdue principal of and, to the extent permitted by law, overdue interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 2% plus the Euro-Dollar Margin plus the higher of (i) the London Interbank Offered Rate applicable to such Loan and (ii) the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than three months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to the Agent are offered to the Agent in the London interbank market for the applicable period determined as provided above (or, if the circumstances described in Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the Base Rate Margin plus the Base Rate for such day).

          (e) Subject to clause (y) of Section 8.01, each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the earlier of (i) the last day thereof, (ii) three months after the initial date thereof and, if such Interest Period is longer than three months, at intervals of three months thereafter or (iii) the Termination Date. Any overdue principal of and, to the extent permitted by law, overdue interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate Margin plus the Base Rate for such day.

          (f) The Agent shall determine (in accordance with this Agreement) each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower by telecopy and the participating Banks by telex, cable or telecopy of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error.

          SECTION 2.10. Fees. (a) Facility Fee. The Borrower shall pay to the Agent for the account of the Banks, ratably in proportion to their Commitments (or, if the Commitments have

24

terminated, ratably in proportion to their outstanding Loans), a facility fee at the rate of (i) 0.100% per annum during each Level I Period, (ii) 0.125% per annum during each Level II Period, (iii) 0.150% per annum during each Level III Period, (iv) 0.175% per annum during each Level IV Period, (v) 0.225% per annum during each Level V Period, (vi) 0.300% during each Level VI Period and (vii) 0.500% during each Level VII Period. Such facility fee shall accrue (i) from and including the Effective Date to but excluding the last day of the Revolving Credit Period, in each case, on the daily average aggregate amount of the Commitments (whether used or unused) and (ii) if any Loans remain outstanding after the Revolving Credit Period (including any Term Loans), from and including the last day of the Revolving Credit Period to but excluding the date such Loans shall be repaid in full, on the daily average aggregate outstanding principal amount of such Loans.

          (b) Payments. Except as otherwise indicated, accrued facility fees under this Section 2.10 shall be payable quarterly in arrears on (i) each Quarterly Date, (ii) the Termination Date and (iii) if any Loans remain outstanding after the Revolving Credit Period, the date such Loans shall be repaid in full; provided that accrued facility fees on outstanding Term Loans shall constitute additional interest on such Loans and shall be payable at the times that accrued interest thereon is payable under this Agreement.

          SECTION 2.11. Method of Electing Interest Rates. (a) The Loans included in each Committed Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Committed Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article VIII), as follows:

     (i)  if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; and

     (ii) if such Loans are Euro-Dollar Loans, the Borrower may (x) elect to convert such Euro-Dollar Loans to Base Rate Loans as of any Domestic Business Day, (y) elect to convert such Euro-Dollar Loans to Euro-Dollar Loans with an Interest Period different from the then current Interest Period applicable to such Loans as of any Euro-Dollar Business Day or (z) elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period beginning on the last day of the then current Interest Period applicable to such Loans;

provided that, if the Borrower elects to convert any Euro-Dollar Loans to Base Rate Loans or to Euro-Dollar Loans with a different Interest Period, as of any day other than the last day of the then current Interest Period applicable to such Loans, the Borrower shall reimburse each Bank in accordance with Section 2.14.

25

          Each such election shall be made by delivering a notice (a “Notice of Interest Rate Election”) to the Agent (i) at least one Domestic Business Day before such notice is to be effective if the relevant Loans are to be converted into Base Rate Loans or (ii) at least three Euro-Dollar Business Days before such conversion or continuation is to be effective if such Loans are to be converted into, or continued as, Euro-Dollar Loans.

          A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each $15,000,000 or any larger multiple of $1,000,000.

          (b) Each Notice of Interest Rate Election shall specify:

     (i)  the Group of Loans (or portion thereof) to which such notice applies;

	(ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above;
	(iii)  whether such Group of Loans (or portion thereof) is to be converted to Base Rate Loans or Euro-Dollar Loans or continued as Euro-Dollar Loans for an additional Interest Period; and
	(iv)  if such Loans (or portions thereof) are to be converted to or continued as Euro-Dollar Loans, the duration of the Interest Period to be applicable thereto immediately after such conversion or continuation.
Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period.

          (c) Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate Election to the Agent for any Euro-Dollar Loans, such Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto.

          SECTION 2.12. Prepayments. (a) The Borrower may (i) upon notice to the Agent to be received no later than 10:30 A.M. (New York City time), prepay the Base Rate Loans (or any Money Market LIBOR Loans which bear interest at the Base Rate at such time for the reason stated in Section 8.01), in whole or in part, on any Domestic Business Day and (ii) upon at least two Euro-Dollar Business Days’ notice to the Agent, prepay any Euro-Dollar Loan, in whole or in part, in amounts aggregating

26

$15,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment; provided that a Money Market Loan may not be prepaid without the prior written consent of the Bank that holds such Money Market Loan, other than as contemplated by clause (i) above. Each such optional prepayment shall be applied to prepay ratably the relevant Loans of the several Banks. Prepayment of a Euro-Dollar Loan on any day other than the last day of an Interest Period applicable thereto shall be subject to Section 2.14.

          (b) Upon receipt of a notice of prepayment pursuant to this Section 2.12, the Agent shall promptly notify each Bank of the contents thereof and of such Bank’s ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower.

          SECTION 2.13. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in its Administrative Questionnaire. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, any Base Rate Loans or fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans and Money Market LIBOR Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month or falls after the Termination Date (or, in the case of Term Loans, the Term-Out Maturity Date), in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Absolute Rate Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time.

          (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is

27

distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate.

          SECTION 2.14. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted to a Base Rate Loan (pursuant to Section 2.11, Section 2.12, Article VI or Article VIII) on any day other than the last day of an Interest Period applicable thereto or the end of an applicable period fixed pursuant to Section 2.09(d), or if any Bank assigns any Fixed Rate Loan as required by Section 8.06 on any day other than the last day of an Interest Period applicable thereto, or if the Borrower fails to borrow or prepay any Fixed Rate Loan after notice has been given to any Bank in accordance with Section 2.04(a) or Section 2.12, the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss reasonably incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after such payment or conversion or assignment or failure to borrow or prepay; provided that such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense with an explanation of the calculation of such loss or expense, which certificate shall be conclusive if made reasonably and in good faith.

          SECTION 2.15. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and facility fees hereunder shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day).

          SECTION 2.16. Regulation D Compensation. For each day for which a Bank is required to maintain reserves in respect of either (x) “Eurocurrency Liabilities” (as defined in all regulations of the Board of Governors of the Federal Reserve System) or (y) any other category of liabilities which includes deposits by reference to which the interest rate in Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents, such Bank may require the Borrower to pay, contemporaneously with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum determined by such Bank up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least five Euro-Dollar Business Days after the giving of such notice and (y) shall notify the

28

Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans of the amount then due to such Bank under this Section. Such Bank’s notice to the Borrower shall set forth its calculation of such additional interest and such calculation shall be conclusive if made reasonably and in good faith.

          SECTION 2.17. Term-Out Option. The Borrower may, upon written notice to the Agent on a date that is prior to the Termination Date, elect that all Committed Loans outstanding on the Termination Date remain outstanding after the Termination Date as Term Loans maturing on the Term-Out Maturity Date; provided that any such election shall be subject to the satisfaction, on the Termination Date, of the conditions set forth in clauses (b) and (d) of Section 3.02 (as though a Borrowing were being made on such date) and to the receipt by the Agent on the Termination Date of a certificate to that effect dated such date and executed by a Responsible Financial Officer of the Borrower. The Agent will notify the Banks of such election promptly following receipt by the Agent of any such notice. Notwithstanding any such election, all Commitments will terminate on the Termination Date, and additional Borrowings will not be permitted after the Termination Date. This Section 2.17 shall not apply to Money Market Loans, which must be repaid on or prior to the Termination Date. After the Termination Date, any Term Loans outstanding as a result of the exercise by the Borrower of its rights under this Section shall continue to constitute “Loans” and “Committed Loans” for all purposes of this Agreement.

ARTICLE III

Conditions

          SECTION 3.01. Effectiveness. This Agreement shall become effective on the date that all of the following conditions shall have been satisfied (or waived in accordance with Section 9.04):

     (a) receipt by the Agent from each of the parties hereto of either (i) a counterpart hereof signed by such party or (ii) telegraphic, telex or other written confirmation, in form satisfactory to the Agent, confirming that a counterpart hereof has been signed by such party;

     (b) receipt by the Agent of a certificate signed by the Chief Financial Officer or the Vice President, Finance, of the Borrower, dated the Effective Date, to the effect that (i) no Default has occurred and is continuing as of the Effective Date and (ii) the representations and warranties of the Borrower set forth in Article IV hereof are true in all material respects on, and as of, the Effective Date;

     (c) receipt by the Agent of an opinion of William C. Baskin III, Esq., counsel to the Borrower, of Davis Polk &

29

Wardwell, special counsel to the Borrower, and of Drinker Biddle & Reath LLP, Pennsylvania counsel to the Borrower, in each case given upon the Borrower’s express instructions, substantially in the forms of Exhibits E-1, E-2 and E-3 hereto, respectively;

     (d) receipt by the Agent of all documents it may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement, and any other matters relevant hereto, all in form and substance satisfactory to the Agent;

     (e) the representations and warranties of the Borrower set forth in Article IV hereof are true in all material respects on and as of the Effective Date;

     (f) receipt by the Banks of all the financial statements referred to in Section 4.04(a);

     (g) the Three-Year Credit Agreement shall have been executed and delivered by the parties thereto and shall be effective;

     (h)  the Borrower shall have terminated all commitments under, and paid all amounts accrued and owing under, the Existing Credit Agreements; and

     (i)  the Agent shall have received all fees and other amounts due and payable by the Borrower on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower;

provided that this Agreement shall not become effective or be binding on any party hereto unless all of the foregoing conditions are satisfied not later than December 6, 2002. The Agent shall promptly notify the Borrower and the Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto.

          SECTION 3.02. Borrowings. The obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions:

     (a) receipt by the Agent of a Notice of Borrowing as required by Section 2.02 or 2.03, as the case may be;

     (b) the fact that, immediately before and immediately after such Borrowing, no Default shall have occurred and be continuing;

     (c) the fact that immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments;

     (d) the fact that the representations and warranties of the Borrower set forth in Article IV (other than those

30

set forth in Sections 4.04 (b) and 4.05) shall be true on and as of the date of such Borrowing; and

     (e) the fact that the Borrowing shall have been approved by the Chairman of the board of directors, the President, the Chief Executive Officer, the Executive Vice President, Strategy and Finance, or the Chief Financial Officer of the Borrower or any one of their respective designees.

Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (b), (c), (d) and (e) of this Section 3.02.

ARTICLE IV

Representations and Warranties

The Borrower represents and warrants that:

          SECTION 4.01. Corporate Existence and Power. The Borrower (i) is a Pennsylvania corporation duly incorporated, validly existing and in good standing under the laws of the State of Pennsylvania, and (ii) has all corporate powers required to carry on its business as now conducted. Each of the Borrower and its Consolidated Subsidiaries has all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, the failure to obtain which would, individually or in the aggregate, have a material adverse effect on the Borrower’s ability to perform its obligations hereunder or on the financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole.

          SECTION 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement are within its corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or advance filing with, any governmental body, agency or official and do not contravene, or constitute a default under, (i) any provision of the certificate of incorporation or by-laws of the Borrower, (ii) any applicable law or regulation or any judgment, injunction, order or decree binding upon the Borrower, or (iii) any material financial agreement or instrument of the Borrower.

          SECTION 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and each Note, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general principles of equity.

31

          SECTION 4.04. Financial Information. (a) The Borrower has heretofore furnished to the Agent, for distribution to each of the Banks, (i) the audited consolidated balance sheet for the Borrower and its Consolidated Subsidiaries as of December 31, 2001, and related consolidated statements of cash flows, income and retained earnings for the Borrower and its Consolidated Subsidiaries for the twelve-month period then ended, and (ii) the unaudited consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as of March 31, 2002, June 30, 2002 and September 30, 2002, and the related consolidated statements of cash flows, income and retained earnings for the three-month, six-month and nine-month periods then ended, respectively. Such financial statements present fairly, in all material respects, the consolidated financial position and results of operations and cash flows of the Borrower and its Consolidated Subsidiaries as of such dates and for such periods, in accordance with GAAP and, in the case of the financial statements described in clause (ii) of this Section 4.04(a), subject to year-end audit adjustments and the absence of footnotes.

          (b) Since December 31, 2001, there has been no material adverse change in the business, assets, operations, prospects or condition (financial or otherwise) of the Borrower and its Consolidated Subsidiaries, taken as a whole; provided that the charges and other information disclosed in the Disclosure Documents and the effect on the Borrower of the adoption of SAS 142 shall be deemed not to constitute any such material adverse change.

          SECTION 4.05. Litigation. Except as disclosed in the Disclosure Documents, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower, threatened against or affecting, the Borrower or its Consolidated Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries taken as a whole or which in any manner draws into question the validity of this Agreement.

          SECTION 4.06. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is not in violation of the presently applicable provisions of ERISA and the Internal Revenue Code where such violation would have a material adverse effect on the financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole, and has not incurred any liability to the PBGC or a Plan under Title IV of ERISA; provided that this Section 4.06 applies to the members of the ERISA Group only in their capacity as employers and not in any other capacity (such as fiduciaries or service providers to Plans for the benefit of employers of others).

32

          SECTION 4.07. Compliance with Laws and Agreements. Each of the Borrower and its Consolidated Subsidiaries has complied in all material respects with all applicable laws and material agreements binding upon it, except where any failure to comply therewith would not individually or collectively have a material adverse effect on the Borrower’s ability to perform its obligations hereunder, and except where necessity of compliance therewith is being contested in good faith by appropriate proceedings; provided, however, that the sole representation and warranty with respect to compliance with ERISA is limited to Section 4.06.

          SECTION 4.08. Investment Company Act; Public Utility Holding Company Act. The Borrower is not (a) an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended, or (b) a “holding company” as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935.

          SECTION 4.09. Full Disclosure. None of the Disclosure Documents or any other information furnished in writing by or on behalf of the Borrower to the Agent or any Bank for purposes of or in connection with this Agreement (in each case taken as a whole with all other information so furnished) contained, as of the time it was furnished, any material misstatement of fact or omitted as of such time to state any material fact necessary to make the statements therein taken as a whole not misleading, in the light of the circumstances under which they were made; provided that with respect to information consisting of statements, estimates and projections regarding the future performance of the Borrower and its Consolidated Subsidiaries, the Borrower represents only that such information has been prepared in good faith based upon assumptions believed by the Borrower to be reasonable at the time of preparation thereof.

          SECTION 4.10. Taxes. The Borrower has filed or caused to be filed all United States Federal income tax returns and all other material tax returns required to be filed by it and has paid or caused to be paid all material taxes required to have been paid by it, except taxes that are being contested in good faith by appropriate proceedings and for which the Borrower has set aside on its books adequate reserves with respect thereto in accordance with GAAP.

ARTICLE V

Covenants

          The Borrower agrees that, so long as any Bank has any Commitment hereunder and so long as any Loan is outstanding hereunder:

          SECTION 5.01. Information. The Borrower will deliver to the Agent, for delivery by the Agent to each of the Banks:

33

     (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of earnings and of cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission by KPMG LLP or other independent public accountants of nationally recognized standing;

     (b)  as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, its Form 10-Q as of the end of such quarter;

     (c)  simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of a Responsible Financial Officer of the Borrower (i) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto and (ii) setting forth calculations demonstrating compliance, as of the date of the most recent balance sheet included in the financial statements being furnished at such time, with the covenants set forth in Sections 5.03, 5.04 and 5.05(e);

     (d)  within five days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of a Responsible Financial Officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto;

     (e)  promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements and reports, and proxy statements so mailed;

     (f)  from time to time such additional publicly available information regarding the financial position or business of the Borrower and its Consolidated Subsidiaries as the Agent, at the request of any Bank, may reasonably request; and

     (g)  prompt written notice after the occurrence of (i) any Reportable Event that, alone or together with any other Reportable Events that have occurred, or (ii) a failure to make a required installment or other payment (within the meaning of Section 412(n)(1) of the Internal Revenue Code) that, could reasonably be expected to result in liability of the Borrower to the PBGC or to a Plan in an aggregate amount exceeding $50,000,000.

          SECTION 5.02. Conduct of Business and Maintenance of Existence and Insurance. The Borrower will preserve, renew and keep in full force and effect, and will cause each Material

34

Subsidiary to preserve, renew and keep in full force and effect, their respective corporate existence; provided that the foregoing shall not prohibit (i) the termination of the existence of any Material Subsidiary if the surviving entity (in the case of any such termination resulting from a merger or consolidation) or the entity to which substantially all such Material Subsidiary’s assets are transferred (in the case of any other such termination) is or becomes a Material Subsidiary or is the Borrower or (ii) any transaction involving the Borrower in accordance with Section 5.06. The Borrower will also maintain, with financially sound and reputable insurance companies, insurance (including, without limitation, self insurance), if reasonably available, in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations.

          SECTION 5.03. Minimum Adjusted Consolidated Net Worth. Adjusted Consolidated Net Worth as of the end of each fiscal quarter of the Borrower ending on or after December 31, 2002, will not be less than the Minimum Adjusted Consolidated Net Worth as of the end of such fiscal quarter.

          SECTION 5.04. Leverage Ratio. The Leverage Ratio as of the end of each fiscal quarter of the Borrower ending on or after December 31, 2002, will not exceed 3.0 to 1.0.

          SECTION 5.05. Liens. The Borrower will not, and will not permit any Consolidated Subsidiary to, create, incur, assume or permit to exist any Indebtedness secured by any Lien on any property or asset now owned or hereafter acquired by it, except:

     (a) any Indebtedness secured by a Lien on any property or asset of the Borrower or any Consolidated Subsidiary existing on the date hereof; provided that (i) such Lien shall not apply to any other property or asset of the Borrower or any Consolidated Subsidiary and (ii) such Lien shall secure only the Indebtedness which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof;

     (b) any Indebtedness secured by a Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Consolidated Subsidiary or existing on any property or asset of any Person that becomes a Consolidated Subsidiary after the date hereof prior to the time such Person becomes a Consolidated Subsidiary; provided that (i) such Indebtedness and Lien are not created in contemplation of or in connection with such acquisition or such Person becoming a Consolidated Subsidiary, as the case may be, (ii) such Lien shall not apply to any other property or assets of the Borrower or any Consolidated Subsidiary and (iii) such Lien shall secure only the Indebtedness which it secures on the date of such acquisition or the date such Person becomes a Consolidated Subsidiary, as the case may be, and extensions, renewals

35

     and replacements thereof that do not increase the outstanding principal amount thereof;

     (c)  any Indebtedness secured by purchase money security interests in property or assets or improvements thereto hereafter acquired (or, in the case of improvements, constructed) by the Borrower or any Consolidated Subsidiary; provided that (i) such security interests and the Indebtedness secured thereby are incurred within 180 days of such acquisition (or construction), (ii) the Indebtedness secured thereby does not exceed the lesser of the cost or the fair market value of such property or assets or improvements at the time of such acquisition (or construction) and (iii) such security interests do not apply to any other property or assets of the Borrower or any Consolidated Subsidiary;

     (d)  any capitalized lease obligations secured by Liens; provided that such Liens do not extend to any property of the Borrower or its Consolidated Subsidiaries other than the property subject to the relevant capital lease; and

     (e)  Indebtedness secured by Liens that are not otherwise permitted by any of the foregoing provisions of this Section 5.05; provided that, at the time that any such Indebtedness is incurred or that any such Lien is granted (and after giving effect thereto), the aggregate outstanding principal amount of all Indebtedness secured by Liens permitted by this paragraph (e) shall not exceed 10% of the consolidated shareholders equity of the Borrower (i) as of September 30, 2002, until the first consolidated financial statements of the Borrower are delivered to the Agent pursuant to Section 5.01(a) or (b) and, thereafter, (ii) as of the most recent date for which a consolidated balance sheet of the Borrower has been delivered to the Agent pursuant to Section 5.01(a) or (b), determined in accordance with GAAP.

          SECTION 5.06. Consolidations, Mergers and Sales of Assets. The Borrower will not consolidate or merge with or into any other corporation or convey or transfer (or permit the conveyance or transfer of) all or substantially all of the properties and assets of the Borrower and its Consolidated Subsidiaries to any other Person unless (i) the surviving or acquiring entity is a corporation organized under the laws of one of the United States, (ii) the surviving or acquiring corporation, if other than the Borrower, expressly assumes the performance of the obligations of the Borrower under this Agreement and all Notes, and (iii) immediately after giving effect to such transaction, no Default shall exist.

          SECTION 5.07. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any “margin stock” within the meaning of Regulation U.

          SECTION 5.08. Compliance with Laws. The Borrower will comply, and will cause its Consolidated Subsidiaries to

36

comply, in all material respects with all applicable laws, except where any failure to comply therewith would not individually or collectively have a material adverse effect on the Borrower’s ability to perform its obligations hereunder, and except where necessity of compliance therewith is being contested in good faith by appropriate proceedings; provided, however, that with respect to compliance with ERISA, this Section 5.08 applies to the Borrower and its Consolidated Subsidiaries only in their respective capacities as employers and not in any other capacity (such as a fiduciary or service provider to Plans for the benefit of employers of others).

          SECTION 5.09. Inspection of Property, Books and Records. The Borrower will keep proper books of record and account in which full, true and correct entries (in all material respects) in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities. The Borrower will permit representatives of any Bank at such Bank’s expense to visit and inspect the Borrower’s financial records and properties, to examine and make extracts from its books and records and to discuss its affairs and financial condition with the Borrower’s officers and (with the participation of or prior notice to such officers) independent public accountants, all at such reasonable times and as often as reasonably requested.

          SECTION 5.10. Payment of Obligations. The Borrower will, and will cause each of its Consolidated Subsidiaries to, pay its tax liabilities and other material obligations, before the same shall become delinquent or in default, except where (a) (i) the validity or amount thereof is being contested in good faith by appropriate proceedings and (ii) the Borrower or such Consolidated Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP or (b) the failure to make such payments could not reasonably be expected to have a material adverse effect on the Borrower’s ability to perform its obligations hereunder or on the financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole.

ARTICLE VI

Defaults

          SECTION 6.01. Events of Default. If one or more of the following events (“Events of Default”) shall have occurred and be continuing:

     (a)  the Borrower shall fail to pay when due any principal on any Loan;

     (b)  the Borrower shall fail to pay within five Domestic Business Days of the date when due any fees or any interest on any Loan;

     (c)  the Borrower shall fail to observe or perform any covenant contained in Sections 5.01(d), 5.03, 5.04 and 5.06;

37

     (d)  the Borrower shall fail to observe or perform, in any material respect, any covenant or agreement contained in this Agreement (other than those covered by clause (a), (b) or (c) above) and such failure shall have continued for a period of 30 days after written notice thereof has been given to the Borrower by the Agent at the request of any Bank;

     (e)  any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made);

     (f)  the Borrower or any Consolidated Subsidiary shall fail to make any payment (whether of principal or interest) in respect of any indebtedness for borrowed money having an outstanding principal amount of $50,000,000 (or its equivalent in any other currency) or more, when and as the same shall become due and payable; or any event or condition occurs that results in any outstanding indebtedness for borrowed money of the Borrower or any Consolidated Subsidiary having an outstanding principal amount of $100,000,000 (or its equivalent in any other currency) or more becoming due prior to its scheduled maturity, or that enables or permits the holder or holders of such indebtedness or any trustee or agent on its or their behalf to cause such indebtedness to become due prior to its scheduled maturity;

     (g)  the Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or all or substantially all of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing;

     (h)  an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or all or substantially all of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect;

     (i)  any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as

38

amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of more than 35% of the outstanding shares of common stock of the Borrower; or at any time Continuing Directors shall not constitute a majority of the board of directors of the Borrower;

     (j)  one or more judgments for the payment of money in an aggregate amount in excess of $50,000,000 (or its equivalent in any other currency) shall be rendered against the Borrower, any Consolidated Subsidiary or any combination thereof and the same shall remain undischarged for a period of 60 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of the Borrower or any Consolidated Subsidiary to enforce any such judgment; or

     (k)  a Reportable Event or Reportable Events, or a failure to make a required installment or other payment (within the meaning of Section 412(n)(1) of the Internal Revenue Code), shall have occurred with respect to any Plan or Plans that reasonably could be expected to result in liability of the Borrower to the PBGC or to a Plan in an aggregate amount exceeding $50,000,000 and, within 30 days after the reporting of any such Reportable Event to the Agent, the Agent shall have notified the Borrower in writing that (i) the Required Banks have made a determination that, on the basis of such Reportable Event or Reportable Events or the failure to make a required payment, there are reasonable grounds (A) for the termination of such Plan or Plans by the PBGC, (B) for the appointment by the appropriate United States District Court of a trustee to administer such Plan or Plans or (C) for the imposition of liens in an amount exceeding $25,000,000 in favor of a Plan and (ii) as a result thereof an Event of Default exists hereunder; or a trustee shall be appointed by a United States District Court to administer any such Plan or Plans; or the PBGC shall institute proceedings to terminate any Plan or Plans;

then, and in every such event, the Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding more than 50% in aggregate principal amount of the Loans, by notice to the Borrower declare the Loans (together with accrued interest thereon) to be, and the Loans (together with accrued interest thereon) shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause (g) or (h) above with respect to the Borrower, without any notice to the Borrower or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Loans (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.

39

          SECTION 6.02. Notice of Default. The Agent shall give notice to the Borrower under Section 6.01(d) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof.

ARTICLE VII

The Agent

          SECTION 7.01. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with all such powers as are reasonably incidental thereto. The Banks named on the cover page of this Agreement as co-syndication agents are not authorized to take any action as agent on behalf of the Agent or on behalf of any Bank, and shall not have any rights, responsibilities, duties or any powers as an agent under this Agreement.

          SECTION 7.02. Agent and Affiliates. JPMorgan Chase Bank shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and JPMorgan Chase Bank and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or Affiliate of the Borrower as if it were not the Agent hereunder.

          SECTION 7.03. Action by Agent. The obligations of the Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI.

          SECTION 7.04. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts.

          SECTION 7.05. Liability of Agent. Neither the Agent nor any of its directors, officers, agents, or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any Borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement

40

or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) reasonably believed by it to be genuine and to be signed by the proper party or parties.

          SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance with its Commitment (or outstanding Loans, if the Commitments have terminated), indemnify the Agent (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Agent’s gross negligence or willful misconduct) that the Agent may suffer or incur in connection with this Agreement or any action taken or omitted by the Agent hereunder.

          SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement.

          SECTION 7.08. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent approved by the Borrower (which approval shall not be unreasonably withheld). If no successor Agent shall have been so appointed by the Required Banks, and approved by the Borrower and shall have accepted such appointment within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least two billion dollars. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent’s resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent.

          SECTION 7.09. Agent’s Fees. The Borrower shall pay to the Agent, for its own account, fees in the amounts and at the times previously agreed upon between the Borrower and the Agent.

ARTICLE VIII

41

Change in Circumstances

          SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Euro-Dollar Loan or Money Market LIBOR Loan the Agent determines (which determination shall be conclusive absent manifest error) that deposits in dollars (in the applicable amounts) are not generally available in the London interbank market for such period or that the London Interbank Offered Rate cannot be determined in accordance with the definition thereof, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make Euro-Dollar Loans, to convert outstanding Base Rate Loans into Euro-Dollar Loans or to convert outstanding Euro-Dollar Loans into Euro-Dollar Loans with a different Interest Period shall be suspended, (ii) each outstanding Euro-Dollar Loan or Money Market LIBOR Loan, as the case may be, shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto, and (iii) unless the Borrower notifies the Agent at least two Domestic Business Days before the date of any Euro-Dollar Borrowing or Money Market LIBOR Borrowing, as the case may be, for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (x) if such Borrowing is a Euro-Dollar Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (y) if such Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day.

          SECTION 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to convert outstanding Base Rate Loans into Euro-Dollar Loans, or to convert outstanding Euro-Dollar Loans into Euro-Dollar Loans with a different Interest Period shall be suspended. Before giving any notice to the Agent pursuant to this Section 8.02, such Bank shall designate a different Applicable Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, all Euro-

42

Dollar Loans of such Bank then outstanding shall be converted to Base Rate Loans either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loans if such Bank may lawfully continue to maintain and fund such Loans to such day or (b) immediately if such Bank may not lawfully continue to maintain and fund such Loans to such day.

          SECTION 8.03. Increased Cost and Reduced Return. (a) If any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such governmental authority, central bank or comparable agency, made or adopted after the date hereof (other than a change currently provided for in any existing law, rule or regulation) shall impose, modify or deem applicable any reserve, special deposit, insurance assessment or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding, with respect to any Euro-Dollar Loan, any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.16) against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans (other than Money Market Absolute Rate Loans), its Note (in respect of such Fixed Rate Loans) or its obligation to make such Fixed Rate Loans; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount reasonably deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction.

          (b) If any Bank shall have determined that any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank or comparable agency, made or adopted after the date hereof (other than a change currently provided for in any existing law, rule or regulation), has or would have the effect of increasing the amount of capital of such Bank (or its parent) required to be maintained in respect of, or otherwise allocated to, such Bank’s obligations hereunder (its “Required Capital”) by an amount

43

reasonably deemed by such Bank to be material, then such Bank may, by notice to the Borrower and the Agent, increase the facility fee payable to such Bank hereunder to the extent required so that the ratio of (w) the sum of the increased facility fee applicable to such Bank’s Commitment or Loans hereunder to (x) the prior facility fee applicable to such Bank’s Commitment or Loans hereunder is the same as the ratio of (y) such Bank’s increased Required Capital to (z) its prior Required Capital. Such Bank’s notice to the Borrower and the Agent shall set forth its calculation of the foregoing ratios and the increased facility fee to which it is entitled under this Section.

          (c) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section (each, a “Trigger Event”) and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. Notwithstanding any other provision of this Section, no Bank shall be entitled to any compensation pursuant to this Section in respect of any Trigger Event (i) for any period of time in excess of 120 days prior to such notice or (ii) for any period of time prior to such notice if such Bank shall not have given such notice within 120 days of the date on which such Trigger Event shall have been enacted, promulgated, adopted or issued in definitive or final form unless such Trigger Event is retroactive. A certificate of any Bank claiming compensation under Section 8.03(a) or (b) and setting forth the additional amount or amounts to be paid to it hereunder and describing the method of calculation thereof shall be conclusive if made reasonably and in good faith. In determining such amount, such Bank may use any reasonable averaging and attribution methods.

          SECTION 8.04. Taxes. (a) For purposes of this Section 8.04, the following terms have the following meanings:

          “Taxes” means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Borrower pursuant to this Agreement or under any Note, and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Lending Office is located and (ii) in the case of each Bank, any United States withholding tax imposed on such payments but only to the extent that such Bank is subject to United States withholding tax at the time such Bank first becomes a party to this Agreement.

          “Other Taxes” means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made

44

pursuant to this Agreement or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note.

           (b) Any and all payments by the Borrower to or for the account of any Bank or the Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof.

           (c) The Borrower agrees to indemnify each Bank and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.04) paid by such Bank or the Agent (as the case may be) and any liability (including penalties, interest and expenses, except to the extent attributable to the negligence or misconduct of such Bank or the Agent, as the case may be) arising therefrom or with respect thereto. This indemnification shall be made within 15 days from the date such Bank or the Agent (as the case may be) makes demand therefor.

          (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, shall provide the Borrower with (i) two Internal Revenue Service (“IRS”) forms W8-BEN or any successor form prescribed by the IRS, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts such Bank from United States withholding tax or reduces the rate of withholding tax on payments of interest and eliminates withholding tax on any fees, or (ii) two IRS forms W8-ECI certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. If the form provided by a Bank indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from “Taxes” as defined in Section 8.04(a). Each such Bank undertakes to deliver to each of the Borrower and the Agent (A) a replacement form (or successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and (B) such amendments thereto or

45

extensions or renewals thereof as may reasonably be required (but only so long as such Bank remains lawfully able to do so).

          (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which a form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.04(b) or Section 8.04(c) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes.

          (f) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to make any claim for indemnification in respect of Taxes or Other Taxes pursuant to this Section 8.04 (each, a “Tax Event”) and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such claim or any other amounts payable by the Borrower under this Section 8.04 and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. Notwithstanding any other provisions of this Section, no Bank shall be entitled to any indemnification pursuant to this Section in respect of any Tax Event (i) for any period of time in excess of 180 days prior to such notice or (ii) for any period of time prior to such notice if such Bank shall not have given such notice within 120 days of the date on which such Bank became aware of such Tax Event unless such Tax Event is retroactive.

          SECTION 8.05. Base Rate Loans Substituted for Affected Euro-Dollar Loans. If (i) the obligation of any Bank to make or maintain Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) and the Borrower shall, by at least five Euro-Dollar Business Days prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply:

     (a) all Loans which would otherwise be made by such Bank as (or continued as or converted into) Euro-Dollar Loans shall instead be Base Rate Loans, and

     (b) after each of its outstanding Euro-Dollar Loans has been repaid (or converted to a Base Rate Loan), all payments of principal which would otherwise be applied to repay such Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead.

If such Bank notifies the Borrower that the circumstances giving rise to such notice no longer apply, the Borrower shall elect

46

that the principal amount of each such Base Rate Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Banks.

          SECTION 8.06. Substitution of Bank. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, the Borrower shall have the right to seek a substitute bank or banks (“Substitute Banks”) (which may be one or more of the Banks) to purchase the Loans and assume the Commitment of such Bank (the “Affected Bank”) under this Agreement and, if the Borrower locates a Substitute Bank, the Affected Bank shall, upon payment to it of the purchase price agreed between it and the Substitute Bank (or, failing such agreement, a purchase price in the amount of the outstanding principal amount of its Loans and accrued interest thereon to the date of payment) plus any amount (other than principal and interest) then due to it or accrued for its account hereunder, assign all its rights and obligations under this Agreement and all of its Notes to the Substitute Bank, and the Substitute Bank shall assume such rights and obligations, whereupon the Substitute Bank shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank.

          SECTION 8.07. Election to Terminate. If during any Level I Period, Level II Period or Level III Period (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, the Borrower may elect to terminate this Agreement as to such Bank, and in connection therewith not to borrow any Loan hereunder from such Bank or to prepay any Base Rate Loan made pursuant to Section 8.02 or 8.05 (without altering the Commitments or Loans of the remaining Banks); provided that the Borrower (i) notifies such Bank through the Agent of such election at least two Euro-Dollar Business Days before any date fixed for such borrowing or such a prepayment, as the case may be, and (ii) repays all of such Bank’s outstanding Loans, accrued interest thereon and any other amounts then due to such Bank or accrued for its account hereunder concurrently with such termination. Upon receipt by the Agent of such notice, the Commitment of such Bank shall terminate.

ARTICLE IX

Miscellaneous

          SECTION 9.01. Notices. (a) Subject to paragraph (b) below, all notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Agent, at its address or telex or telecopy number set forth on the signature pages hereof, (y) in the case of any Bank, at its address, telex or telecopy number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address or telex or

47

telecopy number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address or telex or telecopy number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. All notices from outside the United States to the Borrower shall only be given by telecopy and all other notices to the Borrower given by telex shall also be given by telecopy or non-telex method. Each such notice, request or other communication shall be effective (i) if given by telex or telecopy, when such telex or telecopy is transmitted to the number determined pursuant to this Section and the appropriate answerback is received, (ii) if given by registered or certified mail, return receipt requested, when such return receipt is signed by the recipient or (iii) if given by any other means, when delivered at the address specified in this Section, or, if such date is not a business day in the location where received, on the next business day in such location; provided that notices to the Agent under Article II or Article VIII shall not be effective until received.

     (b)  Notices and other communications to the Banks hereunder (including, without limitation, the delivery of information required by Section 5.01) may be delivered or furnished by electronic communications pursuant to procedures approved by the Agent; provided that the foregoing shall not apply to notices pursuant to Article II unless otherwise agreed by the Agent and the applicable Bank. The Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.

          SECTION 9.02. No Waivers. No failure or delay by the Agent or any Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

          SECTION 9.03. Expenses; Indemnification. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Agent, including reasonable fees and disbursements of special counsel for the Agent, in connection with the preparation and administration of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agent or any Bank, including fees and disbursements of counsel, in connection with such Event of Default and collection and other enforcement proceedings resulting therefrom.

          (b) The Borrower agrees to indemnify each Bank and hold each Bank harmless from and against any and all liabilities, claims, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by any Bank (or

48

by the Agent in connection with its actions as Agent hereunder) in connection with any investigative, administrative or judicial proceeding (whether or not such Bank shall be designated a party thereto) relating to or arising out of (i) any actual or proposed use of proceeds of Loans hereunder to acquire equity securities of any other Person or (ii) any transaction which violates the change in control provisions set forth in Section 6.01(i); provided that no Bank shall have the right to be indemnified hereunder for its own gross negligence or willful misconduct as determined by a court of competent jurisdiction.

          SECTION 9.04. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that no such amendment or waiver shall, unless signed by each Bank directly affected thereby, (i) increase or decrease the Commitment of any Bank or subject any Bank to any additional obligation, (ii) reduce or forgive the principal of or rate of interest on any Loan or any fees hereunder or (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any reduction or termination of any Commitment; provided further that no such amendment or waiver shall, unless signed by all the Banks, amend this Section or otherwise change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement.

          SECTION 9.05. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Bank (and any attempted assignment or transfer by the Borrower without such consent shall be null and void), except as contemplated by Section 5.06. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto and their respective successors and assigns permitted hereby) any legal or equitable right, remedy or claim under or by reason of this Agreement.

          (b) Any Bank may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that (i) except in the case of an assignment to a Bank or an Affiliate of a Bank, each of the Borrower and the Agent must give their prior written consent to such assignment (which consent shall not be unreasonably withheld, it being understood that it shall be reasonable for the Borrower to withhold consent if the proposed assignee does not have an investment grade rating), (ii) except in the case of an assignment to a Bank or an Affiliate of a Bank or an assignment of the entire remaining amount of the assigning Bank’s Commitment

49

(or, if the Commitments have terminated, the entire amount of its outstanding Loans), the amount of the Commitment (or, if the Commitments have terminated, the amount of the outstanding Loans) of the assigning Bank subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Agent) shall not be less than $5,000,000 unless each of the Borrower and the Agent otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Bank’s rights and obligations under this Agreement, except that this clause (iii) shall not apply to rights in respect of outstanding Money Market Loans, (iv) the parties to each assignment shall execute and deliver to the Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500 (except that such fee shall not be payable in the case of an assignment by a Bank to one of its Affiliates or to another Bank), and (v) the assignee, if it shall not be a Bank, shall deliver to the Agent an Administrative Questionnaire; and provided further that any consent of the Borrower otherwise required under this paragraph shall not be required if an Event of Default under clause (a), (b), (g) or (h) of Section 6.01 has occurred and is continuing. Subject to acceptance and recording thereof pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Assumption the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Bank under this Agreement, and the assigning Bank thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Bank’s rights and obligations under this Agreement, such Bank shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.14, 8.03, 8.05 and 9.03). Any assignment or transfer by a Bank of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Bank of a participation in such rights and obligations in accordance with paragraph (e) of this Section.

          (c) The Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Banks, and the Commitment of, and principal amount of the Loans owing to, each Bank pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive, and the Borrower, the Agent and the Banks may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Bank hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Bank, at any reasonable time and from time to time upon reasonable prior notice.

          (d) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Bank and an assignee, the

50

assignee’s completed Administrative Questionnaire (unless the assignee shall already be a Bank hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Agent shall accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph.

          (e) Any Bank may, without the consent of the Borrower or the Agent, sell participations to one or more banks or other entities (a “Participant”) in all or a portion of such Bank’s rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) such Bank’s obligations under this Agreement shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank’s rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Bank sells such a participation shall provide that such Bank shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Bank will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.04 that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.14, 2.16, 8.03 and 8.04 to the same extent as if it were a Bank and had acquired its interest by assignment pursuant to paragraph (b) of this Section.

          (f) A Participant shall not be entitled to receive any greater payment under Section 8.03 or 8.04 than the applicable Bank would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances.

          (g) Any Bank may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Bank, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Bank from any of its obligations hereunder or substitute any such pledgee or assignee for such Bank as a party hereto.

          SECTION 9.06. New York Law. This Agreement shall be construed in accordance with and governed by the law of the State of New York.

51

          SECTION 9.07. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof.

          SECTION 9.08. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

AETNA INC.,
	by
		/s/Alfred P. Quirk, Jr. Name: Alfred P. Quirk, Jr. Title: Vice President, Finance and Treasurer
		Aetna Inc. 151 Farmington Avenue, RE6A Hartford, CT 06156 Attention: Vice President, Finance Telecopier: (860) 273-1314 Telex: 99 241
		with a copy to:
		Aetna Inc. 151 Farmington Avenue, RC4A Hartford, CT 06156 Attention: General Counsel Telecopier: (860) 273-8340 Telex: 99 241
	JPMORGAN CHASE BANK, individually and as Agent,
	By	/s/Dawn Lee Lum
		Name: Dawn Lee Lum
		Title: Vice President

52

JPMorgan Chase Bank
270 Park Avenue
New York, NY 10017
Attention: Dawn Lee Lum
Telecopier: (212) 270-3279
Email: dawn.leelum@jpmorgan.com

with a copy to:

JPMorgan Chase Bank
Loan & Agency Services
1111 Fannin, 10th Floor
Houston, TX 77002
Attention: Sheila King
Telecopier: (713) 750-2783
Email:
sheila.g.king@jpmorgan.com

53

BANK OF AMERICA, N.A.,
By	/s/Joseph L. Corah
	Name: Joseph L. Corah Title: Principal
CITIBANK, N.A.,
By	/s/Maria Hackley
	Name: Maria Hackley
	Title: Managing Director
DEUTSCHE BANK AG, NEW YORK BRANCH,
By	/s/ Ruth Leung
	Name: Ruth Leung
	Title: Director
By	/s/Clinton M. Johnson
	Name: Clinton Johnson
	Title: Managing Director
FLEET NATIONAL BANK,
By	/s/ George J. Urban
	Name: George J. Urban
	Title: Portfolio Manager

54

BANK ONE, N.A.,
By	/s/L. Richard Schiller
	Name: L. Richard Schiller
	Title: Director
STATE STREET BANK AND TRUST COMPANY,
By	/s/ Edward M. Anderson
	Name: Edward M. Anderson
	Title: Vice President
WACHOVIA BANK, NATIONAL ASSOCIATION,
By	/s/ Thomas L. Stitchberry
	Name: Thomas L. Stitchberry
	Title: Managing Director
THE BANK OF NEW YORK,
By	/s/ Christopher T. Kordes
	Name: Christopher T. Kordes
	Title: Vice President

EX-10.4 4 y83806exv10w4.htm THREE YEAR CREDIT AGREEMENT

Exhibit 10.4

EXECUTION COPY

$500,000,000

THREE-YEAR CREDIT AGREEMENT

Dated as of November 27, 2002

among

AETNA INC.,
as Borrower,

The Banks Listed Herein

and

JPMORGAN CHASE BANK,
as Administrative Agent

J.P. MORGAN SECURITIES INC.,
as Lead Arranger and Sole Bookrunner,

and

CITIBANK, N.A.,
DEUTSCHE BANK SECURITIES INC.,
FLEET BANK,
and
BANK OF AMERICA, N.A.,
as Co-Syndication Agents

TABLE OF CONTENTS */

		Page
	ARTICLE I
	Definitions
SECTION 1.01.	Definitions	1
SECTION 1.02.	Accounting Terms and Determinations	13
SECTION 1.03.	Classifications of Borrowings	14
	ARTICLE II
	The Credits
SECTION 2.01.	Commitments to Lend	14
SECTION 2.02.	Notice of Committed Borrowings	14
SECTION 2.03.	Money Market Borrowings	15
SECTION 2.04.	Notice to Banks; Funding of Loans	18
SECTION 2.05.	Evidence of Debt	19
SECTION 2.06.	Maturity of Loans	20
SECTION 2.07.	Termination or Reduction of Commitments	20
SECTION 2.08.	Increase in Commitments	20
SECTION 2.09.	Interest Rates	22
SECTION 2.10.	Fees	24
SECTION 2.11.	Method of Electing Interest Rates	25
SECTION 2.12.	Prepayments	27
SECTION 2.13.	General Provisions as to Payments	27
SECTION 2.14.	Funding Losses	28
SECTION 2.15.	Computation of Interest and Fees	29
SECTION 2.16.	Regulation D Compensation	29

*/ The Table of Contents is not a part of this Agreement.

ii

SECTION 2.17.	Letters of Credit	29
	ARTICLE III
	Conditions
SECTION 3.01.	Effectiveness	34
SECTION 3.02.	Borrowings	35
	ARTICLE IV
	Representations and Warranties
SECTION 4.01.	Corporate Existence and Power	36
SECTION 4.02.	Corporate and Governmental Authorization; No Contravention	36
SECTION 4.03.	Binding Effect	36
SECTION 4.04.	Financial Information	37
SECTION 4.05.	Litigation	37
SECTION 4.06.	Compliance with ERISA	37
SECTION 4.07.	Compliance with Laws and Agreements	38
SECTION 4.08.	Investment Company Act; Public Utility Holding Company Act	38
SECTION 4.09.	Full Disclosure	38
SECTION 4.10.	Taxes	38
	ARTICLE V
	Covenants
SECTION 5.01.	Information	39
SECTION 5.02.	Conduct of Business and Maintenance of Existence and Insurance	40
SECTION 5.03.	Minimum Adjusted Consolidated Net Worth	40
SECTION 5.04.	Leverage Ratio	40
SECTION 5.05.	Liens	40
SECTION 5.06.	Consolidations, Mergers and Sales of Assets	42
SECTION 5.07.	Use of Proceeds and Letters of Credit	42
SECTION 5.08.	Compliance with Laws	42

iii

SECTION 5.09.	Inspection of Property, Books and Records	42
SECTION 5.10.	Payment of Obligations	43
	ARTICLE VI
	Defaults
SECTION 6.01.	Events of Default	43
SECTION 6.02.	Notice of Default	45
	ARTICLE VII
	The Agent
SECTION 7.01.	Appointment and Authorization	46
SECTION 7.02.	Agent and Affiliates	46
SECTION 7.03.	Action by Agent	46
SECTION 7.04.	Consultation with Experts	46
SECTION 7.05.	Liability of Agent	46
SECTION 7.06.	Indemnification	47
SECTION 7.07.	Credit Decision	47
SECTION 7.08.	Successor Agent	47
SECTION 7.09.	Agent’s Fees	47
	ARTICLE VIII
	Change in Circumstances
SECTION 8.01.	Basis for Determining Interest Rate Inadequate or Unfair	48
SECTION 8.02.	Illegality	48
SECTION 8.03.	Increased Cost and Reduced Return	49
SECTION 8.04.	Taxes	51
SECTION 8.05.	Base Rate Loans Substituted for Affected Euro-Dollar Loans	53
SECTION 8.06.	Substitution of Bank	53
SECTION 8.07.	Election to Terminate	54
	ARTICLE IX
	Miscellaneous

iv

SECTION 9.01.	Notices	54
SECTION 9.02.	No Waivers	55
SECTION 9.03.	Expenses; Indemnification	55
SECTION 9.04.	Amendments and Waivers	56
SECTION 9.05.	Successors and Assigns	56
SECTION 9.06.	New York Law	59
SECTION 9.07.	Counterparts; Integration	59
SECTION 9.08.	WAIVER OF JURY TRIAL	59

Schedules and Exhibits

Schedule 2.01 - Commitments to Lend

Exhibit A - Form of Note

Exhibit B - Form of Money Market Quote Request

Exhibit C - Form of Invitation for Money Market Quotes

Exhibit D - Form of Money Market Quote

Exhibit E-1 - Opinion of William C. Baskin III, Esq.

Exhibit E-2 - Opinion of Davis Polk & Wardwell

Exhibit E-3 - Opinion of Drinker Biddle & Reath LLP

Exhibit F - Form of Assignment and Assumption

     THREE-YEAR CREDIT AGREEMENT dated as of November 27, 2002 among AETNA INC., the BANKS listed on the signature pages hereof, and JPMORGAN CHASE BANK, as Administrative Agent.

          The parties hereto agree as follows:

ARTICLE I

Definitions

          SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings:

          “Absolute Rate Auction” means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03.

          “Adjusted Consolidated Net Worth” means at any date the total shareholders’ equity of the Borrower and its Consolidated Subsidiaries determined as of such date, adjusted to exclude net unrealized capital gains and losses.

          “Administrative Questionnaire” means, with respect to each Bank, the administrative questionnaire in the form submitted to such Bank by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank.

          “Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

          “Agent” means JPMorgan Chase Bank in its capacity as administrative agent for the Banks hereunder, and its successors in such capacity.

          “Applicable Lending Office” means, with respect to any Bank, (i) in the case of its Base Rate Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office.

          “Applicable Percentage” means, with respect to any Bank, the percentage of the total Commitments represented by such Bank’s Commitment. If the Commitments have terminated or expired, the Applicable Percentage shall be determined based upon the Commitments most recently in effect, giving effect to any assignments.

          “Assignment and Assumption” means an assignment and assumption entered into by a Bank and an assignee (with the consent of any party whose consent is required by Section 9.05), and accepted by the Agent, in the form of Exhibit F or any other form approved by the Agent.

2

          “Bank” means each bank listed on the signature pages hereof, and its successors and assignees.

          “Base Rate” means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day.

          “Base Rate Loan” means (i) a Committed Loan which bears interest at the Base Rate pursuant to the applicable Notice of Committed Borrowing or a Notice of Interest Rate Election or the provisions of Article VIII or (ii) an overdue amount which was a Base Rate Loan immediately before it became overdue.

          “Base Rate Margin” has the meaning set forth in Section 2.09(a).

          “Borrower” means Aetna Inc., a Pennsylvania corporation, and its successors.

          “Borrowing” means a borrowing hereunder consisting of Loans made to the Borrower at the same time by the Banks pursuant to Article II. A Borrowing is a “Base Rate Borrowing” if such Loans are Base Rate Loans, a “Euro-Dollar Borrowing” if such Loans are Euro-Dollar Loans and a “Money Market Borrowing” if such Loans are Money Market Loans.

          “Commitment” means, with respect to each Bank, the amount set forth opposite the name of such Bank on Schedule 2.01 hereto, as such amount may be terminated or reduced from time to time pursuant to Section 2.07, increased pursuant to Section 2.08, terminated pursuant to Section 8.07 or changed pursuant to Section 9.05.

          “Committed Loan” means a loan made by a Bank pursuant to Section 2.01; provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term “Committed Loan” shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be.

          “Consolidated EBITDA” means, for any period, Consolidated Net Income for such period plus, without duplication, to the extent deducted in determining such Consolidated Net Income, the sum of (a) consolidated interest expense for such period, (b) consolidated income tax expense for such period and (c) all amounts attributable to depreciation, amortization and other similar non-cash charges for such period; provided that, for purposes of determining Consolidated EBITDA for any period, Consolidated Net Income for such period shall be adjusted to exclude, without duplication, the effect on Consolidated Net Income for such period of (i) the aggregate after-tax amount of any nonrecurring charges taken on or before December 31, 2003, during such period (up to an aggregate amount of $150,000,000 during such period), including, but not limited to, charges incurred to restructure operations and/or exit certain activities, including employee termination benefits and

3

other costs, (ii) any extraordinary gains or losses for such period, and (iii) the amount of any cumulative effect adjustment associated with the Borrower’s adoption of SFAS 142.

          “Consolidated Net Income” means, for any period, the consolidated net income (or loss) of the Borrower and its Consolidated Subsidiaries for such period, determined in accordance with GAAP.

          “Consolidated Subsidiary” means, at any date, any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date.

          “Continuing Director” means, at any time, a director who (i) was a director of the Borrower on the Effective Date or (ii) was nominated or elected as a director by vote of a majority of the persons who were Continuing Directors at the time of such nomination or election.

          “Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.

          “Default” means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default.

          “Disclosure Documents” means (a) the Confidential Bank Memorandum dated October 22, 2002 and/or the Confidential Information Memorandum dated October 2002, previously delivered to the Banks; (b) the Borrower’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the period ended December 31, 2001; (c) the Borrower’s Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission for the periods ended March 31, 2002, June 30, 2002, and September 30, 2002; and (d) the Borrower’s Current Reports on Form 8-K filed with the Securities and Exchange Commission on or before October 30, 2002.

          “Domestic Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close.

          “Domestic Lending Office” means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent.

          “Effective Date” means the date this Agreement becomes effective in accordance with Section 3.01.

4

          “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

          “ERISA Group” means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414 of the Internal Revenue Code.

          “Euro-Dollar Business Day” means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London.

          “Euro-Dollar Lending Office” means, as to each Bank, its office, branch or Affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or Affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent.

          “Euro-Dollar Loan” means (i) a Committed Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or a Notice of Interest Rate Election or (ii) an overdue amount which was a Euro-Dollar Loan immediately before it became overdue.

          “Euro-Dollar Margin” has the meaning set forth in Section 2.09(b).

          “Euro-Dollar Rate” means a rate of interest determined pursuant to Section 2.09(b) on the basis of the London Interbank Offered Rate.

          “Euro-Dollar Reserve Percentage” means, for any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor), for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of “Eurocurrency liabilities” (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents).

          “Event of Default” has the meaning set forth in Section 6.01.

          “Existing Credit Agreements” means (a) the $300,000,000 amended and restated 364-day revolving credit agreement dated as of November 30, 2001, among the Borrower, the banks party thereto and JPMorgan Chase Bank, as administrative agent, and (b) the $500,000,000 three-year revolving credit agreement dated as of December 13, 2000, among the Borrower, the banks party thereto and JPMorgan Chase Bank, as administrative agent.

5

          “Federal Funds Rate” means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day; provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to JPMorgan Chase Bank on such day on such transactions as calculated by the Agent, such calculation to be supplied to the Borrower upon the Borrower’s request.

          “Fitch” means Fitch, Inc.

          “Fixed Rate Loans” means Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate for the reason stated in Section 8.01) or any combination of the foregoing.

          “GAAP” means generally accepted accounting principles in the United States of America.

          “Group of Loans” or “Group” means at any time a group of Loans consisting of (i) all Committed Loans which are Base Rate Loans at such time or (ii) all Committed Loans which are Euro-Dollar Loans having the same Interest Period at such time; provided that, if Committed Loans of any particular Bank are converted to or made as Base Rate Loans pursuant to Article VIII, such Loans shall be included in the same Group or Groups of Loans from time to time as they would have been in if they had not been so converted or made.

          “Guarantee” of or by any Person (the “guarantor”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment thereof, including pursuant to any “synthetic” lease arrangement, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness; provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business.

6

          “Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (d) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable and accrued obligations incurred in the ordinary course of business), (e) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (f) all Guarantees by such Person of Indebtedness of others, (g) all obligations of such Person as an account party to reimburse amounts drawn under any letter of credit or letter of guaranty that constituted Indebtedness of such Person under clause (f) above prior to drawing thereunder and (h) all obligations of such Person in respect of leases required to be accounted for as capital leases under GAAP.

          “Interest Period” means:

     (a) with respect to each Base Rate Borrowing, the period commencing on the date of such Borrowing and ending on the next succeeding Quarterly Date; provided that any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date;

     (b) with respect to each Euro-Dollar Loan, a period commencing on the date of Borrowing specified in the applicable Notice of Committed Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice or such longer period as mutually agreed to by the Borrower and all of the Banks; provided that:

     (i) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (iii) below, be extended to the next succeeding Euro-Dollar Business Day;

     (ii) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and

     (iii) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date.

     (c) with respect to each Money Market LIBOR Loan, the period commencing on the date of Borrowing and ending such

7

whole number of months thereafter as the Borrower may elect in accordance with Section 2.03; provided that:

     (i) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (iii) below, be extended to the next succeeding Euro-Dollar Business Day;

     (ii) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (d) below, end on the last Euro-Dollar Business Day of a calendar month; and

     (iii) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date;

     (d) with respect to each Money Market Absolute Rate Loan, the period commencing on the date of Borrowing and ending such number of days thereafter (but not less than seven days) as the Borrower may elect in accordance with Section 2.03; provided that:

     (i) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (ii) below, be extended to the next succeeding Euro-Dollar Business Day; and

     (ii) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date.

          “Internal Revenue Code” means the Internal Revenue Code of 1986, as amended, or any successor statute.

          “Invitation for Money Market Quotes” means an invitation from the Agent to the Banks to submit Money Market Quotes pursuant to Section 2.03(c).

          “Issuing Bank” means JPMorgan Chase Bank in its capacity as the issuer of Letters of Credit hereunder. The Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case the term “Issuing Bank” shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate.

          “LC Disbursement” means a payment made by the Issuing Bank pursuant to a Letter of Credit.

          “LC Exposure” means, at any time, the sum of (i) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (ii) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any Bank at any time shall be its Applicable Percentage of the total LC Exposure at such time.

8

          “Letter of Credit” means any letter of credit issued pursuant to this Agreement.

          “Level I Period” means any period during which any long-term Senior Unsecured Debt of the Borrower has ratings that are better than or equal to at least two of the following three ratings: (i) A by S&P and/or (ii) A2 by Moody’s and/or (iii) A by Fitch; provided that if S&P or Moody’s or Fitch changes its rating system after the date hereof, the new rating of such rating agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level.

          “Level II Period” means any period (other than a Level I Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings that are better than or equal to at least two of the following three ratings: (i) A- by S&P and/or (ii) A3 by Moody’s and/or (iii) A- by Fitch; provided that if S&P or Moody’s or Fitch changes its rating system after the date hereof, the new rating of such rating agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level.

          “Level III Period” means any period (other than a Level I Period or a Level II Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings which are better than or equal to at least two of the following three ratings: (i) BBB+ by S&P and/or (ii) Baa1 by Moody’s and/or (iii) BBB+ by Fitch; provided that if S&P or Moody’s or Fitch changes its rating system after the date hereof, the new rating of such agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level.

          “Level IV Period” means any period (other than a Level I Period, Level II Period or Level III Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings which are better than or equal to at least two of the following three ratings: (i) BBB by S&P and/or (ii) Baa2 by Moody’s and/or (iii) BBB by Fitch; provided that if S&P or Moody’s or Fitch changes its rating system after the date hereof, the new rating of such agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level.

          “Level V Period” means any period (other than a Level I Period, Level II Period, Level III Period or Level IV Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings which are better than or equal to at least two of the following three ratings: (i) BBB- by S&P and/or (ii) Baa3 by Moody’s and/or (iii) BBB- by Fitch; provided that if S&P or Moody’s or Fitch changes its rating system after the date hereof, the new rating of such agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level.

9

          “Level VI Period” means any period (other than a Level I Period, Level II Period, Level III Period, Level IV Period or Level V Period) during which any long-term Senior Unsecured Debt of the Borrower has ratings which are better than or equal to at least two of the following three ratings: (i) BB+ by S&P and/or (ii) Ba1 by Moody’s and/or (iii) BB+ by Fitch; provided that if S&P or Moody’s or Fitch changes its rating system after the date hereof, the new rating of such agency that most closely corresponds to the level specified above for such rating agency shall be substituted for such level.

          “Level VII Period” means any period other than a Level I Period, Level II Period, Level III Period, Level IV Period, Level V Period or Level VI Period.

          “Leverage Ratio” means, as of the end of any fiscal quarter of the Borrower, the ratio of (a) Total Debt as of such date to (b) Consolidated EBITDA for the period of four consecutive fiscal quarters of the Borrower then ended.

          “LIBOR Auction” means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03.

          “Lien” means, with respect to any asset, any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset.

          “Loan” means a Base Rate Loan, a Euro-Dollar Loan or a Money Market Loan and “Loans” means any combination of the foregoing.

          “London Interbank Offered Rate” has the meaning set forth in Section 2.09(b).

          “Material Subsidiary” means a Consolidated Subsidiary of the Borrower that, as of the time of determination of whether such Consolidated Subsidiary is a “Material Subsidiary”, accounted on a consolidated basis for 10% or more of the total assets of the Borrower and its Consolidated Subsidiaries (i) as of September 30, 2002, until the first consolidated financial statements of the Borrower are delivered to the Agent pursuant to Section 5.01(a) or (b) and, thereafter, (ii) as of the most recent date for which a consolidated balance sheet of the Borrower has been delivered to the Agent pursuant to Section 5.01(a) or (b); provided that, for purposes of Article VI, if any event or combination of events described in clauses (g) and (h) of Section 6.01 occur with respect to any one or more Consolidated Subsidiaries that are not Material Subsidiaries but in the aggregate would constitute a Material Subsidiary if such Consolidated Subsidiaries constituted a single Consolidated Subsidiary, then such Consolidated Subsidiaries shall be deemed collectively to constitute a Material Subsidiary for purposes of such clauses.

          “Minimum Adjusted Consolidated Net Worth” means, as of the end of any fiscal quarter of the Borrower, the sum of (a) $5,000,000,000 plus (b) in the case of any determination as of

10

the end of any fiscal quarter ending after December 31, 2002, the amount equal to 50% of Consolidated Net Income in respect of each fiscal quarter of the Borrower as to which Consolidated Net Income is a positive amount and that ends after December 31, 2002, and on or prior to such date of determination; provided that the amount of “Minimum Adjusted Consolidated Net Worth” as of any date shall be reduced on a dollar-for-dollar basis by the aggregate after-tax amount of any nonrecurring charges (up to an aggregate amount of $150,000,000) taken after September 30, 2002, and on or before December 31, 2003, including, but not limited to, charges incurred to restructure operations and/or exit certain activities, including employee termination benefits and other costs.

          “Money Market Absolute Rate” has the meaning set forth in Section 2.03(d).

          “Money Market Absolute Rate Loan” means a loan made or to be made by a Bank pursuant to an Absolute Rate Auction.

          “Money Market Lending Office” means, as to each Bank, its Domestic Lending Office or such other office or branch of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Agent; provided that any Bank may from time to time by notice to the Borrower and the Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require.

          “Money Market LIBOR Loan” means a loan made or to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate for the reason stated in Section 8.01).

          “Money Market Loan” means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan.

          “Money Market Margin” has the meaning set forth in Section 2.03(d).

          “Money Market Quote” means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03.

          “Money Market Quote Request” means a request by the Borrower to the Banks to make Money Market Loans in accordance with Section 2.03(b).

          “Moody’s” means Moody’s Investors Service, Inc.

          “Notes” means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and “Note” means any one of such promissory notes issued hereunder.

11

          “Notice of Borrowing” means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)).

          “Notice of Interest Rate Election” has the meaning set forth in Section 2.11.

          “Other Taxes” has the meaning set forth in Section 8.04(a).

          “Participant” has the meaning set forth in Section 9.05(e).

          “PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.

          “Person” means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

          “Plan” means at any time an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and is either (i) maintained by a member of the ERISA Group for employees of a member of the ERISA Group or (ii) maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which a member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions.

          “Prime Rate” means the rate of interest publicly announced by JPMorgan Chase Bank in New York City from time to time as its Prime Rate.

          “Quarterly Date” means the last Domestic Business Day of each March, June, September and December.

          “Regulation U” means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time.

          “Reportable Event” means any reportable event as defined in Section 4043(c) of ERISA or the regulations issued thereunder (other than a Reportable Event as to which the 30-day notice requirement has been waived by applicable regulation) with respect to a Plan (other than a Plan maintained by a member of an applicable ERISA Group that is considered a member of such ERISA Group only pursuant to subsection (m) or (o) of Section 414 of the Internal Revenue Code).

          “Required Banks” means at any time Banks having at least 51% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding at least 51% of the sum of the aggregate unpaid principal amount of the Loans and the LC Exposure.

12

          “Required Capital” has the meaning set forth in Section 8.03(b).

          “Responsible Financial Officer” means chief financial officer, treasurer, chief accounting officer or senior corporate finance officer.

          “Revolving Credit Period” means the period from the Effective Date to and including the Termination Date.

          “S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc.

          “Senior Unsecured Debt” means indebtedness for borrowed money that is not subordinated to any other indebtedness for borrowed money and is not secured or supported by a guarantee, letter of credit or other form of credit enhancement.

          “SFAS 142” means Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangibles.

          “Subsidiary” means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Borrower.

          “Taxes” has the meaning set forth in Section 8.04(a).

          “Termination Date” means November 27, 2005, or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day.

          “364-Day Credit Agreement” means the 364-day credit agreement dated as of the date hereof among the Borrower, the banks party thereto and JPMorgan Chase Bank, as administrative agent.

          “Total Debt” means, as of any date, the aggregate principal amount of Indebtedness of the Borrower and its Consolidated Subsidiaries as of such date (whether or not such Indebtedness would be reflected on a consolidated balance sheet prepared as of such date in accordance with GAAP), determined on a consolidated basis.

          “Trigger Event” has the meaning set forth in Section 8.03(c).

          “Usage” means at any date the percentage equivalent of a fraction (i) the numerator of which is the sum of (a) the aggregate outstanding principal amount of the Loans (including Money Market Loans) and the total LC Exposure at such date, and (b) the aggregate outstanding principal amount of all “Loans” (including “Money Market Loans”) at such date, in each case under and as defined in the 364-Day Credit Agreement, and (ii) the denominator of which is the sum of (a) the aggregate amount of the Commitments at such date, after giving effect to any reduction or increase in the Commitments on such date, and (b) the aggregate amount of the “Commitments” on such date, after

13

giving effect to any reduction or increase in the “Commitments” on such date, under and as defined in the 364-Day Credit Agreement; provided that if the “Commitments” under and as defined in the 364-Day Credit Agreement have terminated but the Borrower has exercised the term-out option described in Section 2.17 of the 364-Day Credit Agreement, then for the purposes of clause (ii)(b) above the “Commitments” under the 364-Day Credit Agreement shall be deemed to remain in effect in an amount equal to the aggregate principal amount of any outstanding “Term Loans” at the time, under and as defined in the 364-Day Credit Agreement.

          SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower’s independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Agent notifies the Borrower that the Required Banks request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change in GAAP shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith.

          SECTION 1.03. Classifications of Borrowings. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (e.g., a “Euro-Dollar Borrowing” is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article II under which participation therein is determined (i.e., a “Committed Borrowing” is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a “Money Market Borrowing” is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids).

ARTICLE II

The Credits

          SECTION 2.01. Commitments to Lend. On the terms and conditions set forth in this Agreement, each Bank severally agrees to lend to the Borrower, from time to time during the Revolving Credit Period, amounts not to exceed in the aggregate at any one time outstanding (together with its LC Exposure) the amount of such Bank’s Commitment. Each Borrowing under this

14

Section 2.01 shall be in an aggregate principal amount of $15,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount of the unused Commitments or any lesser aggregate amount required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.17(e)) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.12, prepay Loans and reborrow at any time during the Revolving Credit Period under this Section. Failure by any Bank to make Loans as required under the terms of this Agreement will not relieve any other Bank of its obligations hereunder. Notwithstanding the foregoing, any Money Market Loans made by a Bank shall be deemed usage of the total Commitments for the purpose of availability, but shall not reduce such Bank’s obligation to lend its pro rata share of its Commitment.

          SECTION 2.02. Notice of Committed Borrowings. The Borrower shall give the Agent notice (a “Notice of Committed Borrowing”) not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate Borrowing and (y) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying:

     (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing and a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing,

     (b) the aggregate amount of such Borrowing,

     (c)  whether the Loans comprising such Borrowing are to be Base Rate Loans or Euro-Dollar Loans, and

     (d)  in the case of a Euro-Dollar Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period.

          SECTION 2.03. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Loans pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Banks from time to time during the Revolving Credit Period to make offers to make Money Market Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section.

          (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received no later than 10:00 A.M. (New York City time) on (x) the fourth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or

15

date as the Borrower and the Agent shall have mutually agreed upon and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying:

     (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction,

     (ii) the aggregate amount of such Borrowing, which shall be $15,000,000 or a larger multiple of $1,000,000,

     (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and

     (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate.

The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or following notice to each of the Banks, such other number of days as the Borrower and the Agent may agree upon) of any other Money Market Quote Request.

          (c) Invitation for Money Market Quotes. Promptly upon receipt of a Money Market Quote Request, the Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section.

          (d) Submission and Contents of Money Market Quotes. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.01 not later than (x) 9:30 A.M. (New York City time) on the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction, or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Agent (or any Affiliate of the Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Agent or such Affiliate notifies the Borrower of the terms of the offer or offers contained therein

16

not later than (x) 9:15 A.M. (New York City time) on the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:15 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction. Subject to Articles III and VI, any Money Market Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the Borrower.

          (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify:

     (A) the proposed date of Borrowing,

     (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (x) may be greater than or less than the Commitment of the quoting Bank, (y) must be $15,000,000 or a larger multiple of $1,000,000 and (z) may not exceed the principal amount of Money Market Loans for which offers were requested,

     (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the “Money Market Margin”) offered for each such Money Market Loan, expressed as a percentage (rounded to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate,

     (D) in the case of an Absolute Rate Auction, the rate of interest per annum (rounded to the nearest 1/10,000th of 1%) (the “Money Market Absolute Rate”) offered for each such Money Market Loan, and

     (E) the identity of the quoting Bank.

A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes.

     (iii)  Any Money Market Quote shall be disregarded if it:

     (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii);

     (B) contains qualifying, conditional or similar language;

     (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or

     (D) arrives after the time set forth in subsection (d)(i).

          (e) Notice to Borrower. The Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and

17

(y)  of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Agent’s notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered (including the names of the Banks) and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote for any Interest Period may be accepted.

            (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed upon and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a “Notice of Money Market Borrowing”) shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote for any Interest Period in whole or in part; provided that:

     (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request,

     (ii) the principal amount of each Money Market Borrowing must be $15,000,000 or a larger multiple of $1,000,000,

     (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and

     (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement.

            (g) Allocation by Agent. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Agent among such Banks as nearly as possible (in multiples of such number, not greater than

18

$1,000,000 as the Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Agent of the pro rata amounts of Money Market Loans shall be conclusive in the absence of manifest error.

          SECTION 2.04. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank’s share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower.

          (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank participating therein shall make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address specified in or pursuant to Section 9.01. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make the funds so received from the Banks available to the Borrower at the Agent’s aforesaid address; provided that Base Rate Loans made to finance the reimbursement of an LC Disbursement as provided in Section 2.17(e) shall be remitted by the Administrative Agent to the Issuing Bank.

          (c) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank’s share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.04 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.09 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank’s Loan included in such Borrowing for purposes of this Agreement.

          SECTION 2.05. Evidence of Debt. (a) Each Bank shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Bank resulting from each Loan made by such Bank, including the amounts of principal and interest payable and paid to such Bank from time to time hereunder.

          (b) The Agent shall maintain accounts in which it shall record (i) the Commitment of each Bank and the amount of each Loan made hereunder by such Bank, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Bank hereunder and (iii) the

19

amount of any sum received by the Agent hereunder for the accounts of the Banks and each Bank’s share thereof.

          (c) The entries made in the accounts maintained pursuant to paragraph (b) of this Section 2.05 shall be evidence of the existence and amounts of the obligations recorded therein and shall be presumptively correct absent demonstrable error; provided that the failure of the Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement.

          (d) Any Bank may request in writing that Loans made by it be evidenced by a Note. In such event, the Borrower shall prepare, execute and deliver to such Bank a Note payable to the order of such Bank in the form of Exhibit A. Thereafter, the Loans evidenced by such Note and interest thereon shall at all times (including after assignment pursuant to Section 9.05) be represented by one or more Notes in such form payable to the order of the payee named therein.

          (e) Each Bank agrees that it will cancel and return to the Borrower all Notes then held by it upon the earlier of (i) the Termination Date; provided that no Default shall have then occurred and be continuing or (ii) the date such Bank’s Commitment has been terminated and there are no Loans outstanding to or accrued interest owing to such Bank.

          SECTION 2.06. Maturity of Loans. (a) The Committed Loans of each Bank shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the Termination Date.

          (b) Each Money Market Loan shall mature, and the principal amount thereof shall be due and payable, together with accrued interest thereon, on the last day of the Interest Period applicable to such Money Market Loan.

          SECTION 2.07. Termination or Reduction of Commitments. (a) The Commitments of each Bank shall terminate on the Termination Date.

          (b) During the Revolving Credit Period the Borrower may, upon at least three Domestic Business Days’ notice to the Agent, terminate the Commitments at any time, if no Loans are outstanding at such time and there is no LC Exposure at such time.

          (c) During the Revolving Credit Period the Borrower may, upon at least three Domestic Business Days’ notice to the Agent, ratably reduce the Commitments from time to time by an aggregate amount of $10,000,000 or any larger multiple of $1,000,000, but only to the extent that the aggregate amount of the Commitments exceeds the sum of the aggregate outstanding principal amount of the Loans plus the LC Exposure.

          SECTION 2.08. Increase in Commitments. (a) During the Revolving Credit Period, the Borrower may, by written notice

20

to the Agent (which shall promptly deliver a copy to each of the Banks), request at any time or from time to time that the total Commitments be increased; provided that (i) the aggregate amount of all such increases pursuant to this Section shall not exceed $125,000,000, (ii) the Borrower shall offer each Bank the opportunity to increase its Commitment by its Applicable Percentage of the proposed increased amount, and (iii) each Bank, in its sole discretion, may either (A) agree to increase its Commitment by all or a portion of the offered amount or (B) decline to increase its Commitment. Any such notice shall set forth the amount of the requested increase in the total Commitments and the date on which such increase is requested to become effective. In the event that the Banks shall have agreed to increase their Commitments by an aggregate amount less than the increase in the total Commitments requested by the Borrower, the Borrower may arrange for one or more banks or other financial institutions (any such bank or other financial institution being called an “Augmenting Bank”), which may include any Bank, to extend Commitments or increase its existing Commitments in an aggregate amount equal to the unsubscribed amount; provided that (i) each Augmenting Bank, if not already a Bank hereunder, shall be subject to the approval of the Agent (which approval shall not be unreasonably withheld) and (ii) each Augmenting Bank, if not already a Bank hereunder, shall become a party to this Agreement by completing and delivering to the Agent a duly executed accession agreement in a form satisfactory to the Agent and the Borrower. Increases and new Commitments created pursuant to this paragraph (a) shall become effective on the date specified in the notice delivered by the Borrower pursuant to the first sentence of this paragraph. Notwithstanding the foregoing, no increase in the total Commitments (or in the Commitment of any Bank) shall become effective under this paragraph unless, (i) on the date of such increase, the conditions set forth in clauses (b) and (d) of Section 3.02 shall be satisfied (as though a Borrowing were being made on such date) and the Agent shall have received a certificate to that effect dated such date and executed by a Responsible Financial Officer of the Borrower, and (ii) the Agent shall have received (to the extent requested by the Agent reasonably in advance of such date) documents consistent with those delivered under clauses (c) and (d) of Section 3.01 as to the corporate power and authority of the Borrower to borrow hereunder and as to the enforceability of this Agreement after giving effect to such increase.

          (b) At the time that any increase in the total Commitments pursuant to paragraph (a) above (a “Commitment Increase”) becomes effective, if any Committed Loans are outstanding, the Borrower shall prepay in accordance with Section 2.12 the aggregate principal amount of all Committed Loans outstanding (the “Initial Loans”); provided that (i) nothing in this Section shall prevent the Borrower from funding the prepayment of Initial Loans with concurrent Borrowings hereunder in accordance with the provisions of this Agreement, giving effect to the Commitment Increase, and (ii) no such prepayment shall be required if, after giving effect to the Commitment Increase, each Bank has the same Applicable Percentage as immediately prior to such Commitment Increase.

21

          (c) At the time that any Commitment Increase becomes effective, if any Letters of Credit issued hereunder remain outstanding, each Bank’s participation in such Letters of Credit will be adjusted in accordance with such Bank’s Applicable Percentage, after giving effect to such Commitment Increase.

          SECTION 2.09. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate Margin plus the Base Rate for such day. Such interest shall be payable for each Interest Period on the earlier of (i) the last day of the Interest Period applicable thereto or (ii) the Termination Date. Any overdue principal of and, to the extent permitted by law, overdue interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate Margin plus the Base Rate for such day.

          The “Base Rate Margin” applicable to any Base Rate Loan outstanding on any day means:

     (i) if such day falls within a Level I Period, Level II Period, Level III Period or Level IV Period, then 0%;

     (ii) if such day falls within a Level V Period, then 0.350%;

     (iii) if such day falls within a Level VI Period, then 0.625%; and

     (iv) if such day falls within a Level VII Period, then 1.250%.

          (b) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin plus the applicable London Interbank Offered Rate. Such interest shall be payable for each Interest Period on the earlier of (i) the last day thereof, (ii) three months after the initial date thereof and, if such Interest Period is longer than three months, at intervals of three months thereafter or (iii) the Termination Date.

          “Euro-Dollar Margin” applicable to any Euro-Dollar Loan outstanding on any day, (A) if Usage on such day is less than or equal to 33%:

     (i) if such day falls within a Level I Period, then 0.375%;

     (ii) if such day falls within a Level II Period, then 0.475%;

     (iii) if such day falls within a Level III Period, then 0.700%;

     (iv) if such day falls within a Level IV Period, then 0.775%;

22

     (v) if such day falls within a Level V Period, then 1.100%;

     (vi) if such day falls within a Level VI Period, then 1.375%; and

     (vii) if such day falls within a Level VII Period, then 2.000%; or

          (B) if Usage on such day is greater than 33%:

     (i) if such day falls within a Level I Period, then 0.500%;

     (ii) if such day falls within a Level II Period, then 0.600%;

     (iii) if such day falls within a Level III Period, then 0.825%;

     (iv) if such day falls within a Level IV Period, then 1.025%;

     (v) if such day falls within a Level V Period, then 1.350%;

     (vi) if such day falls within a Level VI Period, then 1.625%; and

     (vii) if such day falls within a Level VII Period, then 2.250%.

          The “London Interbank Offered Rate” applicable to any Interest Period means the rate per annum (rounded upwards, if necessary, to the nearest 1/32 of 1%) appearing on the Moneyline Telerate Screen page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period for a period equal to such Interest Period; provided that, if for any reason such rate is not available, the term “London Interbank Offered Rate” applicable to any Interest Period shall mean the rate per annum (rounded upwards, if necessary, to the nearest 1/32 of 1%) appearing on Reuters Screen LIBO Page (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period for a period equal to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page (or any successor page), the applicable rate shall be the arithmetic mean of all such rates.

          (c) Any overdue principal of and, to the extent permitted by law, overdue interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 2% plus

23

the Euro-Dollar Margin plus the higher of (i) the London Interbank Offered Rate applicable to such Loan and (ii) the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than three months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to the Agent are offered to the Agent in the London interbank market for the applicable period determined as provided above (or, if the circumstances described in Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the Base Rate Margin plus the Base Rate for such day).

          (d) Subject to clause (y) of Section 8.01, each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the earlier of (i) the last day thereof, (ii) three months after the initial date thereof and, if such Interest Period is longer than three months, at intervals of three months thereafter or (iii) the Termination Date. Any overdue principal of and, to the extent permitted by law, overdue interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate Margin plus the Base Rate for such day.

          (e) The Agent shall determine (in accordance with this Agreement) each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower by telecopy and the participating Banks by telex, cable or telecopy of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error.

          SECTION 2.10. Fees. (a) Facility Fee. The Borrower shall pay to the Agent for the account of the Banks, ratably in proportion to their Commitments (or, if the Commitments have terminated, ratably in proportion to their outstanding Loans and LC Exposure), a facility fee at the rate of (i) 0.125% per annum during each Level I Period, (ii) 0.150% per annum during each Level II Period, (iii) 0.175% per annum during each Level III Period, (iv) 0.225% per annum during each Level IV Period, (v) 0.275% per annum during each Level V Period, (vi) 0.375% during each Level VI Period and (vii) 0.500% during each Level VII Period. Such facility fee shall accrue (i) from and including the Effective Date to but excluding the last day of the Revolving Credit Period, in each case, on the daily average aggregate amount of the Commitments (whether used or unused) and (ii) if any Loans or LC Exposure remains outstanding after the Revolving Credit Period, from and including the last day of the

24

Revolving Credit Period to but excluding the date such Loans shall be repaid in full, on the daily average aggregate outstanding principal amount of such Loans and LC Exposure.

          (b) Letter of Credit and Fronting Fees. The Borrower agrees to pay (i) to the Administrative Agent for the account of each Bank a letter of credit fee with respect to its participations in Letters of Credit, which shall accrue at the Euro-Dollar Margin used to determine the interest rate applicable to Euro-Dollar Loans on the average daily amount of such Bank’s LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date on which such Bank’s Commitment terminates and the date on which such Bank ceases to have any LC Exposure, and (ii) to the Issuing Bank a fronting fee, which shall accrue at the rate or rates per annum separately agreed upon between the Borrower and the Issuing Bank on the average daily amount of the LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date of termination of the Commitments and the date on which there ceases to be any LC Exposure, as well as the Issuing Bank’s standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder.

          (c) Payment. Except as otherwise indicated, accrued facility fees, letter of credit fees and fronting fees under this Section 2.10 shall be payable quarterly in arrears on (i) each Quarterly Date, (ii) the Termination Date and (iii) if any Loans or LC Exposure remains outstanding after the Revolving Credit Period, the date such Loans shall be repaid in full and such LC Exposure ceases to exist. Any other fees payable to the Issuing Bank pursuant to this Section shall be payable within 10 days after demand.

          SECTION 2.11. Method of Electing Interest Rates. (a) The Loans included in each Committed Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Committed Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article VIII), as follows:

     (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; and

     (ii) if such Loans are Euro-Dollar Loans, the Borrower may (x) elect to convert such Euro-Dollar Loans to Base Rate Loans as of any Domestic Business Day, (y) elect to convert such Euro-Dollar Loans to Euro-Dollar Loans with an Interest Period different from the then current Interest Period applicable to such Loans as of any Euro-Dollar Business Day or (z) elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period beginning on the last day of the then current Interest Period applicable to such Loans;

25

provided that, if the Borrower elects to convert any Euro-Dollar Loans to Base Rate Loans or to Euro-Dollar Loans with a different Interest Period, as of any day other than the last day of the then current Interest Period applicable to such Loans, the Borrower shall reimburse each Bank in accordance with Section 2.14.

          Each such election shall be made by delivering a notice (a “Notice of Interest Rate Election”) to the Agent (i) at least one Domestic Business Day before such notice is to be effective if the relevant Loans are to be converted into Base Rate Loans or (ii) at least three Euro-Dollar Business Days before such conversion or continuation is to be effective if such Loans are to be converted into, or continued as, Euro-Dollar Loans.

          A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each $15,000,000 or any larger multiple of $1,000,000.

          (b) Each Notice of Interest Rate Election shall specify:

     (i) the Group of Loans (or portion thereof) to which such notice applies;

     (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection (a) above;

     (iii) whether such Group of Loans (or portion thereof) is to be converted to Base Rate Loans or Euro-Dollar Loans or continued as Euro-Dollar Loans for an additional Interest Period; and

     (iv) if such Loans (or portions thereof) are to be converted to or continued as Euro-Dollar Loans, the duration of the Interest Period to be applicable thereto immediately after such conversion or continuation.

Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period.

          (c) Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate Election to the Agent for any Euro-Dollar Loans, such Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto.

26

          SECTION 2.12. Prepayments. (a) The Borrower may (i) upon notice to the Agent to be received no later than 10:30 A.M. (New York City time), prepay the Base Rate Loans (or any Money Market LIBOR Loans which bear interest at the Base Rate at such time for the reason stated in Section 8.01), in whole or in part, on any Domestic Business Day and (ii) upon at least two Euro-Dollar Business Days’ notice to the Agent, prepay any Euro-Dollar Loan, in whole or in part, in amounts aggregating $15,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment; provided that a Money Market Loan may not be prepaid without the prior written consent of the Bank that holds such Money Market Loan, other than as contemplated by clause (i) above. Each such optional prepayment shall be applied to prepay ratably the relevant Loans of the several Banks. Prepayment of a Euro-Dollar Loan on any day other than the last day of an Interest Period applicable thereto shall be subject to Section 2.14.

          (b) Upon receipt of a notice of prepayment pursuant to this Section 2.12, the Agent shall promptly notify each Bank of the contents thereof and of such Bank’s ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower.

          SECTION 2.13. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans, fees and reimbursements of LC Disbursements hereunder, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in its Administrative Questionnaire (or to the Issuing Bank, in the case of payments to be made directly to the Issuing Bank as expressly provided herein). The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks, or to the Issuing Bank in the case of payments for its account. Whenever any payment of principal of, or interest on, any Base Rate Loans or fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans and Money Market LIBOR Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month or falls after the Termination Date, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Absolute Rate Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time.

          (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the

27

Banks or the Issuing Bank hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank or the Issuing Bank, as the case may be, on such due date an amount equal to the amount then due such Bank or the Issuing Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank or the Issuing Bank, as the case may be, shall repay to the Agent forthwith on demand such amount distributed to such Bank or the Issuing Bank together with interest thereon, for each day from the date such amount is distributed to such Bank or the Issuing Bank until the date such Bank or the Issuing Bank repays such amount to the Agent, at the Federal Funds Rate.

          SECTION 2.14. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted to a Base Rate Loan (pursuant to Section 2.11, Section 2.12, Article VI or Article VIII) on any day other than the last day of an Interest Period applicable thereto or the end of an applicable period fixed pursuant to Section 2.09(d), or if any Bank assigns any Fixed Rate Loan as required by Section 8.06 on any day other than the last day of an Interest Period applicable thereto, or if the Borrower fails to borrow or prepay any Fixed Rate Loan after notice has been given to any Bank in accordance with Section 2.04(a) or Section 2.12, the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss reasonably incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after such payment or conversion or assignment or failure to borrow or prepay; provided that such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense with an explanation of the calculation of such loss or expense, which certificate shall be conclusive if made reasonably and in good faith.

          SECTION 2.15. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest, facility fees, letter of credit fees and fronting fees hereunder shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day).

          SECTION 2.16. Regulation D Compensation. For each day for which a Bank is required to maintain reserves in respect of either (x) “Eurocurrency Liabilities” (as defined in all regulations of the Board of Governors of the Federal Reserve System) or (y) any other category of liabilities which includes deposits by reference to which the interest rate in Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents, such Bank may require the Borrower to pay, contemporaneously with each payment of interest

28

on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum determined by such Bank up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one minus the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least five Euro-Dollar Business Days after the giving of such notice and (y) shall notify the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans of the amount then due to such Bank under this Section. Such Bank’s notice to the Borrower shall set forth its calculation of such additional interest and such calculation shall be conclusive if made reasonably and in good faith.

          SECTION 2.17. Letters of Credit. (a) General. Subject to the terms and conditions set forth herein, the Borrower may request the issuance of Letters of Credit for its own account in a form reasonably acceptable to the Administrative Agent and the Issuing Bank, at any time and from time to time during the Revolving Credit Period. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Borrower to, or entered into by the Borrower with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control. The parties hereto acknowledge and agree that (i) Letters of Credit may be issued to support obligations of Subsidiaries of the Borrower as well as the Borrower, (ii) Letters of Credit issued to support obligations of a Subsidiary may state that they are issued for such Subsidiary’s account and (iii) regardless of any such statement in any Letter of Credit, the Borrower is the “account party” in respect of all Letters of Credit and will be responsible for reimbursement of LC Disbursements as provided herein.

          (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Bank) to the Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension (which shall be a Domestic Business Day), the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by the Issuing Bank, the Borrower also

29

shall submit a letter of credit application on the Issuing Bank’s standard form in connection with any request for a Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed $50,000,000 and (ii) the sum of the total LC Exposure plus the aggregate outstanding principal amount of the Loans shall not exceed the aggregate amount of the Commitments.

          (c) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Domestic Business Days prior to the Termination Date.

          (d) Participations. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Banks, the Issuing Bank hereby grants to each Bank, and each Bank hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Bank’s Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Bank hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Bank’s Applicable Percentage of each LC Disbursement made by the Issuing Bank and not reimbursed by the Borrower on the date due as provided in paragraph (e) of this Section, or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Bank acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever.

          (e) Reimbursement. If the Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than 12:00 Noon, New York City time, on the date that such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 10:00 A.M., New York City time, on such date, or, if such notice has not been received by the Borrower prior to such time on such date, then not later than 12:00 Noon, New York City time, on (i) the Domestic Business Day that the Borrower receives such notice, if such notice is received prior to 10:00 A.M., New York City time, on the day of receipt, or (ii) the Domestic Business Day immediately following the day that the Borrower receives such notice, if such notice is not received prior to such time on the day of receipt; provided

30

that the Borrower may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.02 that such payment be financed with a Base Rate Borrowing in an equivalent amount and, to the extent so financed, the Borrower’s obligation to make such payment shall be discharged and replaced by the resulting Base Rate Borrowing. If the Borrower fails to make such payment when due, the Administrative Agent shall notify each Bank of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such Bank’s Applicable Percentage thereof. Promptly following receipt of such notice, each Bank shall pay to the Administrative Agent its Applicable Percentage of the payment then due from the Borrower, in the same manner as provided in Section 2.04 with respect to Loans made by such Bank (and Section 2.04 shall apply, mutatis mutandis, to the payment obligations of the Banks), and the Administrative Agent shall promptly pay to the Issuing Bank the amounts so received by it from the Banks. Promptly following receipt by the Administrative Agent of any payment from the Borrower pursuant to this paragraph, the Administrative Agent shall distribute such payment to the Issuing Bank or, to the extent that Banks have made payments pursuant to this paragraph to reimburse the Issuing Bank, then to such Banks and the Issuing Bank as their interests may appear. Any payment made by a Bank pursuant to this paragraph to reimburse the Issuing Bank for any LC Disbursement (other than the funding of Base Rate Loans as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement.

          (f) Obligations Absolute. The Borrower’s obligation to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower’s obligations hereunder. Neither the Administrative Agent, the Banks nor the Issuing Bank (nor any of their Affiliates, directors, officers, employees, agents and advisors, or their Affiliates’ directors, officers, employees, agents and advisors), shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence

31

arising from causes beyond the control of the Issuing Bank; provided that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Bank’s failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or wilful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit.

          (g) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Banks with respect to any such LC Disbursement.

          (h) Interim Interest. If the Issuing Bank shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to Base Rate Loans; provided that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to paragraph (e) of this Section, then the last sentence of the first paragraph of Section 2.09(a) shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Bank pursuant to paragraph (e) of this Section to reimburse the Issuing Bank shall be for the account of such Bank to the extent of such payment.

          (i) Cash Collateralization. If any Event of Default shall occur and be continuing, on the Domestic Business Day that the Borrower receives notice from the Administrative Agent or the Required Banks that the Required Banks are demanding the deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Banks, an

32

amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid interest thereon; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower described in clause (g) or (h) of Article VI. Such deposit shall be held by the Administrative Agent as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Borrower’s risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse the Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the maturity of the Loans has been accelerated (but subject to the consent of the Required Banks), be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three Domestic Business Days after all Events of Default have been cured or waived.

ARTICLE III

Conditions

          SECTION 3.01. Effectiveness. This Agreement shall become effective on the date that all of the following conditions shall have been satisfied (or waived in accordance with Section 9.04):

 (a)   receipt by the Agent from each of the parties hereto of either (i) a counterpart hereof signed by such party or (ii) telegraphic, telex or other written confirmation, in form satisfactory to the Agent, confirming that a counterpart hereof has been signed by such party;

 (b)   receipt by the Agent of a certificate signed by the Chief Financial Officer or the Vice President, Finance, of the Borrower, dated the Effective Date, to the effect that (i) no Default has occurred and is continuing as of the Effective Date and (ii) the representations and warranties of the Borrower set forth in Article IV hereof are true in all material respects on, and as of, the Effective Date;

 (c)   receipt by the Agent of an opinion of William C. Baskin III, Esq., counsel to the Borrower, of Davis Polk &

33

Wardwell, special counsel to the Borrower, and of Drinker Biddle & Reath LLP, Pennsylvania counsel to the Borrower, in each case given upon the Borrower’s express instructions, substantially in the forms of Exhibits E-1, E-2 and E-3 hereto, respectively;

    (d) receipt by the Agent of all documents it may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement, and any other matters relevant hereto, all in form and substance satisfactory to the Agent;

    (e) the representations and warranties of the Borrower set forth in Article IV hereof are true in all material respects on and as of the Effective Date;

    (f) receipt by the Banks of all the financial statements referred to in Section 4.04(a);

    (g) the 364-Day Credit Agreement shall have been executed and delivered by the parties thereto and shall be effective;

    (h) the Borrower shall have terminated all commitments under, and paid all amounts accrued and owing under, the Existing Credit Agreements; and

    (i) the Agent shall have received all fees and other amounts due and payable by the Borrower on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower;

provided that this Agreement shall not become effective or be binding on any party hereto unless all of the foregoing conditions are satisfied not later than December 6, 2002. The Agent shall promptly notify the Borrower and the Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto.

          SECTION 3.02. Borrowings. The obligation of any Bank to make a Loan on the occasion of any Borrowing, and of the Issuing Bank to issue, amend, renew or extend any Letter of Credit, is subject to the satisfaction of the following conditions:

    (a) receipt by the Agent of a Notice of Borrowing as required by Section 2.02 or 2.03 or receipt by the Issuing Bank of a notice as required by Section 2.17(b), as the case may be;

    (b) the fact that, immediately before and immediately after such Borrowing or the issuance, amendment, renewal or extension of such Letter of Credit, as applicable, no Default shall have occurred and be continuing;

    (c) the fact that immediately after such Borrowing or the issuance, amendment, renewal or extension of such

34

Letter of Credit, as applicable, the sum of the aggregate outstanding principal amount of the Loans plus the total LC Exposure will not exceed the aggregate amount of the Commitments;

     (d) the fact that the representations and warranties of the Borrower set forth in Article IV (other than those set forth in Sections 4.04(b) and 4.05) shall be true on and as of the date of such Borrowing or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable; and

     (e) the fact that the Borrowing or issuance, amendment, renewal or extension of the Letter of Credit, as applicable, shall have been approved by the Chairman of the board of directors, the President, the Chief Executive Officer, the Executive Vice President, Strategy and Finance, or the Chief Financial Officer of the Borrower or any one of their respective designees.

Each Borrowing and each issuance, amendment, renewal or extension of a Letter of Credit hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable, as to the facts specified in clauses (b), (c), (d) and (e) of this Section 3.02.

ARTICLE IV

Representations and Warranties

        The Borrower represents and warrants that:

          SECTION 4.01. Corporate Existence and Power. The Borrower (i) is a Pennsylvania corporation duly incorporated, validly existing and in good standing under the laws of the State of Pennsylvania, and (ii) has all corporate powers required to carry on its business as now conducted. Each of the Borrower and its Consolidated Subsidiaries has all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, the failure to obtain which would, individually or in the aggregate, have a material adverse effect on the Borrower’s ability to perform its obligations hereunder or on the financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole.

          SECTION 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement are within its corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or advance filing with, any governmental body, agency or official and do not contravene, or constitute a default under, (i) any provision of the certificate of incorporation or by-laws of the Borrower, (ii) any applicable law or regulation or any judgment, injunction, order or decree binding upon the Borrower, or

35

(iii)  any material financial agreement or instrument of the Borrower.

          SECTION 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and each Note, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally and by general principles of equity.

          SECTION 4.04. Financial Information. (a) The Borrower has heretofore furnished to the Agent, for distribution to each of the Banks, (i) the audited consolidated balance sheet for the Borrower and its Consolidated Subsidiaries as of December 31, 2001, and related consolidated statements of cash flows, income and retained earnings for the Borrower and its Consolidated Subsidiaries for the twelve-month period then ended, and (ii) the unaudited consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as of March 31, 2002, June 30, 2002 and September 30, 2002, and the related consolidated statements of cash flows, income and retained earnings for the three-month, six-month and nine-month periods then ended, respectively. Such financial statements present fairly, in all material respects, the consolidated financial position and results of operations and cash flows of the Borrower and its Consolidated Subsidiaries as of such dates and for such periods, in accordance with GAAP and, in the case of the financial statements described in clause (ii) of this Section 4.04(a), subject to year-end audit adjustments and the absence of footnotes.

          (b) Since December 31, 2001, there has been no material adverse change in the business, assets, operations, prospects or condition (financial or otherwise) of the Borrower and its Consolidated Subsidiaries, taken as a whole; provided that the charges and other financial information disclosed in the Disclosure Documents and the effect on the Borrower of the adoption of SFAS 142 shall be deemed not to constitute any such material adverse change.

          SECTION 4.05. Litigation. Except as disclosed in the Disclosure Documents, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower, threatened against or affecting, the Borrower or its Consolidated Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries taken as a whole or which in any manner draws into question the validity of this Agreement.

          SECTION 4.06. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with

36

respect to each Plan and is not in violation of the presently applicable provisions of ERISA and the Internal Revenue Code where such violation would have a material adverse effect on the financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole, and has not incurred any liability to the PBGC or a Plan under Title IV of ERISA; provided that this Section 4.06 applies to the members of the ERISA Group only in their capacity as employers and not in any other capacity (such as fiduciaries or service providers to Plans for the benefit of employers of others).

          SECTION 4.07. Compliance with Laws and Agreements. Each of the Borrower and its Consolidated Subsidiaries has complied in all material respects with all applicable laws and material agreements binding upon it, except where any failure to comply therewith would not individually or collectively have a material adverse effect on the Borrower’s ability to perform its obligations hereunder, and except where necessity of compliance therewith is being contested in good faith by appropriate proceedings; provided, however, that the sole representation and warranty with respect to compliance with ERISA is limited to Section 4.06.

          SECTION 4.08. Investment Company Act; Public Utility Holding Company Act. The Borrower is not (a) an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940, as amended, or (b) a “holding company” as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935.

          SECTION 4.09. Full Disclosure. None of the Disclosure Documents or any other information furnished in writing by or on behalf of the Borrower to the Agent or any Bank for purposes of or in connection with this Agreement (in each case taken as a whole with all other information so furnished) contained, as of the time it was furnished, any material misstatement of fact or omitted as of such time to state any material fact necessary to make the statements therein taken as a whole not misleading, in the light of the circumstances under which they were made; provided that with respect to information consisting of statements, estimates and projections regarding the future performance of the Borrower and its Consolidated Subsidiaries, the Borrower represents only that such information has been prepared in good faith based upon assumptions believed by the Borrower to be reasonable at the time of preparation thereof.

          SECTION 4.10. Taxes. The Borrower has filed or caused to be filed all United States Federal income tax returns and all other material tax returns required to be filed by it and has paid or caused to be paid all material taxes required to have been paid by it, except taxes that are being contested in good faith by appropriate proceedings and for which the Borrower has set aside on its books adequate reserves with respect thereto in accordance with GAAP.

ARTICLE V

37

Covenants

          The Borrower agrees that, so long as any Bank has any Commitment hereunder and so long as any Loan is outstanding hereunder, any Letter of Credit remains outstanding or any LC Disbursement has not been reimbursed:

          SECTION 5.01. Information. The Borrower will deliver to the Agent, for delivery by the Agent to each of the Banks:

    (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of earnings and of cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission by KPMG LLP or other independent public accountants of nationally recognized standing;

    (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, its Form 10-Q as of the end of such quarter;

     (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of a Responsible Financial Officer of the Borrower (i) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto and (ii) setting forth calculations demonstrating compliance, as of the date of the most recent balance sheet included in the financial statements being furnished at such time, with the covenants set forth in Sections 5.03, 5.04 and 5.05(e);

    (d) within five days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of a Responsible Financial Officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto;

    (e) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements and reports, and proxy statements so mailed;

    (f) from time to time such additional publicly available information regarding the financial position or business of the Borrower and its Consolidated Subsidiaries as the Agent, at the request of any Bank, may reasonably request; and

38

  (g) prompt written notice after the occurrence of (i) any Reportable Event that, alone or together with any other Reportable Events that have occurred, or (ii) a failure to make a required installment or other payment (within the meaning of Section 412(n)(1) of the Internal Revenue Code) that, could reasonably be expected to result in liability of the Borrower to the PBGC or to a Plan in an aggregate amount exceeding $50,000,000.

          SECTION 5.02. Conduct of Business and Maintenance of Existence and Insurance. The Borrower will preserve, renew and keep in full force and effect, and will cause each Material Subsidiary to preserve, renew and keep in full force and effect, their respective corporate existence; provided that the foregoing shall not prohibit (i) the termination of the existence of any Material Subsidiary if the surviving entity (in the case of any such termination resulting from a merger or consolidation) or the entity to which substantially all such Material Subsidiary’s assets are transferred (in the case of any other such termination) is or becomes a Material Subsidiary or is the Borrower or (ii) any transaction involving the Borrower in accordance with Section 5.06. The Borrower will also maintain, with financially sound and reputable insurance companies, insurance (including, without limitation, self insurance), if reasonably available, in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations.

          SECTION 5.03. Minimum Adjusted Consolidated Net Worth. Adjusted Consolidated Net Worth as of the end of each fiscal quarter of the Borrower ending on or after December 31, 2002 will not be less than the Minimum Adjusted Consolidated Net Worth as of the end of such fiscal quarter.

          SECTION 5.04. Leverage Ratio. The Leverage Ratio as of the end of each fiscal quarter of the Borrower ending on or after December 31, 2002, will not exceed 3.0 to 1.0.

          SECTION 5.05. Liens. The Borrower will not, and will not permit any Consolidated Subsidiary to, create, incur, assume or permit to exist any Indebtedness secured by any Lien on any property or asset now owned or hereafter acquired by it, except:

    (a) any Indebtedness secured by a Lien on any property or asset of the Borrower or any Consolidated Subsidiary existing on the date hereof; provided that (i) such Lien shall not apply to any other property or asset of the Borrower or any Consolidated Subsidiary and (ii) such Lien shall secure only the Indebtedness which it secures on the date hereof and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof;

    (b) any Indebtedness secured by a Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Consolidated Subsidiary or existing on any property or asset of any Person that becomes a Consolidated

39

Subsidiary after the date hereof prior to the time such Person becomes a Consolidated Subsidiary; provided that (i) such Indebtedness and Lien are not created in contemplation of or in connection with such acquisition or such Person becoming a Consolidated Subsidiary, as the case may be, (ii) such Lien shall not apply to any other property or assets of the Borrower or any Consolidated Subsidiary and (iii) such Lien shall secure only the Indebtedness which it secures on the date of such acquisition or the date such Person becomes a Consolidated Subsidiary, as the case may be, and extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof;

     (c) any Indebtedness secured by purchase money security interests in property or assets or improvements thereto hereafter acquired (or, in the case of improvements, constructed) by the Borrower or any Consolidated Subsidiary; provided that (i) such security interests and the Indebtedness secured thereby are incurred within 180 days of such acquisition (or construction), (ii) the Indebtedness secured thereby does not exceed the lesser of the cost or the fair market value of such property or assets or improvements at the time of such acquisition (or construction) and (iii) such security interests do not apply to any other property or assets of the Borrower or any Consolidated Subsidiary;

     (d) any capitalized lease obligations secured by Liens; provided that such Liens do not extend to any property of the Borrower or its Consolidated Subsidiaries other than the property subject to the relevant capital lease; and

     (e) Indebtedness secured by Liens that are not otherwise permitted by any of the foregoing provisions of this Section 5.05; provided that, at the time that any such Indebtedness is incurred or that any such Lien is granted (and after giving effect thereto), the aggregate outstanding principal amount of all Indebtedness secured by Liens permitted by this paragraph (e) shall not exceed 10% of the consolidated shareholders equity of the Borrower (i) as of September 30, 2002, until the first consolidated financial statements of the Borrower are delivered to the Agent pursuant to Section 5.01(a) or (b) and, thereafter, (ii) as of the most recent date for which a consolidated balance sheet of the Borrower has been delivered to the Agent pursuant to Section 5.01(a) or (b), determined in accordance with GAAP.

          SECTION 5.06. Consolidations, Mergers and Sales of Assets. The Borrower will not consolidate or merge with or into any other corporation or convey or transfer (or permit the conveyance or transfer of) all or substantially all of the properties and assets of the Borrower and its Consolidated Subsidiaries to any other Person unless (i) the surviving or acquiring entity is a corporation organized under the laws of one of the United States, (ii) the surviving or acquiring

40

corporation, if other than the Borrower, expressly assumes the performance of the obligations of the Borrower under this Agreement and all Notes, and (iii) immediately after giving effect to such transaction, no Default shall exist.

          SECTION 5.07. Use of Proceeds and Letters of Credit. The proceeds of the Loans made under this Agreement will be used by the Borrower for general corporate purposes. Letters of Credit issued under this Agreement may support obligations of Subsidiaries of the Borrower as well as the Borrower. None of such proceeds or Letters of Credit will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any “margin stock” within the meaning of Regulation U.

          SECTION 5.08. Compliance with Laws. The Borrower will comply, and will cause its Consolidated Subsidiaries to comply, in all material respects with all applicable laws, except where any failure to comply therewith would not individually or collectively have a material adverse effect on the Borrower’s ability to perform its obligations hereunder, and except where necessity of compliance therewith is being contested in good faith by appropriate proceedings; provided, however, that with respect to compliance with ERISA, this Section 5.08 applies to the Borrower and its Consolidated Subsidiaries only in their respective capacities as employers and not in any other capacity (such as a fiduciary or service provider to Plans for the benefit of employers of others).

          SECTION 5.09. Inspection of Property, Books and Records. The Borrower will keep proper books of record and account in which full, true and correct entries (in all material respects) in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities. The Borrower will permit representatives of any Bank at such Bank’s expense to visit and inspect the Borrower’s financial records and properties, to examine and make extracts from its books and records and to discuss its affairs and financial condition with the Borrower’s officers and (with the participation of or prior notice to such officers) independent public accountants, all at such reasonable times and as often as reasonably requested.

          SECTION 5.10. Payment of Obligations. The Borrower will, and will cause each of its Consolidated Subsidiaries to, pay its tax liabilities and other material obligations, before the same shall become delinquent or in default, except where (a) (i) the validity or amount thereof is being contested in good faith by appropriate proceedings and (ii) the Borrower or such Consolidated Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP or (b) the failure to make such payments could not reasonably be expected to have a material adverse effect on the Borrower’s ability to perform its obligations hereunder or on the financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole.

ARTICLE VI

41

Defaults

          SECTION 6.01. Events of Default. If one or more of the following events (“Events of Default”) shall have occurred and be continuing:

     (a)  the Borrower shall fail to pay when due any principal on any Loan or any reimbursement obligation in respect of any LC Disbursement;

     (b)  the Borrower shall fail to pay within five Domestic Business Days of the date when due any fees or any interest on any Loan or LC Disbursement;

     (c)  the Borrower shall fail to observe or perform any covenant contained in Sections 5.01(d), 5.03, 5.04 and 5.06;

     (d)  the Borrower shall fail to observe or perform, in any material respect, any covenant or agreement contained in this Agreement (other than those covered by clause (a), (b) or (c) above) and such failure shall have continued for a period of 30 days after written notice thereof has been given to the Borrower by the Agent at the request of any Bank;

     (e)  any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made);

     (f)  the Borrower or any Consolidated Subsidiary shall fail to make any payment (whether of principal or interest) in respect of any indebtedness for borrowed money having an outstanding principal amount of $50,000,000 (or its equivalent in any other currency) or more, when and as the same shall become due and payable; or any event or condition occurs that results in any outstanding indebtedness for borrowed money of the Borrower or any Consolidated Subsidiary having an outstanding principal amount of $100,000,000 (or its equivalent in any other currency) or more becoming due prior to its scheduled maturity, or that enables or permits the holder or holders of such indebtedness or any trustee or agent on its or their behalf to cause such indebtedness to become due prior to its scheduled maturity;

     (g)  the Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or all or substantially all of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing;

42

     (h)  an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or all or substantially all of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect;

     (i)  any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of more than 35% of the outstanding shares of common stock of the Borrower; or at any time Continuing Directors shall not constitute a majority of the board of directors of the Borrower;

      (j) one or more judgments for the payment of money in an aggregate amount in excess of $50,000,000 (or its equivalent in any other currency) shall be rendered against the Borrower, any Consolidated Subsidiary or any combination thereof and the same shall remain undischarged for a period of 60 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of the Borrower or any Consolidated Subsidiary to enforce any such judgment; or

     (k)  a Reportable Event or Reportable Events, or a failure to make a required installment or other payment (within the meaning of Section 412(n)(1) of the Internal Revenue Code), shall have occurred with respect to any Plan or Plans that reasonably could be expected to result in liability of the Borrower to the PBGC or to a Plan in an aggregate amount exceeding $50,000,000 and, within 30 days after the reporting of any such Reportable Event to the Agent, the Agent shall have notified the Borrower in writing that (i) the Required Banks have made a determination that, on the basis of such Reportable Event or Reportable Events or the failure to make a required payment, there are reasonable grounds (A) for the termination of such Plan or Plans by the PBGC, (B) for the appointment by the appropriate United States District Court of a trustee to administer such Plan or Plans or (C) for the imposition of liens in an amount exceeding $25,000,000 in favor of a Plan and (ii) as a result thereof an Event of Default exists hereunder; or a trustee shall be appointed by a United States District Court to administer any such Plan or Plans; or the PBGC shall institute proceedings to terminate any Plan or Plans;

then, and in every such event, the Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding more than 50% in aggregate principal amount of the

43

Loans, by notice to the Borrower declare the Loans (together with accrued interest thereon) to be, and the Loans (together with accrued interest thereon) shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause (g) or (h) above with respect to the Borrower, without any notice to the Borrower or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Loans (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.

          SECTION 6.02. Notice of Default. The Agent shall give notice to the Borrower under Section 6.01(d) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof.

ARTICLE VII

The Agent

          SECTION 7.01. Appointment and Authorization. Each Bank and the Issuing Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with all such powers as are reasonably incidental thereto. The Banks named on the cover page of this Agreement as co-syndication agents are not authorized to take any action as agent on behalf of the Agent or on behalf of any Bank, and shall not have any rights, responsibilities, duties or any powers as an agent under this Agreement.

          SECTION 7.02. Agent and Affiliates. JPMorgan Chase Bank shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and JPMorgan Chase Bank and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or Affiliate of the Borrower as if it were not the Agent hereunder.

          SECTION 7.03. Action by Agent. The obligations of the Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI.

          SECTION 7.04. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts.

44

          SECTION 7.05. Liability of Agent. Neither the Agent nor any of its directors, officers, agents, or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any Borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) reasonably believed by it to be genuine and to be signed by the proper party or parties.

          SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance with its Commitment (or outstanding Loans and LC Exposure, if the Commitments have terminated), indemnify the Agent (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Agent’s gross negligence or willful misconduct) that the Agent may suffer or incur in connection with this Agreement or any action taken or omitted by the Agent hereunder.

          SECTION 7.07. Credit Decision. Each Bank and the Issuing Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank or Issuing Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank and the Issuing Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank or Issuing Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement.

          SECTION 7.08. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Banks, the Issuing Bank and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent approved by the Borrower (which approval shall not be unreasonably withheld). If no successor Agent shall have been so appointed by the Required Banks, and approved by the Borrower and shall have accepted such appointment within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks and the Issuing Bank, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least two billion dollars. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such

45

successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent’s resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent.

          SECTION 7.09. Agent’s Fees. The Borrower shall pay to the Agent, for its own account, fees in the amounts and at the times previously agreed upon between the Borrower and the Agent.

ARTICLE VIII

Change in Circumstances

          SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Euro-Dollar Loan or Money Market LIBOR Loan the Agent determines (which determination shall be conclusive absent manifest error) that deposits in dollars (in the applicable amounts) are not generally available in the London interbank market for such period or that the London Interbank Offered Rate cannot be determined in accordance with the definition thereof, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make Euro-Dollar Loans, to convert outstanding Base Rate Loans into Euro-Dollar Loans or to convert outstanding Euro-Dollar Loans into Euro-Dollar Loans with a different Interest Period shall be suspended, (ii) each outstanding Euro-Dollar Loan or Money Market LIBOR Loan, as the case may be, shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto, and (iii) unless the Borrower notifies the Agent at least two Domestic Business Days before the date of any Euro-Dollar Borrowing or Money Market LIBOR Borrowing, as the case may be, for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (x) if such Borrowing is a Euro-Dollar Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (y) if such Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day.

          SECTION 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar

46

Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to convert outstanding Base Rate Loans into Euro-Dollar Loans, or to convert outstanding Euro-Dollar Loans into Euro-Dollar Loans with a different Interest Period shall be suspended. Before giving any notice to the Agent pursuant to this Section 8.02, such Bank shall designate a different Applicable Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, all Euro-Dollar Loans of such Bank then outstanding shall be converted to Base Rate Loans either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loans if such Bank may lawfully continue to maintain and fund such Loans to such day or (b) immediately if such Bank may not lawfully continue to maintain and fund such Loans to such day.

          SECTION 8.03. Increased Cost and Reduced Return. (a) If any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) or the Issuing Bank with any request or directive (whether or not having the force of law) of any such governmental authority, central bank or comparable agency, made or adopted after the date hereof (other than a change currently provided for in any existing law, rule or regulation) shall impose, modify or deem applicable any reserve, special deposit, insurance assessment or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding, with respect to any Euro-Dollar Loan, any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.16) against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or the Issuing Bank or shall impose on any Bank (or its Applicable Lending Office) or the Issuing Bank or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans (other than Money Market Absolute Rate Loans), its Note (in respect of such Fixed Rate Loans), its obligation to make such Fixed Rate Loans or its participating in, issuing or maintaining any Letter of Credit; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) or such Issuing Bank of making or maintaining any Fixed Rate Loan, participating in, issuing or maintaining any Letter of Credit, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) or such Issuing Bank under this Agreement or under its Note with respect thereto, by an amount reasonably deemed by such Bank or such Issuing Bank to be material, then, within 15 days after demand by such Bank or such Issuing Bank (with a copy to the Agent), the Borrower shall

47

pay to such Bank or such Issuing Bank such additional amount or amounts as will compensate such Bank or such Issuing Bank for such increased cost or reduction.

          (b) If any Bank or the Issuing Bank shall have determined that any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank or comparable agency, made or adopted after the date hereof (other than a change currently provided for in any existing law, rule or regulation), has or would have the effect of increasing the amount of capital of such Bank or such Issuing Bank (or its parent) required to be maintained in respect of, or otherwise allocated to, such Bank or such Issuing Bank’s obligations hereunder (its “Required Capital”) by an amount reasonably deemed by such Bank or such Issuing Bank to be material, then such Bank or such Issuing Bank may, by notice to the Borrower and the Agent, increase the facility fee, letter of credit fee or fronting fee payable to such Bank or such Issuing Bank hereunder to the extent required so that the ratio of (w) the sum of the increased facility fee, letter of credit fee or fronting fee applicable to such Bank or such Issuing Bank’s Commitment or Loans hereunder to (x) the prior facility fee, letter of credit fee or fronting fee applicable to such Bank’s or such Issuing Bank’s Commitment or Loans or Letters of Credit (or participations therein) hereunder is the same as the ratio of (y) such Bank’s or such Issuing Bank’s increased Required Capital to (z) its prior Required Capital. Such Bank or such Issuing Bank’s notice to the Borrower and the Agent shall set forth its calculation of the foregoing ratios and the increased facility fee, letter of credit fee or fronting fee to which it is entitled under this Section.

          (c) Each Bank or the Issuing Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank or such Issuing Bank to compensation pursuant to this Section (each, a “Trigger Event”) and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank or such Issuing Bank, be otherwise disadvantageous to such Bank or such Issuing Bank. Notwithstanding any other provision of this Section, neither any Bank nor the Issuing Bank shall be entitled to any compensation pursuant to this Section in respect of any Trigger Event (i) for any period of time in excess of 120 days prior to such notice or (ii) for any period of time prior to such notice if such Bank or such Issuing Bank (as applicable) shall not have given such notice within 120 days of the date on which such Trigger Event shall have been enacted, promulgated, adopted or issued in definitive or final form unless such Trigger Event is retroactive. A certificate of any Bank or the Issuing Bank claiming compensation under Section 8.03(a) or (b) and setting forth the additional amount or amounts to be paid to it hereunder

48

and describing the method of calculation thereof shall be conclusive if made reasonably and in good faith. In determining such amount, such Bank or such Issuing Bank may use any reasonable averaging and attribution methods.

          SECTION 8.04. Taxes. (a) For purposes of this Section 8.04, the following terms have the following meanings:

          “Taxes” means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Borrower pursuant to this Agreement or under any Note, and all liabilities with respect thereto, excluding (i) in the case of each Bank, the Issuing Bank and the Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank, Issuing Bank or the Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Lending Office is located and (ii) in the case of each Bank, any United States withholding tax imposed on such payments but only to the extent that such Bank is subject to United States withholding tax at the time such Bank first becomes a party to this Agreement.

          “Other Taxes” means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note.

          (b) Any and all payments by the Borrower to or for the account of any Bank, the Issuing Bank or the Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Bank, such Issuing Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof.

          (c) The Borrower agrees to indemnify each Bank, the Issuing Bank and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.04) paid by such Bank, such Issuing Bank or the Agent (as the case may be) and any liability (including penalties, interest and expenses, except to the extent attributable to the negligence or misconduct of such Bank, such Issuing Bank or the Agent, as the case may be) arising therefrom or with respect thereto. This indemnification shall be made

49

within 15 days from the date such Bank, such Issuing Bank or the Agent (as the case may be) makes demand therefor.

          (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, shall provide the Borrower with (i) two Internal Revenue Service (“IRS”) forms W8-BEN or any successor form prescribed by the IRS, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts such Bank from United States withholding tax or reduces the rate of withholding tax on payments of interest and eliminates withholding tax on any fees, or (ii) two IRS forms W8-ECI certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. If the form provided by a Bank indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from “Taxes” as defined in Section 8.04(a). Each such Bank undertakes to deliver to each of the Borrower and the Agent (A) a replacement form (or successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and (B) such amendments thereto or extensions or renewals thereof as may reasonably be required (but only so long as such Bank remains lawfully able to do so).

          (e) For any period with respect to which a Bank has failed to provide the Borrower with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which a form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.04(b) or Section 8.04(c) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes.

          (f) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to make any claim for indemnification in respect of Taxes or Other Taxes pursuant to this Section 8.04 (each, a “Tax Event”) and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such claim or any other amounts payable by the Borrower under this Section 8.04 and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. Notwithstanding any other provisions of this Section, no Bank shall be entitled to any indemnification pursuant to this Section in respect of any Tax Event (i) for any period of time in excess of 180 days prior to such notice or (ii) for any period of time prior to such notice if such Bank shall not have given such notice within 120 days of

50

the date on which such Bank became aware of such Tax Event unless such Tax Event is retroactive.

          SECTION 8.05. Base Rate Loans Substituted for Affected Euro-Dollar Loans. If (i) the obligation of any Bank to make or maintain Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) and the Borrower shall, by at least five Euro-Dollar Business Days prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply:

     (a) all Loans which would otherwise be made by such Bank as (or continued as or converted into) Euro-Dollar Loans shall instead be Base Rate Loans, and

     (b) after each of its outstanding Euro-Dollar Loans has been repaid (or converted to a Base Rate Loan), all payments of principal which would otherwise be applied to repay such Euro-Dollar Loans shall be applied to repay its Base Rate Loans instead.

If such Bank notifies the Borrower that the circumstances giving rise to such notice no longer apply, the Borrower shall elect that the principal amount of each such Base Rate Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Banks.

          SECTION 8.06. Substitution of Bank. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, the Borrower shall have the right to seek a substitute bank or banks (“Substitute Banks”) (which may be one or more of the Banks) to purchase the Loans and assume the Commitment of such Bank (the “Affected Bank”) under this Agreement and, if the Borrower locates a Substitute Bank, the Affected Bank shall, upon payment to it of the purchase price agreed between it and the Substitute Bank (or, failing such agreement, a purchase price in the amount of the outstanding principal amount of its Loans and accrued interest thereon to the date of payment) plus any amount (other than principal and interest) then due to it or accrued for its account hereunder, assign all its rights and obligations under this Agreement and all of its Notes to the Substitute Bank, and the Substitute Bank shall assume such rights and obligations, whereupon the Substitute Bank shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank.

          SECTION 8.07. Election to Terminate. If during any Level I Period, Level II Period or Level III Period (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, the Borrower may elect to terminate this Agreement as to such Bank, and in connection therewith not to borrow any Loan hereunder from such Bank or to

51

prepay any Base Rate Loan made pursuant to Section 8.02 or 8.05 (without altering the Commitments or Loans of the remaining Banks); provided that the Borrower (i) notifies such Bank through the Agent of such election at least two Euro-Dollar Business Days before any date fixed for such borrowing or such a prepayment, as the case may be, and (ii) repays all of such Bank’s outstanding Loans, accrued interest thereon and any other amounts then due to such Bank or accrued for its account hereunder concurrently with such termination. Upon receipt by the Agent of such notice, the Commitment of such Bank shall terminate.

ARTICLE IX

Miscellaneous

          SECTION 9.01. Notices. (a) Subject to paragraph (b) below, all notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower, the Agent or the Issuing Bank, at its address or telex or telecopy number set forth on the signature pages hereof, (y) in the case of any Bank, at its address, telex or telecopy number set forth in its Administrative Questionnaire, (z) in the case of any party, such other address or telex or telecopy number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. All notices from outside the United States to the Borrower shall only be given by telecopy and all other notices to the Borrower given by telex shall also be given by telecopy or non-telex method. Each such notice, request or other communication shall be effective (i) if given by telex or telecopy, when such telex or telecopy is transmitted to the number determined pursuant to this Section and the appropriate answerback is received, (ii) if given by registered or certified mail, return receipt requested, when such return receipt is signed by the recipient or (iii) if given by any other means, when delivered at the address specified in this Section, or, if such date is not a business day in the location where received, on the next business day in such location; provided that notices to the Agent under Article II or Article VIII shall not be effective until received.

          (b) Notices and other communications to the Banks hereunder (including, without limitation, the delivery of information required by Section 5.01) may be delivered or furnished by electronic communications pursuant to procedures approved by the Agent; provided that the foregoing shall not apply to notices pursuant to Article II unless otherwise agreed by the Agent and the applicable Bank. The Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.

          SECTION 9.02. No Waivers. No failure or delay by the Agent or any Bank or the Issuing Bank in exercising any right,

52

power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

          SECTION 9.03. Expenses; Indemnification. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Agent, including reasonable fees and disbursements of special counsel for the Agent, in connection with the preparation and administration of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder, (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agent or any Bank or the Issuing Bank, including fees and disbursements of counsel, in connection with such Event of Default and collection and other enforcement proceedings resulting therefrom, and (iii) all reasonable out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder.

          (b) The Borrower agrees to indemnify each Bank and the Issuing Bank and hold each Bank and the Issuing Bank harmless from and against any and all liabilities, claims, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by any Bank or the Issuing Bank (or by the Agent in connection with its actions as Agent hereunder) in connection with any investigative, administrative or judicial proceeding (whether or not such Bank or such Issuing Bank shall be designated a party thereto) relating to or arising out of (i) any actual or proposed use of proceeds of Loans hereunder to acquire equity securities of any other Person, (ii) any transaction which violates the change in control provisions set forth in Section 6.01(i) or (iii) any actual or proposed use of any Letter of Credit issued pursuant to this Agreement (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit); provided that no Bank or Issuing Bank shall have the right to be indemnified hereunder for its own gross negligence or willful misconduct as determined by a court of competent jurisdiction.

          SECTION 9.04. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); provided that no such amendment or waiver shall, unless signed by each Bank directly affected thereby, (i) increase or decrease the Commitment of any Bank or subject any Bank to any additional obligation, (ii) reduce or forgive the principal of or rate of interest on any Loan or LC Disbursement or any fees hereunder or (iii) postpone the date fixed for any payment of principal of or interest on any Loan or LC Disbursement or any fees hereunder or for any reduction or termination of any Commitment; provided

53

further that no such amendment or waiver shall (i) unless signed by all the Banks, amend this Section or otherwise change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans or LC Exposure, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement; or (ii) amend, modify or otherwise affect the rights or duties of the Issuing Bank without the prior written consent of the Issuing Bank.

          SECTION 9.05. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Bank (and any attempted assignment or transfer by the Borrower without such consent shall be null and void), except as contemplated by Section 5.06. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit)) any legal or equitable right, remedy or claim under or by reason of this Agreement.

          (b) Any Bank may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that (i) except in the case of an assignment to a Bank or an Affiliate of a Bank, each of the Borrower and the Agent must give their prior written consent to such assignment (which consent shall not be unreasonably withheld, it being understood that it shall be reasonable for the Borrower to withhold consent if the proposed assignee does not have an investment grade rating), (ii) except in the case of an assignment to a Bank or an Affiliate of a Bank or an assignment of the entire remaining amount of the assigning Bank’s Commitment (or, if the Commitments have terminated, the entire amount of its outstanding Loans and LC Exposure), the amount of the Commitment (or, if the Commitments have terminated, the amount of the outstanding Loans and LC Exposure) of the assigning Bank subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Agent) shall not be less than $5,000,000 unless each of the Borrower and the Agent otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Bank’s rights and obligations under this Agreement, except that this clause (iii) shall not apply to rights in respect of outstanding Money Market Loans, (iv) the parties to each assignment shall execute and deliver to the Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500 (except that such fee shall not be payable in the case of an assignment by a Bank to one of its Affiliates or to another Bank), and (v) the assignee, if it shall not be a Bank, shall deliver to the Agent an Administrative Questionnaire; and provided further that any consent of the

54

Borrower otherwise required under this paragraph shall not be required if an Event of Default under clause (a), (b), (g) or (h) of Section 6.01 has occurred and is continuing. Subject to acceptance and recording thereof pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Assumption the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Bank under this Agreement, and the assigning Bank thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Bank’s rights and obligations under this Agreement, such Bank shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.14, 8.03, 8.05 and 9.03). Any assignment or transfer by a Bank of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Bank of a participation in such rights and obligations in accordance with paragraph (e) of this Section.

          (c) The Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Banks, and the Commitment of, and principal amount of the Loans owing to and LC Exposure of, each Bank pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive, and the Borrower, the Agent, the Issuing Bank and the Banks may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Bank hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Issuing Bank and any Bank, at any reasonable time and from time to time upon reasonable prior notice.

          (d) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Bank and an assignee, the assignee’s completed Administrative Questionnaire (unless the assignee shall already be a Bank hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Agent shall accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph.

          (e) Any Bank may, without the consent of the Borrower, the Issuing Bank or the Agent, sell participations to one or more banks or other entities (a “Participant”) in all or a portion of such Bank’s rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) such Bank’s obligations under this Agreement shall remain unchanged, (ii) such Bank shall remain solely responsible to the other parties hereto for the

55

performance of such obligations and (iii) the Borrower, the Agent, the Issuing Bank and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank’s rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Bank sells such a participation shall provide that such Bank shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Bank will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.04 that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.14, 2.16, 8.03 and 8.04 to the same extent as if it were a Bank and had acquired its interest by assignment pursuant to paragraph (b) of this Section.

          (f) A Participant shall not be entitled to receive any greater payment under Section 8.03 or 8.04 than the applicable Bank would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances.

          (g) Any Bank may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Bank, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Bank from any of its obligations hereunder or substitute any such pledgee or assignee for such Bank as a party hereto.

          SECTION 9.06. New York Law. This Agreement shall be construed in accordance with and governed by the law of the State of New York.

          SECTION 9.07. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof.

          SECTION 9.08. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

56

          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

AETNA INC.,
by
	/s/ Alfred P. Quirk, Jr.
	Name: Alfred P. Quirk, Jr. Title: Vice President, Finance           and Treasurer
	Aetna Inc. 151 Farmington Avenue, RE6A Hartford, CT 06156 Attention: Vice President, Finance Telecopier: (860) 273-1314 Telex: 99 241
	with a copy to:
	Aetna Inc. 151 Farmington Avenue, RC4A Hartford, CT 06156 Attention: General Counsel Telecopier: (860) 273-8340 Telex: 99 241
JPMORGAN CHASE BANK, individually and as Agent,
By	/s/ Dawn Lee Lum Name: Dawn Lee Lum Title: Vice President
	JPMorgan Chase Bank 270 Park Avenue New York, NY 10017 Attention: Dawn Lee Lum Telecopier: (212) 270-3279 Email: dawn.leelum@jpmorgan.com
	with a copy to:
	JPMorgan Chase Bank Loan & Agency Services 1111 Fannin, 10th Floor Houston, TX 77002 Attention: Sheila King Telecopier: (713) 750-2783 Email: sheila.g.king@jpmorgan.com

57

	for notice to it as Issuing Bank:
	JPMorgan Chase Bank 10420 Highland Manor Drive, 4th Floor Tampa, FL 33610 Attention: Stephen Carew Telecopier: (813) 432-5161/5165 Email: stephen.m.carew@chase.com
BANK OF AMERICA, N.A.,
By	/s/ Joseph L. Corah
	Name: Joseph L. Corah Title: Principal
CITIBANK, N.A.,
By	/s/ Maria Hackley
	Name: Maria Hackley Title: Managing Director
DEUTSCHE BANK AG, NEW YORK BRANCH,
By	/s/ Ruth Leung
	Name: Ruth Leung Title: Director
By	/s/ Clinton M. Johnson
	Name: Clinton Johnson Title: Managing Director
FLEET NATIONAL BANK,
By	/s/ George J. Urban
	Name: George J. Urban Title: Portfolio Manager

58

BANK ONE, N.A.,
By	/s/ L. Richard Schiller Name: L. Richard Schiller Title: Director
STATE STREET BANK AND TRUST COMPANY,
By	/s/ Edward M. Anderson Name: Edward M. Anderson Title: Vice President
WACHOVIA BANK, NATIONAL ASSOCIATION,
By	/s/ Thomas L. Stitchberry Name: Thomas L. Stitchberry Title: Managing Director
THE BANK OF NEW YORK,
By	/s/ Christopher T. Kordes Name: Christopher T. Kordes Title: Vice President

EX-10.11 5 y83806exv10w11.htm MEMORANDUM

Exhibit 10.11

	Interoffice Communication
	Elease E. Wright Head of Aetna Human Resources (860) 273-8371 Fax: (860) 560-8721

To	John W. Rowe, MD
Date	December 6, 2002
Subject	Employment Agreement

Aetna Inc.’s Board of Director’s Committee on Compensation and Organization has approved the following amendment to your Employment Agreement with the Company dated as of September 6, 2000. Section 2.04 of the Employment Agreement shall be deleted and replaced with the following: “During the Employment Term, Company shall pay an annual premium of $73,500 on life insurance covering Executive and payable to beneficiaries designated by Executive”.

Except as so amended, the Employment Agreement shall remain in full force and effect.

Aetna Inc.

By:	/s/ Elease E. Wright
	Elease E. Wright

EX-10.12 6 y83806exv10w12.htm EMPLOYMENT AGREEMENT

Exhibit 10.12

	151 Farmington Avenue Hartford, CT 06156-3124
	John W. Rowe, M.D. Chairman, President and CEO (860) 273-4455

September 28, 2001

Alan M. Bennett

Dear Alan:

On behalf of Aetna Inc. and its affiliates (the “Company”), I am pleased to offer you this special retention arrangement. As we discussed, given your current position with the Company, this arrangement is subject to review and approval by the Board of Directors of Aetna Inc. I plan to present this arrangement to the Board at its next regularly scheduled meeting. The terms of the arrangement are as follows:

1.	Base Salary: Your base salary will increase to $425,000. (If approved by the Board of Directors, this increase will be effective retroactive to April 1, 2001).
2.	Bonus Target: Your bonus target will increase to 65%. All bonus awards are subject to review and approval by the Board of Director Committee on Compensation and Organization.
3.	Severance: In the event your employment is terminated by the Company other than for cause, you will be entitled to received 78 weeks of severance (calculated as base and target bonus) in lieu of any other severance or salary continuation benefit to which you might have been entitled under Company plans or programs then in effect, upon delivery to the Company of a release of any employment-related claims in the Company’s customary form.
4.	Change in job duties: If during the 6 month period following the commencement of employment of a new Executive Vice President of Administration and Finance (or equivalent position) to which you will report, you believe your duties as Senior Vice President and Chief Financial Officer have been significantly diminished you will be free to seek my review of the situation. If I (or my successor if I am no longer the Chief Executive Officer of the Company) agree that your duties have been significantly diminished and you choose to leave the Company as a result of the change in duties, you will be entitled to receive the severance outlined in item 3 above. If you wish to exercise your right to have your duties reviewed, you must notify me in writing prior to the expiration of the 6 month period. We have agreed that I (or my successor if applicable) shall have sole authority to make the determination as to whether your duties have been significantly reduced.

Exhibit 10.12

Page 2
Alan M. Bennett
September 28, 2001

	During the period you receive severance payments under item 3 or 4 above, you will be eligible for the same employee benefits, if any, as are provided under the severance plan or program in which you otherwise would have been eligible to participate but for this special arrangement.
5.	Retention Bonus: You will be eligible to receive a retention bonus in the amount of $100,000, less applicable withholding and taxes (“Bonus”). The Bonus will be paid on the later of 60 days after the commencement of employment of a new Executive Vice President of Finance, Strategy and Administration (or equivalent position) and May 1 2002, if

(i)	on the scheduled payment date you remain actively employed by the Company; or
(ii)	before the scheduled payment date, your employment has been involuntarily terminated by the Company other than for misconduct in which case, the Bonus payment will not be accelerated but shall be paid to you on the scheduled payment date.

	You will not be entitled to receive the Bonus if you voluntarily terminate your employment or if your employment has been involuntarily terminated by the Company for misconduct. Notwithstanding, if you voluntarily terminate your employment due to a change in job duties as described in item 4 above, the Bonus will be paid to you on the scheduled payment date.
	The Bonus will not count for any benefit plan purposes.
6.	Long-Term Incentive Program: We will recommend to the Board Committee on Compensation and Organization that you be granted 2,500 Performance Stock Units and 15,000 stock options. The option price will be based on the closing price of Aetna Common Stock on the effective date of the grant. This option grant will not be exercisable for the first year after the effective date of the grant and will vest in three annual installments.
7.	Stock Option Vesting: If you are eligible to receive severance benefits pursuant to item 3 or 4 above, any stock options you hold will continue to vest and are exercisable during the severance period. Vested options may be exercised for the 90 day period following the end of severance. If at the end of the severance period the Company notifies you that you are unable to sell the underlying stock in an open market transaction due to your access to material nonpublic information pertaining to the Company, you shall have an additional 90 days to exercise your options from the date the Company notifies you that you are no longer precluded from selling such shares (but in no event may options be exercised beyond the original term of the option).

Exhibit 10.12

Page 3
Alan M. Bennett
September 28, 2001

I look forward to continue working with you in the future.

This letter will supercede the letters from the Company dated July 20, 2000 and August 8, 2001. This letter is not intended to constitute an employment contract and shall not limit the Company’s right to terminate your at-will employment at any time.

Very truly yours,	Agreed and Accepted
/s/ John W. Rowe John W. Rowe, M.D.	/s/ Alan M. Bennett Alan M. Bennett

EX-12 7 y83806exv12.htm STATEMENT RE: CALCULATION

Exhibit 12

AETNA INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS

TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

								Years Ended
								December 31,
(Millions)	2002		2001					2000					1999		1998
Pretax income (loss) from continuing operations	$	544.8	$	(378.7	)	(1	)	$	(39.0	)	(2	)	$	744.8	$	842.0
Add back fixed charges		178.3		218.8					360.9					322.3		291.7
Income as adjusted	$	723.1	$	(159.9	)			$	321.9				$	1,067.1	$	1,133.7
Fixed charges:
Interest on indebtedness	$	119.5	$	142.8				$	248.2				$	232.7	$	206.2
Portion of rents representative of interest factor		58.8		76.0					112.7					89.6		85.5
Total fixed charges		178.3		218.8					360.9					322.3		291.7
Preferred stock dividend requirements (3)		—		—					—					56.9		103.4
Total combined fixed charges and preferred stock dividend requirements (3)		178.3	$	218.8				$	360.9				$	379.2	$	395.1
Ratio of earnings to fixed charges		4.06		(0.73	)	(1	)		0.89		(2	)		3.31		3.89
Ratio of earnings to combined fixed charges and preferred stock dividends		4.06		(0.73	)	(1	)		0.89		(2	)		2.81		2.87

(1)	Pretax loss from continuing operations reflects a severance and facilities charge of $192.5 million. Additional pretax income from continuing operations necessary to achieve both a ratio of earnings to fixed charges of 1.0 and a ratio of earnings to combined fixed charges and preferred stock dividends of 1.0, was approximately $378.7 million.
(2)	Pretax loss from continuing operations reflects a goodwill write-off of $310.2 million, a severance and facilities charge of $142.5 million and $57.8 million of change-in control related payments and other costs required to effect the spin-off of the Company from former Aetna. Additional pretax income from continuing operations necessary to achieve both a ratio of earnings to fixed charges of 1.0 and a ratio of earnings to combined fixed charges and preferred stock dividends of 1.0, was approximately $39.0 million.
(3)	Although the Company did not pay preferred stock dividends, preferred stock dividends paid by former Aetna Inc. have been included for purposes of this calculation for the years ending December 31, 1998 and 1999 (through the redemption date of July 19, 1999), as the preferred stock issued by former Aetna Inc. was issued in connection with the acquisition of U.S. Healthcare Inc. in 1996.

EX-13 8 y83806exv13.htm ANNUAL REPORT TO SECURITY HOLDERS

Exhibit 13

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis presents a review of Aetna Inc. and its subsidiaries as of December 31, 2002 and 2001, and its results of operations for 2002, 2001 and 2000. This Management’s Discussion and Analysis should be read in its entirety, since it contains detailed information that is important to understanding Aetna Inc. and its subsidiaries’ results and financial condition. The information herein is as of February 26, 2003.

OVERVIEW

General

The consolidated financial statements include Aetna Inc. (a Pennsylvania corporation) (“Aetna”) and its subsidiaries (collectively, the “Company”). The Company’s operations include three business segments: Health Care, Group Insurance and Large Case Pensions. Health Care consists of health and dental plans offered on both a risk basis (where the Company assumes all or a majority of the risk for health and dental care costs) (“Risk”) and an employer-funded basis (where the plan sponsor under an administrative service contract, and not the Company, assumes all or a majority of this risk) (“ASC”). Health plans include health maintenance organization (“HMO”), point-of-service (“POS”), preferred provider organization (“PPO”) and indemnity benefit products (“Indemnity”). The Group Insurance segment includes group life insurance products offered on a risk basis, as well as group disability and long-term care insurance products offered on both a risk and an employer-funded basis. Large Case Pensions manages a variety of retirement products (including pension and annuity products) primarily for defined benefit and defined contribution plans. These products provide a variety of funding and benefit payment distribution options and other services. The Large Case Pensions segment includes certain discontinued products.

Turnaround Initiatives

During 2002, the Company continued to implement strategic and operational initiatives aimed at improving the performance of its business. These initiatives included, among other things, implementing a new customer market approach, improving the efficiency of operations, addressing rising medical costs, improving relations with health care providers and withdrawing certain products within markets. Specific actions taken included significant price increases, withdrawal from certain unprofitable Commercial HMO and Medicare products within markets, changes to underwriting practices, initiatives to improve the efficiency of claims payment and other member services processes, and initiatives to reduce expenses, including significant staff reductions.

For various reasons, including premium rate increases and withdrawal from certain unprofitable Commercial HMO and Medicare products within markets, the Company’s membership has decreased significantly. Total medical membership at December 31, 2002 was 13.7 million members, compared to 17.2 million members at December 31, 2001.

The Company has also continued to reduce its cost structure as its membership has decreased. The Company recorded severance and facilities charges of $105 million after tax during 2002 and a severance and facilities charge of $125 million after tax in the fourth quarter of 2001. Refer to “Severance and Facilities Charges” and Note 11 of Notes to Consolidated Financial Statements for more information.

Page 1

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

OVERVIEW (Continued)

Consolidated Results

The Company reported a net loss of $2.5 billion in 2002, a net loss of $280 million in 2001 and net income of $127 million in 2000. The Company reported income from continuing operations of $393 million in 2002 and losses from continuing operations of $292 million in 2001 and $127 million in 2000. Income from continuing operations per diluted common share was $2.57 in 2002 compared to losses from continuing operations per basic common share of $2.03 in 2001 and $.90 in 2000. The net loss in 2002 includes income from discontinued operations of $50 million and a cumulative effect charge of approximately $3.0 billion related to the Company’s adoption of Financial Accounting Standard (“FAS”) No. 142, Goodwill and Other Intangible Assets, as discussed below. The loss in 2001 includes an $11 million benefit from the reduction of the reserve for costs relating to the sale of certain discontinued operations and a cumulative effect benefit of $.5 million related to the Company’s adoption of the amended FAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The net income in 2000 includes income from discontinued operations of $255 million. (Refer to “Results of Discontinued Operations” for more information.)

For 2002, income from continuing operations includes severance and facilities charges of $105 million, a benefit from the reduction of the reserve for anticipated future losses on discontinued products in the Large Case Pensions segment of $5 million and net realized capital gains of $22 million. The loss from continuing operations in 2001 includes a severance and facilities charge of $125 million, a benefit from the reduction of the reserve for anticipated future losses on discontinued products in Large Case Pensions of $61 million and net realized capital gains of $74 million. The loss from continuing operations in 2000 includes a charge of $238 million related to the write-off of goodwill primarily associated with Medicare service area exits effective January 1, 2001, a severance and facilities charge of $93 million, costs of $38 million resulting from change in control-related payments and other costs required to effect the spin-off of the Company from its predecessor, a benefit from the reduction of the reserve for anticipated future losses on discontinued products in Large Case Pensions of $95 million and net realized capital losses of $14 million. Excluding these items, income from continuing operations would have been $470 million in 2002 compared to a loss from continuing operations of $302 million in 2001, and income from continuing operations of $161 million in 2000.

Pharmacy Strategy

In October 2002, the Company announced that, following a review of strategic options related to its pharmacy benefits management operations, the Company decided to retain and expand upon its existing capabilities. In February 2003, the Company completed the purchase of a mail order pharmacy facility from Eckerd Health Services. The Company also expects to expand its existing clinical and sales capabilities relating to its pharmacy benefits management operations.

New Accounting Standard on Goodwill and Other Acquired Intangible Assets

On January 1, 2002, the Company adopted FAS No. 142. As a result, the Company recorded an impairment of goodwill of approximately $3.0 billion in the first quarter of 2002 which is recorded as a cumulative effect adjustment in the Consolidated Statement of Income. Refer to “Critical Accounting Policies” and “Goodwill and Other Acquired Intangible Assets” within this MD&A and Notes 2 and 6 of Notes to Consolidated Financial Statements for further discussion.

Page 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

HEALTH CARE

Operating Summary

(Millions)			2002			2001			2000
Premiums:
	Commercial HMO (1)		$	10,858.5		$	14,345.8		$	14,164.4
	Medicare HMO			1,013.1			1,995.7			4,051.3
	Other (2)			3,164.5			3,598.9			3,530.9
Total premiums				15,036.1			19,940.4			21,746.6
Administrative services contract fees				1,806.6			1,802.9			1,903.2
Net investment income				295.7			373.9			428.5
Other income				15.6			50.6			45.1
Net realized capital gains				56.0			102.2			2.6
		Total revenue		17,210.0			22,270.0			24,126.0
Health care costs (3)				12,452.8			17,938.8			18,884.1
Salaries and related benefits				2,150.1			2,188.4			2,384.6
Other operating expenses				1,884.4			2,130.0			2,261.4
Amortization of goodwill				—			198.1			204.9
Amortization of other acquired intangible assets				130.8			218.5			230.7
Goodwill write-off				—			—			310.2
Severance and facilities charges				156.0			192.5			142.5
		Total benefits and expenses		16,774.1			22,866.3			24,418.4
Income (loss) before income taxes (benefit) and cumulative effect adjustments				435.9			(596.3	)		(292.4	)
Income taxes (benefit)				119.5			(157.3	)		.4
Cumulative effect adjustments, net of tax				(2,965.7	)		.5			—
Net loss			$	(2,649.3	)	$	(438.5	)	$	(292.8	)
Net realized capital gains, net of tax (included above)			$	36.4		$	77.4		$	13.1

(1)	Commercial HMO includes premiums related to POS members who access primary care physicians and referred care through an HMO network.
(2)	Includes POS, PPO, Indemnity, Medicaid HMO and Dental products.
(3)	The percentage of health care costs related to capitated arrangements (a fee arrangement where the Company pays providers a monthly fixed fee for each member, regardless of the medical services provided to the member) was 11.3% for 2002, compared to 11.7% for 2001 and 14.1% for 2000.

The table presented below identifies certain items which, although they may recur, are excluded from net loss to arrive at operating earnings or loss. Management believes this provides a comparison more reflective of Health Care’s underlying business performance. The table reconciles operating earnings or loss to net loss reported in accordance with accounting principles generally accepted in the United States of America.

(Millions)		2002			2001			2000
Net loss		$	(2,649.3	)	$	(438.5	)	$	(292.8	)
Other items included in net loss:
	Net realized capital gains		(36.4	)		(77.4	)		(13.1	)
	Amortization of goodwill		—			195.3			200.4
	Amortization of other acquired intangible assets		85.0			142.4			150.0
	Goodwill write-off		—			—			238.3
	Severance and facilities charges		101.4			125.1			92.6
	Release of state income tax reserves (1)		(19.8	)		—			—
	Change in control-related costs		—			—			37.7
	Cumulative effect adjustments		2,965.7			(.5	)		—
Operating earnings (loss)		$	446.6		$	(53.6	)	$	413.1

(1) During the first quarter of 2002, the Company released $19.8 million of state income tax related reserves as a result of the favorable conclusion of several state tax audits.

Page 3

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

HEALTH CARE (Continued)

2002 Compared to 2001

Operating earnings for 2002 reflect an increase of $500 million from the operating loss in 2001, which decreased $467 million from the operating earnings in 2000. For 2002 and 2001, membership levels were lower than in the prior year periods, resulting in both lower overall premiums and medical costs. For 2002, the increase in operating earnings was due primarily to significant premium rate increases and reductions of membership with historically higher medical cost ratios (including withdrawal of products within certain markets), partially offset by higher per member medical costs for Commercial HMO products and, to a lesser extent, for PPO, POS and Indemnity products. Premiums for 2002 also reflect a benefit of approximately $21 million after tax ($32 million pretax) from the favorable resolution of prior period contract matters for a large customer. Medical costs for 2002 reflect the favorable development of prior period medical cost estimates of approximately $26 million after tax ($40 million pretax) for Commercial HMO products and approximately $23 million after tax ($35 million pretax) for Medicare HMO. Medical costs for 2001 reflect the unfavorable development of prior period medical cost estimates of approximately $42 million after tax ($65 million pretax), primarily related to Medicare service areas that the Company exited, effective January 1, 2001. The increase in 2002 operating earnings was also attributable to a decrease in total operating expenses, including salaries and related benefits, resulting from expense reduction initiatives related to lower membership levels, including workforce reductions, lower broker commissions and sales compensation expense, offset partially by higher performance-based compensation, due to the Company’s improved results, and higher pension costs. Operating earnings for 2002 were adversely affected by a decrease in net investment income due primarily to lower average yields on debt securities, mortgage loans and short-term investments as well as lower average assets, partially offset by higher limited partnership income, and a decrease in other income primarily due to proceeds in the third quarter of 2001, not present in 2002, of approximately $13 million after tax ($20 million pretax) from the sale of the Company’s New Jersey Medicaid membership (discussed in more detail below).

2001 Compared to 2000

The decrease in operating earnings for 2001 reflects lower results for Commercial HMO products and, to a lesser extent, lower results for Indemnity, PPO and POS medical products, partially offset by higher results for Medicare HMO products. The decline in results for Commercial HMO products resulted from significantly higher per member medical costs outpacing per member premium rate increases, partially offset by a decrease in operating expenses, including salaries and related benefits, resulting from expense reduction initiatives. The decline in results for Indemnity, PPO and POS products was due primarily to higher per member medical costs outpacing per member premium rate increases. The operating loss for 2001 was partially offset by higher results for Medicare HMO products due to the Company’s exit of a number of Medicare service areas on January 1, 2001 and per member premium rate increases on renewing business, partially offset by significantly higher per member medical costs. 2001 results also reflect a decrease in net investment income primarily due to lower income from limited partnerships and lower yields on debt securities and short-term investments, partially offset by higher asset balances. Results in 2001 also include a charge of $15 million after tax ($23 million pretax) for prior period claim surcharges, and a benefit of $13 million after tax ($20 million pretax) related to the net settlement of a reinsurance agreement with The Prudential Insurance Company of America, as well as a benefit of approximately $13 million after tax ($20 million pretax) relating to the sale of the Company’s New Jersey Medicaid membership. Results for Risk Products in 2000 also reflect a favorable development related to a government plan arrangement included in Indemnity, PPO and POS products, almost entirely offset by unfavorable development related to the resolution or termination of certain provider contracts included in Medicare HMO products.

Page 4

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

HEALTH CARE (Continued)

Commercial HMO

Commercial HMO premiums decreased approximately $3.5 billion in 2002, when compared to 2001, and increased $181 million in 2001, when compared to 2000. This decrease for 2002 primarily reflects significant membership reductions, offset in part by significant premium rate increases on renewing business. The increase in 2001 was due to premium rate increases on renewing business, partially offset by a shift in the geographic mix of membership, customers selecting lower premium plans and by membership reductions.

The Commercial HMO medical cost ratio was 83.2% for 2002, 90.3% for 2001 and 86.3% for 2000. The decrease in 2002, compared to 2001, was the result of significant per member premium rate increases outpacing per member medical cost increases and reductions of membership with historically higher medical cost ratios (including withdrawal of products within certain markets). Premiums for 2002 also include a benefit of approximately $32 million pretax from the favorable resolution of prior period contract matters for a large customer. Per member medical cost increases in 2002 were partially offset by favorable development of prior period medical cost estimates of approximately $40 million pretax. Excluding the favorable resolution of prior period contract matters for a large customer and the favorable development of prior period medical cost estimates, the Commercial HMO medical cost ratio was 83.8% for 2002. Higher per member medical costs were primarily due to higher utilization related to 2002 services and also reflect the impact of certain unit cost increases. While the specific factors vary in importance by local market, the major drivers of the increase in utilization include an increase in physician services (including specialists), inpatient services, pharmacy and outpatient services (particularly ambulatory surgeries and radiology). The increase in 2001, compared to 2000, was the result of significantly increased per member medical costs outpacing per member premium increases. Higher per member medical costs were primarily due to higher utilization.

Medicare HMO

The Company’s Medicare+Choice contracts with the federal government are renewed for a one-year period each January 1. In September 2002, the Company notified the Centers for Medicare and Medicaid Services (“CMS”) of its intent not to renew its Medicare+Choice contracts for 2003 for individuals in a number of Medicare service areas affecting approximately 9,000 members, or approximately 8% of the Company’s total Medicare membership at December 31, 2002. Employer groups offering Aetna’s Medicare+Choice coverage in these service areas will continue to be able to do so. As part of a new CMS Medicare+Choice Demonstration Project, the Company is offering an open access Medicare+Choice plan (the Aetna Golden Choice plan) for 2003 in certain service areas, including certain service areas where the Company decided not to renew its Medicare+Choice contracts for individuals. This new Aetna Golden Choice plan will not require referrals or the selection of a primary care physician.

In September 2001, the Company notified CMS of its intent to exit a number of Medicare service areas, affecting approximately 95,000 members, or approximately 37% of the Company’s total Medicare membership at December 31, 2001. The termination of these Medicare+Choice contracts became effective on January 1, 2002. The medical cost ratio for the exited Medicare service areas, effective January 1, 2002, was approximately 100% for 2001. In June 2000, the Company notified CMS of its intent to exit a number of Medicare service areas affecting approximately 260,000 members, or approximately 47% of the Company’s total Medicare membership at December 31, 2000. The termination of these Medicare+Choice contracts became effective on January 1, 2001.

Medicare HMO premiums decreased $983 million in 2002, when compared to 2001, and decreased $2.1 billion in 2001, when compared to 2000. The decrease in 2002 was substantially due to the Company exiting a number of Medicare service areas on January 1, 2002, discussed above. The decrease in 2001, compared to 2000, was due to the exit of a number of Medicare service areas on January 1, 2001, partially offset by increases in supplemental premiums and rate increases by CMS.

Page 5

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

HEALTH CARE (Continued)

The Medicare HMO medical cost ratio for 2002 was 82.2%, compared to 93.7% (excluding premiums and medical costs relating to Medicare service areas that the Company exited, effective January 1, 2001 (“2001 exited markets”)) for 2001 and 91.6% for 2000 excluding 2001 exited markets. The decrease for 2002, compared to 2001, primarily reflects the Company’s exit from certain Medicare service areas on January 1, 2002 that had high medical cost ratios, premium rate increases outpacing medical cost increases and the favorable development of prior period medical cost estimates discussed previously. Excluding the favorable development of prior period medical cost estimates for 2002 of approximately $35 million pretax, the Medicare HMO medical cost ratio was 85.6%. The increase for 2001, compared to 2000, reflects increased per member medical costs which outpaced the increases in supplemental premiums and CMS rate increases. The increases in per member medical costs were primarily a result of higher utilization and, to a lesser extent, unit cost increases mostly due to a shift from capitation to fee-for-service arrangements in certain markets. Excluding premiums and medical costs relating to Medicare service areas that the Company exited, effective January 1, 2002, the Medicare HMO medical cost ratio would have been approximately 91.0% for 2001. Medical costs for 2001 reflect the unfavorable development of prior period medical cost estimates of approximately $56 million pretax, primarily related to those Medicare service areas that the Company exited, effective January 1, 2001. For 2001 and 2000, the Medicare HMO medical cost ratio (including 2001 exited markets) was 95.7% and 97.0%, respectively.

Medicaid Sale

On August 1, 2001, the Company completed the sale of its New Jersey Medicaid and New Jersey Family Care membership to AmeriChoice. The agreement covered approximately 118,000 New Jersey Medicaid beneficiaries and members of the New Jersey Family Care program for uninsured children and adults. Proceeds from this sale of approximately $20 million pretax are included in other income for 2001. The operating results of the Medicaid business sold, which include the proceeds from the sale, were not material to the Company’s results of operations.

Health Care Costs Payable

Health care costs payable reflects estimates of the ultimate cost of claims that have been incurred but not yet reported or reported but not yet paid. Health care costs payable is estimated periodically, and any resulting adjustments are reflected in the current-period operating results within health care costs. Health care costs payable is based on a number of factors, including those derived from historical claim experience. A large portion of health care claims are not submitted to the Company until after the end of the quarter in which services are rendered by providers to members. As a result, an extensive degree of judgment is used in this estimation process, considerable variability is inherent in such estimates, and the adequacy of the estimates is highly sensitive to changes in medical claims payment patterns and changes in medical cost trends. A worsening (or improvement) of medical cost trend or changes in claim payment patterns from those that were assumed in estimating health care costs payable at December 31, 2002 would cause these estimates to change in the near term, and such a change could be material. For example, a 100 basis point change in the estimated medical cost trend for Commercial HMO Risk products would have changed annual after tax results for 2002 by approximately $50 million. This estimation process is a critical accounting policy for the Company. Refer to “Critical Accounting Policies” for more information.

Other Revenue

ASC fees for 2002 remained relatively consistent with 2001. This reflects overall lower ASC membership levels, offset by an increase in rates. The decrease in ASC fees for 2001 of approximately $100 million, when compared to 2000, is primarily due to lower overall membership levels, partially offset by higher Commercial HMO fees due to higher Commercial HMO membership and rate increases.

Page 6

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

HEALTH CARE (Continued)

Net realized capital gains for 2002 include a capital gain of $39 million after tax related to the Company’s 1997 sale of its behavioral health subsidiary, Human Affairs International (“HAI”) and net gains from the sale of debt securities resulting from the Company’s rebalancing of its investment portfolio in a low interest rate environment. The Company records capital gains relating to the HAI sale as they become realizable. Refer to “Total Investments - Capital Gains and Losses” for further discussion of the $60 million pretax that was scheduled to be paid to the Company by the purchaser of HAI, Magellan Health Services, Inc. (“Magellan”), and Magellan’s current financial condition. These gains were partially offset by capital losses primarily due to the write-down of certain debt and equity securities, the final resolution of matters related to the prior year sale of NYLCare Texas, the sale of the Company’s investment in an internet technology-based connectivity company and losses from futures contracts. Net realized capital gains for 2001 primarily reflect a capital gain of $38 million after tax related to the HAI sale, net gains from the sale of debt securities resulting from the Company’s rebalancing of its investment portfolio and capital gains resulting from collections of previously charged-off mortgage loans. These gains in 2001 were partially offset by capital losses resulting primarily from the write-down of certain debt securities. Net realized capital gains for 2000 primarily reflect a capital gain of $38 million after tax related to the HAI sale. During 2000, the Company incurred capital losses due to the rebalancing of its investment portfolio in a then rising interest rate environment, the write-down of certain debt securities and on the sale of certain corporate real estate, which almost entirely offset the HAI capital gain.

Income Taxes

Results for 2002 included approximately $20 million of state income tax related reserves released in the first quarter of 2002 as a result of the favorable conclusion of several state tax audits. Results for 2000 included a charge of $238 million after tax related to the write-off of goodwill, primarily associated with Medicare service area exits effective January 1, 2001. Excluding the state income tax reserve release in 2002, the goodwill write-off in 2000, amortization of goodwill for 2001 and 2000, and net realized capital gains and amortization of other acquired intangible assets for all periods, the effective tax rates were 32.4%, 36.6% and 37.3% for 2002, 2001 and 2000, respectively. Fluctuations in the effective tax rates primarily reflect a change in the mix of state income taxes that apply to pretax income or loss. This mix of state income taxes depends on the states in which the Company’s earnings or losses are incurred and the level of such earnings or losses, due to differing tax rates and/or limitations of allowed losses in various states.

Membership

Health Care’s membership was as follows:

		December 31, 2002						December 31, 2001
(Thousands)		Risk		ASC		Total		Risk		ASC		Total
Commercial
	HMO (1)		3,948		1,349		5,297		6,712		1,086		7,798
	PPO		753		3,171		3,924		907		3,168		4,075
	POS		101		2,514		2,615		183		2,820		3,003
	Indemnity		106		1,517		1,623		204		1,691		1,895
	Total Commercial Membership		4,908		8,551		13,459		8,006		8,765		16,771
Medicare HMO			117		—		117		255		—		255
Medicaid HMO			—		102		102		15		129		144
	Total Medical Membership		5,025		8,653		13,678		8,276		8,894		17,170
Dental			4,740		7,027		11,767		5,704		7,755		13,459

(1) Commercial HMO in thousands includes POS members who access primary care physicians and referred care through an HMO network of 1,067 at December 31, 2002 and 1,475 at December 31, 2001.

Page 7

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

HEALTH CARE (Continued)

Total medical and dental membership as of December 31, 2002 decreased by approximately 3.5 million members and 1.7 million members, respectively, compared to December 31, 2001, resulting from the Company’s strategic and operational initiatives, including significant price increases, the withdrawal of under-performing Commercial HMO products in certain markets and the exit from certain Medicare service areas. Substantially all of the medical membership decrease relates to Risk membership and as a result, ASC membership at December 31, 2002 represents approximately 63% of Health Care’s total medical membership, compared to approximately 52% at December 31, 2001.

Outlook

The Company continues to implement its strategic and operational initiatives which are designed to improve profitability and competitiveness. As a result, certain key actions and the Company’s success in implementing them are expected to be significant drivers of the Company’s 2003 financial performance. A key goal for the Company in 2003 is to begin to grow membership levels, as discussed below.

Medical Costs/Pricing Actions. The Company continues to take certain actions designed to improve its medical cost ratios. The Company attempts to improve profitability through price increases and, where appropriate, through improved underwriting and more effective contracting, benefit plan designs and medical management programs. Premiums for Risk health plans are generally fixed for one-year periods and, accordingly, cost levels in excess of medical cost projections reflected in pricing cannot be recovered in the contractual year through higher premiums. The Company has sought significant price increases for 2003 renewals to further improve profitability. A majority of the Company’s Health Risk business will renew during the first quarter of 2003. As a result, the Company’s results for 2003 are particularly sensitive to the price increases it achieves for business renewing in the early part of the year. There can be no assurances regarding the accuracy of medical cost projections assumed for pricing purposes and if the rate of increase in medical costs in 2003 were to exceed the levels projected for pricing purposes, our results would be materially adversely affected.

Membership/Revenue. Premium increases for 2002 renewals and other actions resulted in significantly reduced membership for 2002. Actions affecting membership also included the exit of certain Medicare service areas and the withdrawal of under-performing Commercial HMO products in certain markets. Further premium increases for 2003 renewals have resulted in additional membership reductions during the first quarter of 2003. If membership declines more than we expect or if we lose accounts with favorable medical cost experience while retaining accounts with unfavorable medical cost experience, our business and results of operations may be adversely affected in 2003. First quarter 2003 medical membership is expected to be approximately 13.0 million members. However, the Company is taking steps to begin to increase membership and expects growth beginning in the second quarter of 2003 and that medical membership at December 31, 2003 will be approximately 13.2 million members. Lower levels of membership are projected to result in lower revenue in 2003, compared to 2002.

Page 8

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

HEALTH CARE (Continued)

Expenses. To improve operating margins, the Company will need to continue to reduce operating expenses, particularly if membership continues to decrease. The Company continues to implement initiatives designed to improve the efficiency of its operations, while at the same time attempting to improve customer service and comply with important new privacy and other regulations. The Company recorded severance and facilities charges for Health Care of $28 million after tax in the fourth quarter of 2002, $56 million after tax in the third quarter of 2002 and $18 million after tax in the second quarter of 2002 relating to actions to reduce its workforce and vacate certain leased facilities. The charge in the fourth quarter of 2002 includes the elimination of approximately 607 positions and is expected to be completed by December 31, 2003. The charge in the third quarter of 2002 includes the elimination of approximately 2,600 positions and is expected to be completed by September 30, 2003. The charge in the second quarter of 2002 was substantially completed by December 31, 2002. (Refer to “Severance and Facilities Charges” later for additional details.) The Company expects that its 2003 pension costs will increase by approximately $110 million pretax due to continued or sustained declines in equity markets and the resulting impact on the fair value of pension plan assets (refer to “Critical Accounting Policies — Defined Benefit Pension and Other Post-Retirement Benefit Plans”).

Internal Revenue Service Audits. The Internal Revenue Service is currently auditing certain issues related to the Company and the Company’s predecessor, former Aetna, and the Company has established reserves to cover adverse outcomes of such audits. The Company is currently negotiating the settlement of certain of these audits and as a result, the Company expects to conclude certain of these audits in 2003. Refer to Note 13 of Notes to Consolidated Financial Statements for more information.

The future performance of the Company will depend in large part on its ability to continue to implement its strategic and operational initiatives. If these initiatives do not achieve their objectives, or result in unanticipated increases in medical cost trends or other adverse affects, the Company’s results in future periods would be materially adversely affected.

Refer to “Forward-Looking Information/Risk Factors” for information regarding other important factors that may materially affect the Company.

GROUP INSURANCE

Operating Summary

(Millions)			2002			2001		2000
Premiums:
	Life		$	1,093.0		$	1,052.1	$	1,045.5
	Disability			300.0			267.4		238.7
	Long-term care			64.4			59.1		44.4
Total premiums				1,457.4			1,378.6		1,328.6
Administrative services contract fees				36.0			32.3		34.3
Net investment income				269.5			286.0		300.9
Other income				4.0			4.0		4.1
Net realized capital gains (losses)				(21.6	)		.4		(49.0	)
		Total revenue		1,745.3			1,701.3		1,618.9
Current and future benefits				1,380.5			1,303.6		1,216.2
Salaries and related benefits				79.4			85.0		79.3
Other operating expenses				97.8			90.1		79.5
Severance and facilities charge				5.0			—		—
		Total benefits and expenses		1,562.7			1,478.7		1,375.0
Income before income taxes				182.6			222.6		243.9
Income taxes				57.6			71.2		82.6
Net income			$	125.0		$	151.4	$	161.3
Net realized capital gains (losses), net of tax (included above)			$	(14.0	)	$	.3	$	(31.8	)

Page 9

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

GROUP INSURANCE (Continued)

Results

Net income for 2002 reflects a decrease of $26 million, when compared to 2001, which decreased $10 million when compared to 2000. Net income for 2001 includes $9 million for life insurance claims resulting from the events of September 11, 2001. Excluding the severance and facilities charges in 2002 of $3 million after tax, the impact from the events of September 11, 2001 and net realized capital gains or losses, operating earnings for 2002 decreased $18 million, compared to 2001, and operating earnings for 2001 decreased $33 million, when compared to 2000. The decrease in operating earnings for 2002 is due primarily to an increase in the benefit cost ratio (current and future benefits divided by premiums) and lower net investment income. Lower net investment income is primarily due to lower average yields on mortgage loans, bonds and short-term investments as well as lower mortgage loan equity participation and prepayment income, partially offset by higher average assets and higher limited partnership and real estate income. The decrease in operating earnings for 2002 also reflects an increase in other operating expenses due primarily to higher broker commission expenses, partially offset by a decrease in salaries and related benefits due primarily to lower sales compensation expense. The decrease in operating earnings for 2001 is due primarily to increases in the benefit cost ratio and operating expenses as well as a decrease in net investment income. The benefit cost ratios, excluding the events of September 11, 2001, were 94.7% for 2002, 93.6% for 2001 and 91.5% for 2000.

Net realized capital losses for 2002 primarily reflect losses due to the write-down of certain investments in debt and equity securities and losses on futures contracts. These losses were partially offset by capital gains from debt securities resulting from the Company’s rebalancing of its investment portfolio in a low interest rate environment. Net realized capital gains for 2001 primarily reflect collections of previously charged-off mortgage loans, partially offset by capital losses resulting primarily from the write-down of certain bonds and capital losses on Treasury futures contracts used for managing the maturities of invested assets with the payment of expected liabilities. Net realized capital losses for 2000 primarily reflect the Company’s rebalancing of its investment portfolio in a then rising interest rate environment and the write-down of certain debt securities.

The table presented below identifies certain items which, although they may recur, are excluded from net income to arrive at operating earnings. Management believes this provides a comparison more reflective of Group Insurance’s underlying business performance. The table reconciles operating earnings to net income reported in accordance with accounting principles generally accepted in the United States of America.

(Millions)		2002		2001			2000
Net income		$	125.0	$	151.4		$	161.3
Other items included in net income:
	Net realized capital (gains) losses		14.0		(.3	)		31.8
	Severance and facilities charges		3.2		—			—
	Impact from events of September 11, 2001		—		9.0			—
Operating earnings		$	142.2	$	160.1		$	193.1
Operating earnings:
	Life products	$	112.2	$	116.5		$	136.0
	Disability and Long-term care products		30.0		43.6			57.1
Total Group Insurance		$	142.2	$	160.1		$	193.1

Page 10

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

GROUP INSURANCE (Continued)

Life Products

Life products include Basic Term Group Life Insurance, Group Universal Life, Supplemental or Voluntary programs and Accidental Death and Dismemberment coverage. Operating earnings for Life products decreased for 2002, when compared to 2001, primarily due to lower net investment income discussed previously. Operating earnings for Life products decreased for 2001, when compared to 2000, primarily due to a decrease in net investment income as a result of lower limited partnership income, partially offset by mortgage loan prepayment fees in the first quarter of 2001. The decrease in operating earnings for 2001 also reflects increases in operating expenses and the benefit cost ratio.

Disability and Long-term care Products

Disability and Long-term care products consist primarily of short-term and long-term disability insurance (and products which combine both), as well as long-term care products, which provide benefits offered to cover the cost of care in private home settings, adult day care, assisted living or nursing facilities. Operating earnings for 2002 decreased, when compared to 2001, primarily due to an increase in the combined benefit cost ratio for Disability and Long-term care products and, to a lesser extent, lower net investment income discussed previously. Operating earnings for 2001 decreased, when compared to 2000, primarily due to an increase in the combined benefit cost ratio for Disability and Long-term care products and, to a lesser extent, increases in operating expenses. The decrease in 2001 operating earnings was partially offset by an increase in net investment income primarily resulting from an increase in mortgage loan prepayment fees. The 2001 increase in the Disability benefit cost ratio reflects an increase in current and future benefits resulting from less favorable reserve developments than those in 2000, partially offset by selective premium rate increases on renewing business.

Membership

Group Insurance’s membership was as follows:

(Thousands)	2002		2001
Life products		9,274		9,211
Disability products		2,210		2,140
Long-term care products		180		129
Total		11,664		11,480

Total Group Insurance membership as of December 31, 2002 increased by 184,000 members, when compared to December 31, 2001. This increase reflects the addition of approximately 1,768,000 members, offset by lapses of approximately 1,584,000 members during 2002. Total Group Insurance membership as of December 31, 2001 decreased 204,000 members, when compared to December 31, 2000. This decrease reflects the addition of approximately 2,196,000 members, offset by lapses of approximately 2,400,000 members during 2001.

Outlook

The Company projects operating earnings in 2003 from Group Insurance products to be slightly lower than 2002 operating earnings. The Company also expects membership for Group Insurance to increase for 2003, compared to 2002.

Refer to “Forward-Looking Information/Risk Factors” for information regarding important factors that may materially affect the Company.

Page 11

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

LARGE CASE PENSIONS

Operating Summary

(Millions)			2002			2001			2000
Premiums			$	219.2		$	453.0		$	139.7
Net investment income				685.5			751.7			902.2
Other income				18.8			21.3			25.8
Net realized capital gains (losses)				(.1	)		(6.5	)		6.3
		Total revenue		923.4			1,219.5			1,074.0
Current and future benefits				865.0			1,154.7			937.3
Salaries and related benefits				15.7			17.0			16.8
Other operating expenses				5.2			4.5			8.2
Reductions of reserve for anticipated future losses on discontinued products				(8.3	)		(94.5	)		(146.0	)
		Total benefits and expenses		877.6			1,081.7			816.3
Income before income taxes				45.8			137.8			257.7
Income taxes				16.3			48.9			92.3
Net income			$	29.5		$	88.9		$	165.4
Net realized capital gains (losses), net of tax (included above)			$	(.1	)	$	(4.1	)	$	4.5
Assets under management: (1)
Fully guaranteed discontinued products			$	4,784.2		$	5,246.2		$	5,490.0
	Experience-rated			5,764.2			6,476.3			7,008.5
	Non-guaranteed			7,916.5			8,364.7			11,294.1
		Total assets under management	$	18,464.9		$	20,087.2		$	23,792.6

(1) Excludes net unrealized capital gains of $511.0 million at December 31, 2002, $176.0 million at December 31, 2001 and $108.1 million at December 31, 2000.

Results

Large Case Pensions’ net income decreased $59 million in 2002, compared to 2001, which decreased $77 million from 2000. Net income for 2002 includes a benefit from the reduction of the reserve for anticipated future losses on discontinued products for Large Case Pensions of $5 million due primarily to favorable mortality and retirement experience and certain reductions in administrative expenses, partially offset by lower investment portfolio returns. Net income for 2001 includes a benefit from the reduction of the reserve for anticipated future losses on discontinued products of $61 million primarily as a result of favorable investment performance that included equity gains and mortgage loan prepayment penalty income, as well as favorable mortality and retirement experience. Net income for 2000 includes a benefit from the reduction of the reserve for anticipated future losses on discontinued products of $95 million primarily resulting from favorable investment performance as well as favorable mortality and retirement experience. Excluding the discontinued products reserve releases and net realized capital gains and losses, operating earnings were $24 million in 2002, $32 million in 2001 and $66 million in 2000.

The decreases in results for 2002 and 2001 continue to reflect the run off of underlying liabilities and related assets. Premiums, along with current and future benefits, decreased for 2002, compared to 2001, primarily due to less activity relating to the funding of retirement incentive programs by an existing customer and also the 2001 transfer of cash from separate accounts to the general account to purchase annuities for another large customer. Premiums, along with current and future benefits, increased for 2001, compared to 2000, due to the funding of a retirement incentive program by an existing customer and a transfer of cash from separate accounts to the general account to purchase annuities for another large customer.

Page 12

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

LARGE CASE PENSIONS (Continued)

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

(Millions)	2002		2001		2000
Scheduled contract maturities and benefit payments (1)	$	793.6	$	929.3	$	870.7
Contractholder withdrawals other than scheduled contract maturities and benefit payments (2)		104.6		218.1		220.4
Participant-directed withdrawals (2)		22.9		20.7		44.1

(1)

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

(2)

Approximately $674 million and $679 million at December 31, 2002 and 2001, respectively, of experience-rated pension contracts allowed for unscheduled contractholder withdrawals, subject to timing restrictions and formula-based market value adjustments. Further, approximately $1.1 billion and $1.4 billion at December 31, 2002 and 2001, respectively, of experience-rated contracts supported by general account assets could be withdrawn or transferred to other plan investment options at the direction of plan participants, without market value adjustment, subject to plan, contractual and income tax provisions.

Outlook

Large Case Pensions operating earnings are projected to be lower for 2003, compared to operating earnings in 2002, as the business continues to run off.

Refer to “Forward-Looking Information/Risk Factors” for information regarding other important factors that may materially affect Large Case Pensions.

Discontinued Products

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

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

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

Page 13

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

LARGE CASE PENSIONS (Continued)

The results of discontinued products were as follows:

(Millions)	2002			2001			2000
Interest deficit (1)	$	(12.2	)	$	(17.0	)	$	(10.2	)
Net realized capital gains (losses)		(37.2	)		13.8			(18.3	)
Interest earned on receivable from continuing products		17.4			17.7			19.6
Other, net		10.8			13.4			9.7
Results of discontinued products, after tax	$	(21.2	)	$	27.9		$	0.8
Results of discontinued products, pretax	$	(33.7	)	$	40.0		$	(2.2	)
Net realized capital gains (losses) from bonds, after tax (included above)	$	(53.3	)	$	29.9		$	(58.3	)

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

Net realized capital losses in 2002 are due primarily to debt securities sales and the write-down of certain debt and equity securities, partially offset by the sale of an equity investment and the collection of previously charged-off mortgage loans. Net realized capital gains in 2001 were due primarily to gains on the sale of bonds in a declining interest rate environment, partially offset by capital losses on Treasury futures contracts used for duration management and the sale of equity securities. Net realized capital losses in 2000 are due primarily to losses on the sale of bonds in a then rising interest rate environment, partially offset by gains on the sale of equities.

At the time of discontinuance, a receivable from Large Case Pensions’ continuing products equivalent to the net present value of the anticipated cash flow shortfalls was established for the discontinued products. Interest on the receivable is accrued at the discount rate that was used to calculate the reserve. Total assets supporting discontinued products and the reserve include a receivable from continuing products of $357 million at December 31, 2002, $345 million at December 31, 2001 and $389 million at December 31, 2000.

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

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

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

The Company’s assumptions about the cost of asset management and customer service reflect actual investment and general expenses allocated over invested assets.

Page 14

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

LARGE CASE PENSIONS (Continued)

The activity in the reserve for anticipated future losses on discontinued products was as follows (pretax):

(Millions)
Reserve at December 31, 1999	$	1,147.6
Operating income		16.1
Net realized capital losses		(31.1	)
Mortality and other		12.8
Reserve reduction		(146.0	)
Reserve at December 31, 2000		999.4
Operating income		3.2
Net realized capital gains		18.9
Mortality and other		17.9
Reserve reduction		(94.5	)
Reserve at December 31, 2001		944.9
Operating income		8.2
Net realized capital losses		(57.5	)
Mortality and other		15.6
Reserve reduction		(8.3	)
Reserve at December 31, 2002	$	902.9

Management reviews the adequacy of the discontinued products reserve quarterly and, as a result, $5 million ($8 million pretax) of the reserve was released in 2002 primarily due to favorable mortality and retirement experience and certain reductions in administrative expenses, partially offset by lower portfolio returns. For 2001, $61 million ($95 million pretax) of the reserve was released primarily due to favorable investment performance that included equity gains and mortgage loan prepayment penalty income, as well as favorable mortality and retirement experience. For 2000, $95 million ($146 million pretax) of the reserve was released primarily due to favorable investment performance related to certain equity investments, favorable mortality and retirement experience and the decrease in size of the overall bond portfolio, which decreased default risk. The current reserve reflects management’s best estimate of anticipated future losses.

The anticipated run off of the December 31, 2002 reserve balance is as follows:

(Millions)
2003	$	30.8
2004		31.2
2005		31.5
2006		31.7
2007		31.8
2008 – 2012		163.2
2013 – 2017		155.2
2018 – 2022		133.1
2023 – 2027		104.2
Thereafter		190.2

The above table assumes that assets are held until maturity and that the reserve run off is proportional to the liability run off.

The expected liability (as of December 31, 1993) and actual balances for the GIC and SPA liabilities at December 31 are as follows:

	Expected				Actual
(Millions)	GIC		SPA		GIC		SPA
2000	$	690.7	$	4,357.9	$	548.8	$	4,462.5
2001		352.9		4,238.9		261.5		4,512.6
2002		169.5		4,114.6		82.9		4,361.1

Page 15

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

LARGE CASE PENSIONS (Continued)

The GIC balances were lower than expected in each period, as several contractholders redeemed their contracts prior to contract maturity. The SPA balances in each period were higher than expected because of additional amounts received under existing contracts. The increase in the 2001 actual SPA balance, when compared to 2000, is due to the transfer of funds from separate accounts to purchase guaranteed annuities in the Company’s general account, under an existing contract.

The discontinued products investment portfolio is as follows:

(Millions)	December 31, 2002					December 31, 2001
Class	Amount		Percent			Amount		Percent
Debt securities available for sale	$	3,481.0		68.4	%	$	3,573.8		66.8	%
Loaned securities (1)		167.1		3.3			131.9		2.5
Total debt securities		3,648.1		71.7			3,705.7		69.3
Mortgage loans		763.2		15.0			822.1		15.4
Investment real estate		95.0		1.9			130.4		2.4
Equity securities		73.4		1.4			211.0		3.9
Other (2)		505.7		10.0			481.4		9.0
Total	$	5,085.4		100.0	%	$	5,350.6		100.0	%

(1)	Refer to Note 2 of Notes to Consolidated Financial Statements for further discussion of the Company’s securities lending program.
(2)	Amount includes restricted debt securities on deposit as required by regulatory authorities of $68.3 million at December 31, 2002 and $55.7 million at December 31, 2001 included in long-term investments on the Consolidated Balance Sheets.

The investment portfolio has declined from 2001, as assets were used to pay off contractual liabilities. As mentioned above, the investment portfolio has changed since inception. Mortgage loans have decreased from $5.4 billion (37% of the investment portfolio) at December 31, 1993 to their current level. This was a result of maturities, prepayments and the securitization and sale of commercial mortgages. Also, real estate decreased from $.5 billion (4% of the investment portfolio) at December 31, 1993 to its current level, primarily as a result of sales. The resulting proceeds were reinvested in debt and equity securities.

The change in the composition of the overall investment portfolio resulted in a change in the quality of the portfolio since 1993. As the Company’s exposure to commercial mortgage loans and real estate has diminished, additional investment return has been achieved by increasing the risk in the bond portfolio. At December 31, 1993, 60% of the debt securities had a quality rating of AAA or AA, and at December 31, 2002, 29% of the debt securities had a quality rating of AAA or AA. However, management believes the level of risk in the total portfolio of assets supporting discontinued products was lower at December 31, 2002 when compared to December 31, 1993 due to the reduction of the portfolio’s exposure to mortgage loan and real estate investments.

Distributions on discontinued products were as follows:

(Millions)	2002		2001		2000
Scheduled contract maturities, settlements and benefit payments	$	704.0	$	835.7	$	917.8
Participant-directed withdrawals		3.6		5.6		9.6

Page 16

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

LARGE CASE PENSIONS (Continued)

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

At December 31, 2002, scheduled maturities, future benefit payments and other expected payments, including future interest, were as follows:

(Millions)
2003	$	575.9
2004		529.6
2005		505.2
2006		493.4
2007		482.0
2008 – 2012		2,232.3
2013 – 2017		1,846.9
2018 – 2022		1,431.1
2023 – 2027		1,034.3
Thereafter		1,605.5

Refer to Note 12 of Notes to Consolidated Financial Statements and “Total Investments” for additional information.

CORPORATE INTEREST

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

After-tax interest expense was $78 million for 2002, $93 million for 2001 and $161 million for 2000. The decrease in interest expense for 2002, when compared to 2001, is primarily a result of lower interest rates and a benefit from the Company’s interest rate swap agreement entered into in December 2001. The decrease in interest expense for 2001, when compared to 2000, is primarily a result of lower levels of debt as a result of the spin-off of the Company from its predecessor, as well as lower short-term rates.

Outlook

Interest expense is expected to be approximately level in 2003, compared to 2002. Refer to “Liquidity and Capital Resources” for more information on the Company’s interest rate swap agreements entered into in December 2002 and December 2001.

Refer to “Forward-Looking Information/Risk Factors” for information regarding important factors that may materially affect the Company.

Page 17

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

SEVERANCE AND FACILITIES CHARGES

The Company has taken a number of actions during the last three years to reduce operating costs including, among other actions, significant staff reductions and vacating certain leased facilities. During 2002 and 2001, the Company recorded severance and facilities charges of $105 million after tax and $125 million after tax, respectively. As a result of actions related to these charges, the Company eliminated approximately 7,000 positions and expects to make 2003 severance payments for employee positions eliminated prior to December 31, 2003 and rental payments on facilities to be partially or fully vacated prior to December 31, 2003, net of anticipated sublease rentals and related costs, of approximately $89 million after tax. During 2003, as a result of these actions, the Company also expects a reduction in salary and related benefits and other operating expenses totaling approximately $283 million after tax and an increase in after tax cash flows from operating activities of approximately $196 million. See information below for more details on each charge taken during 2002 and 2001.

Fourth Quarter 2002 Severance and Facilities Charge

In the fourth quarter of 2002, the Company recorded a severance and facilities charge of $45 million pretax ($29 million after tax) relating to the implementation of ongoing initiatives that are intended to improve the Company’s overall future performance. The initiatives included further reductions to operating expenses and the continued reorganization and realignment of Health Care and Group Insurance operations. This charge included $20 million after tax for severance activities relating to the planned elimination of approximately 680 employee positions (primarily customer service, information technology and Group Insurance related positions) and $9 million after tax representing the present value of the difference between rent required to be paid by the Company and future sublease rentals expected to be received by the Company relating to certain leased facilities, or portions of such facilities, that will be vacated. Severance actions and the vacating of leased facilities relating to the fourth quarter of 2002 charge are expected to be completed by December 31, 2003.

As a result of these actions, the Company eliminated 321 positions and used approximately $22 million pretax of reserves through December 31, 2002. Refer to Note 11 of Notes to Consolidated Financial Statements for more details.

The Company expects to make severance payments for employee positions eliminated prior to December 31, 2003 of approximately $17 million after tax in 2003 and approximately $3 million after tax in 2004. Rental payments on facilities to be partially or fully vacated prior to December 31, 2003, net of anticipated sublease rentals and related costs, is expected to be approximately $2 million after tax in 2003 and approximately $9 million after tax in 2004 through 2009.

As a result of these actions, the Company expects a reduction in salary and related benefit costs of approximately $21 million after tax in 2003 and approximately $30 million after tax in 2004 and annually thereafter, as well as a reduction in other operating expenses due to reduced rent expense of approximately $2 million after tax in 2003 and approximately $9 million after tax in 2004 through 2009.

The Company expects an after tax increase in future cash flows from operating activities as a result of the actions being taken in connection with the fourth quarter charge of approximately $3 million in 2003, approximately $27 million in 2004 and approximately $30 million annually thereafter, reflecting expected cost savings, net of termination payments.

Page 18

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

SEVERANCE AND FACILITIES CHARGES (Continued)

Third Quarter 2002 Severance and Facilities Charge

In the third quarter of 2002, the Company recorded a severance and facilities charge of $89 million pretax ($58 million after tax) relating to the implementation of ongoing initiatives intended to improve the Company’s overall future performance. These initiatives included further reductions to operating expenses and the continued reorganization and realignment of Health Care and Group Insurance operations. This charge included $53 million after tax for severance activities relating to the planned elimination of approximately 2,750 employee positions (primarily customer service, plan sponsor services, patient management, sales, network management and Group Insurance) and $5 million after tax representing the present value of the difference between rent required to be paid by the Company and future sublease rentals expected to be received by the Company relating to certain leased facilities, or portions of such facilities, that will be vacated. Severance actions and the vacating of leased facilities relating to the third quarter of 2002 charge are expected to be completed by September 30, 2003.

As a result of these actions, the Company eliminated 1,805 positions from July 1, 2002 through December 31, 2002 and used approximately $73 million pretax of reserves through December 31, 2002. Refer to Note 11 of Notes to Consolidated Financial Statements for more details.

The Company expects to make severance payments for employee positions eliminated prior to September 30, 2003 relating to the third quarter charge of approximately $42 million after tax in 2003 and $2 million after tax in 2004. Rental payments on facilities to be partially or fully vacated prior to September 30, 2003, net of anticipated sublease rentals and related costs, are expected to be approximately $2 million after tax in 2003 and approximately $3 million after tax in 2004 through completion in 2009.

As a result of these actions, the Company expects to reduce salary and related benefit costs by approximately $79 million after tax in 2003 and approximately $93 million after tax annually thereafter, as well as a reduction in other operating expenses due to reduced rent expense of approximately $1 million after tax in 2003 and approximately $3 million after tax in 2004 through 2009.

The Company expects an after tax increase in future cash flows from operating activities as a result of the actions being taken in connection with the third quarter charge of approximately $37 million in 2003, approximately $91 million in 2004 and approximately $93 million annually thereafter, reflecting expected cost savings, net of termination payments.

Second Quarter 2002 Severance Charge

In the second quarter of 2002, the Company recorded a severance charge of $27 million pretax ($18 million after tax) relating to the implementation of ongoing initiatives that are intended to improve the Company’s overall future performance. These initiatives include further reductions to operating expenses and the continued reorganization and realignment of Health Care operations. As a result of these initiatives, the Company eliminated 527 positions (primarily regional field management, information technology and medical service functions) from April 1, 2002 through December 31, 2002 resulting in a reduction of the severance reserve of approximately $27 million pretax. Severance actions relating to the second quarter of 2002 severance charge were substantially completed by December 31, 2002. Refer to Note 11 of Notes to Consolidated Financial Statements for more details.

As a result of these actions, the Company expects to make severance payments for employee positions eliminated of approximately $5 million after tax in 2003.

The Company expects to reduce salary and related benefit costs by approximately $26 million after tax in 2003 and annually thereafter.

Page 19

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

SEVERANCE AND FACILITIES CHARGES (Continued)

As a result of these actions, the Company expects an after tax increase in future cash flows from operating activities of approximately $21 million in 2003 and approximately $26 million annually thereafter, reflecting expected cost savings, net of termination payments.

2001 Severance and Facilities Charge

In the fourth quarter of 2001, the Company recorded a severance and facilities charge of $193 million pretax ($125 million after tax) relating to the implementation of initiatives that are intended to improve the Company’s overall future performance. These initiatives included seeking to reduce 2002 expenses, reorganization and realignment of Health Care operations to better align our business resources with our customer market-focused approach, business process improvements, product market withdrawals, continued migration off the Prudential Health Care systems and vacating certain facilities (primarily customer service-related locations). This charge included $85 million after tax for severance activities relating to the planned elimination of approximately 4,400 employee positions (primarily customer service and regional field management functions) and $40 million after tax representing the present value of the difference between rent required to be paid by the Company and future sublease rentals expected to be received by the Company relating to certain leased facilities, or portions of such facilities, that were vacated. As a result of these actions, the Company eliminated 3,487 positions and used approximately $143 million pretax of reserves in 2002 and eliminated 757 positions and used approximately $50 million pretax of reserves in 2001. Severance actions and the vacating of leased facilities relating to the fourth quarter of 2001 severance and facilities charge, as aligned to better reflect service operations consistent with its customer market approach, were completed by December 31, 2002. Refer to Note 11 of Notes to Consolidated Financial Statements for more details.

RESULTS OF DISCONTINUED OPERATIONS

In December 2000, the Company was spun off from its predecessor, former Aetna, and is considered the successor for accounting purposes. Accordingly, the account balances and activities of former Aetna’s financial services and international businesses for periods prior to December 13, 2000 have been segregated and reported as discontinued operations. The Company reported income from discontinued operations of $255 million in 2000. Income from discontinued operations in 2000 includes a charge for the reserve for net costs associated with the transaction of approximately $174 million after tax. These costs, which were directly associated with the sale of former Aetna’s financial services and international businesses, were included in the results of discontinued operations for 2000 and related to certain compensation-related arrangements, costs for outside financial and legal advisors, income taxes related to legal entity realignment, payments for the settlement of certain former Aetna employee stock options held by employees of the sold businesses and various other expenses related to the change in control of former Aetna. During the fourth quarter of 2001, the Company reduced the reserve for such costs by approximately $11 million after tax, which management determined were no longer necessary. Included in the cost associated with the transaction was the release of approximately $53 million of previously established reserves in connection with prior dispositions of businesses reflected as discontinued operations. Refer to Note 21 of Notes to Consolidated Financial Statements for more details on the results of discontinued operations.

The Company released $50 million of federal income tax reserves resulting from the resolution of several Internal Revenue Service audit issues during the first quarter of 2002 that related to the property and casualty insurance business of former Aetna, which was sold in 1996.

Page 20

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

TOTAL INVESTMENTS

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

Total investments at December 31 were as follows:

(Millions)	2002		2001
Debt securities available for sale	$	13,379.1	$	13,446.0
Loaned securities		948.2		608.1
Total debt securities		14,327.3		14,054.1
Mortgage loans		1,773.2		2,045.0
Equity securities		93.2		242.1
Other investment securities		605.3		689.2
Investment real estate		308.8		359.7
Other (1)		1,790.5		1,472.9
Total investments	$	18,898.3	$	18,863.0

(1) Amount includes restricted debt securities on deposit as required by regulatory authorities of $747.5 million at December 31, 2002 and $691.6 million at December 31, 2001 included in long-term investments on the Consolidated Balance Sheets.

Debt and Equity Securities

Debt securities represented 76% at December 31, 2002 and 75% at December 31, 2001 of the Company’s total general account invested assets and supported the following types of products:

(Millions)	2002		2001
Supporting discontinued products	$	3,648.1	$	3,705.7
Supporting experience-rated products		2,303.2		2,167.4
Supporting remaining products		8,376.0		8,181.0
Total debt securities	$	14,327.3	$	14,054.1

The debt securities in the Company’s portfolio are generally rated by external rating agencies and, if not externally rated, are rated by the Company on a basis believed to be similar to that used by the rating agencies. The Company’s investments in debt securities had an average quality rating of A+ at December 31, 2002 and 2001 (34% and 32% were AAA at December 31, 2002 and 2001, respectively). “Below investment grade” debt securities carry a rating of below BBB-/Baa3 and represented 5% and 7% of the portfolio at December 31, 2002 and December 31, 2001, respectively, of which 22% at December 31, 2002 and 23% at December 31, 2001, support discontinued and experience-rated products. Refer to Note 7 of Notes to Consolidated Financial Statements for disclosures related to debt securities by market sector.

The Company has classified its debt and equity securities as available for sale and carries them at fair value. Fair values for such securities are based on quoted market prices. Non-traded debt securities are priced independently by a third-party vendor and non-traded equity securities are priced based on an internal analysis of the investment’s financial statements and cash flow projections. The carrying value of non-traded debt and equity securities as of December 31, 2002 and 2001 were as follows.

	December 31, 2002							December 31, 2001
		Debt		Equity					Debt		Equity
(Millions)		Securities		Securities		Total			Securities		Securities		Total
Supporting discontinued and experience-rated products		$	531.8	$	11.2	$	543.0		$	759.6	$	15.8	$	775.4
Supporting remaining products			19.9		7.3		27.2			31.3		10.1		41.4
Total non-traded securities		$	551.7	$	18.5	$	570.2		$	790.9	$	25.9	$	816.8

Page 21

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

TOTAL INVESTMENTS (Continued)

Debt securities reflect net unrealized capital gains of $859 million (comprised of gross unrealized capital gains of $949 million and gross unrealized losses of $90 million) at December 31, 2002 compared with net unrealized capital gains of $266 million (comprised of gross unrealized capital gains of $470 million and gross unrealized losses of $204 million) at December 31, 2001. Of the net unrealized capital gains at December 31, 2002, $295 million relate to assets supporting discontinued products and $159 million relate to experience-rated products. Of the net unrealized capital gains at December 31, 2001, $107 million relate to assets supporting discontinued products and $64 million relate to experience-rated products.

Equity securities reflect net unrealized capital gains of $2 million (comprised of gross unrealized capital gains of $7 million and gross unrealized losses of $5 million) at December 31, 2002 compared with net unrealized capital gains of $8 million (comprised of gross unrealized capital gains of $24 million and gross unrealized losses of $16 million) at December 31, 2001.

If management believes a decline in the value of a particular investment is temporary, the decline is recorded as an unrealized loss in Shareholders’ Equity, consistent with the guidance of FAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. If the decline is “other-than-temporary”, the carrying value of the investment is written down and a realized loss is recorded in the Consolidated Statement of Income. The Company’s impairment analysis is discussed in more detail in Capital Gains and Losses below. As of December 31, 2002 and 2001, the amount of gross unrealized losses and related fair value, by investment type included in our Shareholders’ Equity were as follows:

		December 31, 2002					December 31, 2001
(Millions)		Fair Value		Unrealized Losses				Fair Value			Unrealized Losses
Debt securities:
	Supporting discontinued and experienced-rated products	$	495.4		$	54.3			$	1,697.0	$	97.6
	Supporting remaining products		804.9			35.8				2,347.3		106.4
Total		$	1,300.3		$	90.1			$	4,044.3	$	204.0
Equity securities:
	Supporting discontinued and experienced-rated products	$	7.5		$	4.2			$	38.5	$	3.8
	Supporting remaining products		1.2			.4				16.2		11.9
Total		$	8.7		$	4.6			$	54.7	$	15.7

At December 31, 2002 and 2001, debt and equity securities which were non-investment grade and non-rated represented approximately 2.3% and 3.5%, respectively, of the total debt and equity security portfolio (.7% related to non-investment grade and non-rated debt and equity securities supporting experience-rated and discontinued products at December 31, 2002 and 2001) and approximately 54.0% and 54.2%, respectively, of total unrealized losses related to securities which were non-investment grade and non-rated (30.8% and 20.5%, respectively, related to securities supporting experience-rated and discontinued products).

Page 22

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

TOTAL INVESTMENTS (Continued)

As of December 31, 2002 and 2001, the amount of unrealized losses and related fair value for debt and equity securities in an unrealized loss position for greater than nine months were as follows:

		December 31, 2002					December 31, 2001
(Millions)		Fair Value		Unrealized Losses				Fair Value		Unrealized Losses
Debt and equity securities:
	Supporting discontinued and experienced-rated products	$	321.4		$	41.8		$	685.4	$	63.3
	Supporting remaining products		218.3			26.2			405.0		72.9
Total (1)		$	539.7		$	68.0		$	1,090.4	$	136.2

(1) At December 31, 2002, securities with a fair value of less than 80% of amortized costs had a fair value of $24.0 million and unrealized losses of $9.2 million (includes securities supporting discontinued and experience-rated products with a fair value of $7.1 million and unrealized losses of $2.0 million). At December 31, 2001, securities with a fair value of less than 80% of amortized cost had a fair value of $85.5 million and unrealized losses of $79.3 million (includes securities supporting discontinued and experience-rated products with a fair value of $40.9 million and unrealized losses of $29.5 million).

The Company had no material unrealized losses on individual debt or equity securities at December 31, 2002 or 2001.

The maturity dates for debt securities in an unrealized loss position as of December 31, 2002 and 2001 were as follows:

		December 31, 2002
			Supporting discontinued				Supporting remaining
			and experience-rated products				products				Total
			Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Millions)			Value		Losses		Value		Losses		Value		Losses
Due to mature:
	Less than one year		$	25.5	$	4.6	$	27.9	$	1.7	$	53.4	$	6.3
	One year through five years			30.5		3.6		216.9		5.3		247.4		8.9
	After five years through ten years			47.7		5.4		198.9		9.5		246.6		14.9
	Greater than ten years			391.7		40.7		350.7		19.3		742.4		60.0
	Mortgage-backed securities			—		—		10.5		—		10.5		—
Total			$	495.4	$	54.3	$	804.9	$	35.8	$	1,300.3	$	90.1

		December 31, 2001
			Supporting discontinued				Supporting remaining
			and experience-rated products				products				Total
			Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Millions)			Value		Losses		Value		Losses		Value		Losses
Due to mature:
	Less than one year		$	3.0	$	—	$	5.9	$	0.1	$	8.9		$	0.1
	One year through five years			119.4		6.5		344.0		27.0		463.4			33.5
	After five years through ten years			322.7		33.0		886.1		34.7		1,208.8			67.7
	Greater than ten years			1,146.8		57.0		751.3		41.3		1,898.1			98.3
	Mortgage-backed securities			105.1		1.1		360.0		3.3		465.1			4.4
Total			$	1,697.0	$	97.6	$	2,347.3	$	106.4	$	4,044.3		$	204.0

Page 23

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

TOTAL INVESTMENTS (Continued)

Capital Gains and Losses

The Company periodically reviews its debt and equity securities to determine whether a decline in fair value below the carrying value is other than temporary. If a decline in market value is considered other than temporary, the cost basis/carrying amount of the security is written down and the amount of the write-down is included in earnings. The Company analyzes all relevant facts and circumstances for each investment when performing this analysis, in accordance with the guidance of FAS No. 115 and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 59, Accounting for Noncurrent Marketable Equity Securities. The available guidance on the determination of whether a decline in the value of an investment is other-than-temporary requires management to exercise significant diligence and judgment in the consideration of whether an unrealized loss is other-than-temporary.

Among the factors considered in evaluating whether a decline is other-than-temporary, management considers whether the decline in fair value results from a change in the quality of the investment security itself, whether the decline results from a downward movement in the market as a whole, the prospects for realizing the carrying value of the security based on the investee’s current and short-term prospects for recovery and other factors. For unrealized losses deemed to be the result of market conditions (e.g., increasing interest rates, volatility due to conditions in the overall market, etc.) or industry-related events, the Company determines if there exists an expectation for a reasonable market recovery and whether management has the intent and ability to hold the investment until maturity or market recovery is realized. In such a case, an other-than-temporary impairment is generally not recognized.

The Company measures other-than-temporary losses based on the valuation of an investment, including in-house credit analyst expectations of future performance, the current market environment and current market values. Based on the Company’s evaluation, if any factors reviewed, individually or in combination, indicate that a decline in fair value below its carrying value is other-than-temporary, the Company records an impairment charge in earnings.

The risks inherent in assessing the impairment of an investment include the risk that market factors may differ from the Company’s expectations; facts and circumstances factored into our assessment may change with the passage of time; or the Company may decide to subsequently sell the investment.

For 2002, net realized capital gains were $34 million ($22 million after tax) and included net investment write-downs of $83 million ($54 million after tax). The majority of these impairments were taken in the telecommunications and transportation sectors. Throughout 2002, the market values of telecommunication companies and assets declined precipitously, resulting in the bankruptcy of numerous companies, resulting in the Company’s decision to impair these investments. Also, during 2002, impairments were taken in the transportation sector as the market values of companies in the airline industry declined significantly as a result of widespread financial difficulties. For 2001, net realized capital gains were $96 million ($74 million after tax) and included net investment write-downs of $49 million ($32 million after tax). In 2001, the majority of the impairment losses recognized were taken in the telecommunications sector as the market values of high-yield telecommunication companies declined primarily as a result of their inability to raise capital. For the year ended December 31, 2000, net realized capital losses were $40 million ($14 million after tax) and include net investment write-downs of $58 million ($38 million after tax). In 2000, the majority of the impairments were taken in the banking/finance and telecommunications sectors. The factors contributing to the impairment losses recognized in 2002, 2001 and 2000 did not impact other material investments held at the time. The Company had no material realized losses on individual debt or equity securities during 2002 or 2001.

Page 24

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

TOTAL INVESTMENTS (Continued)

The Company has been able to earn contingent consideration under a long-term strategic provider relationship with Magellan, the purchaser of HAI. The Company recognized the final installment of this contingent consideration under this agreement of approximately $60 million pretax during the second quarter of 2002. This amount was due in February 2003, but was not paid and Magellan has announced that it is experiencing financial difficulties. Based on the Company’s discussions with Magellan regarding their plans to address these issues, the Company currently believes it will ultimately recover the full amount due.

Mortgage Loans

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

(Millions)	2002		2001
Supporting discontinued products	$	763.2	$	822.1
Supporting experience-rated products		387.6		563.1
Supporting remaining products		622.4		659.8
Total mortgage loans	$	1,773.2	$	2,045.0

The mortgage loan portfolio balance represented 9% and 11% of the Company’s total invested assets at December 31, 2002 and 2001, respectively. Problem, restructured and potential problem loans included in mortgage loans were $51 million at December 31, 2002 and $174 million at December 31, 2001, of which 82% at December 31, 2002 and 92% at December 31, 2001 support discontinued and experience-rated products. Specific impairment reserves on these loans were $11 million at December 31, 2002 and $26 million at December 31, 2001. Refer to Notes 2 and 7 of Notes to Consolidated Financial Statements for additional information.

At December 31, 2002 scheduled mortgage loan principal repayments were as follows:

(Millions)
2003	$	261.0
2004		156.6
2005		81.5
2006		136.8
2007		251.1
Thereafter		897.5

Outlook

Net investment income is projected to be lower for 2003, compared to 2002, due primarily to lower yields.

Risk Management and Market-Sensitive Instruments

The Company manages interest rate risk by seeking to maintain a tight duration band where appropriate, while credit risk is managed by seeking to maintain high average quality ratings and diversified sector exposure within the debt securities portfolio. In connection with its investment and risk management objectives, the Company also uses financial instruments whose market value is at least partially determined by, among other things, levels of or changes in interest rates (short-term or long-term), duration, prepayment rates, equity markets or credit ratings/spreads. The Company’s use of derivatives is generally limited to hedging purposes and has principally consisted of using interest rate swap agreements, forward contracts and futures contracts. These instruments, viewed separately, subject the Company to varying degrees of interest rate, equity price and credit risk. However, when used for hedging, the expectation is that these instruments would reduce overall risk. Refer to “Liquidity and Capital Resources – Long-term Debt” and Note 8 of Notes to Consolidated Financial Statements for additional information.

Page 25

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

TOTAL INVESTMENTS (Continued)

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

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

Management also reviews, on a quarterly basis, the impact of hypothetical net losses in the Company’s consolidated near-term financial position, results of operations and cash flows assuming certain reasonably possible changes in market rates and prices were to occur. The potential effect of interest rate risk on near-term net income, cash flow and fair value was determined based on commonly used models. The models project the impact of interest rate changes on a wide range of factors, including duration, prepayment, put options and call options. Fair value was estimated based on the net present value of cash flows or duration estimates using a representative set of likely future interest rate scenarios. The assumptions used were as follows: an immediate increase of 100 basis points in interest rates (which the Company believes represents a moderately adverse scenario and is approximately equal to the historical annual volatility of interest rate movements for the Company’s intermediate-term available-for-sale debt securities) and an immediate decrease of 25% in prices for domestic equity securities.

Based on the Company’s overall exposure to interest rate risk and equity price risk, the Company believes that these changes in market rates and prices would not materially affect the consolidated near-term financial position, results of operations or cash flows of the Company as of December 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

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

Cash flows provided by (inflow) operating activities were approximately $306 million for 2002. Excluding the impact of changes in insurance reserves related to the Large Case Pensions business segment which are included in operating activities but are funded from sales of investments, cash flows provided by operating activities were approximately $579 million. Uses of operating cash reflect the payment of approximately $974 million from estimated reserves the Company held for members that lapsed during 2002. This was partially offset by the collection of an estimated $170 million of premiums receivable for these lapsed members. Cash flows provided by operating activities also reflect approximately $176 million for payments related to actions covered by severance and facilities reserves. Refer to the “Consolidated Statements of Cash Flows” for additional information.

In 2003, the Company expects cash flows from operations to be significantly less than income levels due primarily to continued medical claim payments for lapsed members and payments on severance and facilities reserves.

Page 26

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

LIQUIDITY AND CAPITAL RESOURCES (Continued)

Dividends

On September 27, 2002, the Board declared an annual cash dividend of $.04 per common share to shareholders of record at the close of business on November 15, 2002. The dividend was paid on November 29, 2002. The Board reviews the Company’s common stock dividend annually. Among the factors considered by the Board in determining the amount of the dividend are the Company’s results of operations and the capital requirements, growth and other characteristics of its businesses.

Financings, Financing Capacity and Capitalization

At December 31, 2002, the Company’s borrowings were $1.6 billion of long-term senior notes and there was no short-term debt outstanding. The Company’s total debt to capital ratio (total debt divided by total debt and shareholders’ equity, adjusted for unrealized gains or losses on available-for-sale investment securities) was 19.6% at December 31, 2002. Refer to Note 15 of Notes to Consolidated Financial Statements for additional information.

The ratings of Aetna Inc. and its subsidiaries follow:

		Rating Agencies
						Moody's
						Investors		Standard
		A.M. Best		Fitch**		Service		& Poor's
Aetna Inc. (senior debt)
	October 30, 2002		*	BBB+		Baa3		BBB
	February 27, 2003 (1)		*	BBB+		Baa3		BBB
Aetna Inc. (commercial paper)
	October 30, 2002		*		F2		P3		A2
	February 27, 2003(1)		*		F2		P3		A2
Aetna Life Insurance Company (“ALIC”) (financial strength)
	October 30, 2002		A-		A+		A3		A-
	February 27, 2003 (1)		A-		A+		A3		A-

*	Nonrated by the agency.
**	Formerly known as Duff & Phelps.
(1)	A.M. Best has the ALIC rating on outlook-positive. Fitch has the Aetna Inc. senior debt and ALIC ratings on outlook-stable. Moody’s has the Aetna Inc. senior debt and commercial paper and ALIC ratings on outlook-stable. Standard & Poor’s has the Aetna Inc. senior debt and ALIC ratings on outlook-stable.

On February 13, 2002, Moody’s Investors Service downgraded the Company’s senior debt rating from Baa2 to Baa3, the Company’s commercial paper rating from P2 to P3 and ALIC’s financial strength rating from A2 to A3. This downgrade has not materially affected either the Company’s ability to borrow or the cost of borrowing. The Company’s ability to borrow under its commercial paper program, as well as the cost of such borrowings, could be adversely affected if its ratings were downgraded further, however a ratings downgrade would not affect the Company’s ability to borrow under its revolving credit facilities as an alternative. On January 14, 2003, Fitch improved its ratings outlook from negative to stable for the Company’s senior debt rating and ALIC’s financial strength rating. On January 30, 2003, A.M. Best improved its ratings outlook from stable to positive for ALIC’s financial strength rating.

The Company continually monitors existing and alternative financing sources to support its capital and liquidity needs, including, but not limited to, debt issuance, preferred or common stock issuance and pledging or selling of assets.

Page 27

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

LIQUIDITY AND CAPITAL RESOURCES (Continued)

Long-term Debt

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

In December 2001, the Company entered into an interest rate swap agreement to convert the fixed rate of 8.5% on $350 million of its senior notes to a variable rate of three-month LIBOR plus 159.5 basis points (approximately 3.02% at December 31, 2002). In December 2002, the Company also entered into an interest rate swap agreement to convert the fixed rate of 8.5% on an additional $200 million of its senior notes to a variable rate of three-month LIBOR plus 254.0 basis points (approximately 3.95% at December 31, 2002). As a result of these swap agreements, the Company’s effective interest rate on its long-term debt was 6.99% during 2002. In accordance with the Company’s accounting policy for fair value hedges, the change in the fair value of the interest rate swaps and the loss or gain on the hedged senior notes attributable to the hedged interest rate risk are recorded in current period earnings. No material changes in value occurred during the period ended December 31, 2002. Because the terms of the interest rate swap agreements match the terms of the senior notes, the gain or loss on the swaps and the senior notes will generally be offsetting. The swap agreements contain bilateral credit protection covenants which, depending on credit ratings, obligates each party to post collateral equal to the fair value of the swaps. As of February 26, 2003, the Company was not required to post collateral for the $350 million interest rate swap, but did post $2 million for the $200 million interest rate swap.

Short-term Debt

The Company has significant short-term liquidity supporting its businesses. The Company uses short-term borrowings from time to time to address timing differences between cash receipts and disbursements. The maximum amount of domestic short-term borrowings outstanding during 2002 was $145 million. The Company’s short-term borrowings consist of a commercial paper program that relies on backup revolving credit facilities, which together provide for an aggregate borrowing capacity of $800 million. The Company’s credit facilities consist of a $300 million credit facility which terminates in November 2003 and a $500 million credit facility which terminates in November 2005.

These facilities contain financial covenants. Under the terms of its credit facilities, the Company is required to maintain a minimum level of shareholders’ equity, excluding net unrealized capital gains and losses, as of each fiscal quarter end. The required minimum level is increased by 50% of the Company’s consolidated net income each quarter beginning with the quarter ending March 31, 2003, and is decreased by up to $150 million for certain non-recurring after-tax charges (“excluded charges”). At December 31, 2002, the Company met its required minimum level of approximately $5 billion. The Company is also required to maintain its ratio of total debt to consolidated earnings as of each fiscal quarter end at or below 3.0. For this purpose, consolidated earnings equals, for the period of four consecutive quarters, net income plus interest expense, income tax expense, depreciation expense, amortization expense, certain excluded charges, the goodwill impairment resulting from the adoption of FAS No. 142 and any extraordinary gains or losses. The Company met this requirement at December 31, 2002. Failure to meet the financial covenants would affect both the Company’s ability to borrow under the facilities and the commercial paper program.

Page 28

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

LIQUIDITY AND CAPITAL RESOURCES (Continued)

Common Stock Transactions

During the second quarter of 2002, the Company repurchased approximately 2.1 million shares of common stock at a cost of approximately $104 million, completing a previous share repurchase program. On June 28, 2002, the Board authorized a new share repurchase program for the repurchase of up to 5 million shares of common stock (not to exceed an aggregate purchase price of $250 million). During the remainder of 2002, the Company repurchased approximately 1.5 million shares of common stock at a cost of approximately $61 million. Also, during 2002, the Company issued approximately 9.3 million shares of common stock for benefit plans, including approximately 8.4 million shares related to stock option exercises. Refer to Note 16 of Notes to Consolidated Financial Statements for further discussion related to the Company’s stock option grant to eligible employees and Note 14 of Notes to Consolidated Financial Statements for information on the shareholder approved Employee Stock Purchase Plan.

For the full year 2002, the Company had weighted average common shares, including common share equivalents, of approximately 153 million (refer to Note 5 of Condensed Notes to Consolidated Financial Statements).

Financing Obligations

The Company’s financing obligations generally include debt, lease payment obligations and commitments to fund certain of its investments in equity limited partnership investments and commercial mortgage loans. At December 31, 2002, annual payments required by the Company, through 2007, relating to these financing obligations were as follows:

(Millions)	2003		2004		2005		2006		2007
Long-term debt (1)	$	128.1	$	128.1	$	128.1	$	550.4	$	94.9
Noncancelable leases		181.8		147.5		112.1		81.8		67.6
Funding requirements for equity limited partnership investments		151.7		51.1		32.0		30.0		14.4
Funding requirements for commercial mortgage loans		44.0		—		—		—		—
Total	$	505.6	$	326.7	$	272.2	$	662.2	$	176.9

(1) The interest payments for each of the periods presented do not consider the Company’s interest rate swap agreements.

Noncancelable lease payments in the table above include approximately $11 million in 2003 declining to approximately $7 million in 2007 relating to a leasing program with an independent third party grantor trust primarily for the lease of a corporate aircraft and certain office furniture. The total value of the assets under this leasing program at December 31, 2002 was approximately $54 million. For 2002, this arrangement was classified as an operating lease and therefore the related assets and liabilities are not included in the Company’s Consolidated Balance Sheet. Beginning with the third quarter of 2003, the Company will consolidate this entity in accordance with Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (refer to Note 2 of Notes to Consolidated Financial Statements for more information). The Company may terminate the lease program at any time by purchasing the assets at cost or dissolving the grantor trust through liquidation. If the assets were sold to a third party at less than cost to the grantor trust, the Company’s maximum exposure under a residual value guarantee was approximately $48 million as of December 31, 2002.

The Company also uses derivative instruments, generally limited to hedging purposes, principally consisting of interest rate swap agreements, forward contracts and futures contracts. These derivative instruments are not expected to materially adversely affect the near-term financial position or cash flows of the Company. Refer to “Total Investments - Risk Management and Market-Sensitive Investments” for more information.

Page 29

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

LIQUIDITY AND CAPITAL RESOURCES (Continued)

Other than as noted above, the Company does not have any material off-balance sheet arrangements, trading activities involving non-exchange traded contracts accounted for at fair value or relationships with persons or entities that derive benefits from a non-independent relationship with the Company or the Company’s related parties.

Restrictions on Certain Payments by the Company

In addition to general state law restrictions on payments of dividends and other distributions to shareholders applicable to all corporations, HMOs and insurance companies are subject to further state regulations that, among other things, may require those companies to maintain certain levels of equity, and restrict the amount of dividends and other distributions that may be paid to their parent corporations. These regulations are not directly applicable to Aetna Inc., as a holding company, since it is not an HMO or insurance company. The additional regulations applicable to Aetna Inc.’s HMO and insurance company subsidiaries are not expected to affect the ability of Aetna Inc. to service its debt, meet its other financing obligations or pay dividends, or the ability of any of Aetna Inc.’s subsidiaries to service debt or other financing obligations, if any. Under regulatory requirements, the amount of dividends that may be paid to Aetna Inc. by its domestic insurance and HMO subsidiaries at December 31, 2002 without prior approval by state regulatory authorities is approximately $505 million in the aggregate.

Solvency Regulation

The National Association of Insurance Commissioners (“NAIC”) utilizes risk-based capital (“RBC”) standards for life insurance companies that are designed to identify weakly capitalized companies by comparing each company’s adjusted surplus to its required surplus (“RBC ratio”). The RBC ratio is designed to reflect the risk profile of life insurance companies. Within certain ratio ranges, regulators have increasing authority to take action as the RBC ratio decreases. There are four levels of regulatory action, ranging from requiring insurers to submit a comprehensive plan to the state insurance commissioner to requiring the state insurance commissioner to place the insurer under regulatory control. At December 31, 2002, the RBC ratio of each of the Company’s primary insurance subsidiaries was above the level that would require regulatory action. The RBC framework described above for insurers has been extended by the NAIC to health organizations, including HMOs. Although not all states had adopted these rules at December 31, 2002, at that date, each of the Company’s active HMOs had a surplus that exceeded either the applicable state net worth requirements or, where adopted, the levels that would require regulatory action under the NAIC’s RBC rules. Refer to Note 17 of Notes to Consolidated Financial Statements for information relating to the rules on codification of statutory accounting principles. External rating agencies use their own RBC standards as part of determining a company’s rating.

CRITICAL ACCOUNTING POLICIES

The accounting policies described below are those the Company considers critical in preparing its Consolidated Financial Statements. These policies include significant estimates made by management using information available at the time the estimates are made. However, as described below, these estimates could change materially if different information or assumptions were used. Also, these estimates may not ultimately reflect the actual amounts of the final transactions that occur. The descriptions below are summarized and have been simplified for clarity. A more detailed description of the significant accounting policies used by the Company in preparing its financial statements is included in Note 2 of Notes to the Consolidated Financial Statements.

Page 30

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

CRITICAL ACCOUNTING POLICIES (Continued)

Revenue Recognition (Allowance for Estimated Terminations and Uncollectable Accounts)

The Company’s revenue is principally derived from premiums and fees billed to customers in the Health Care and Group Insurance businesses. In Health Care, revenue is recognized based on customer billings, which reflect contracted rates per employee and the number of covered employees recorded in Company records at the time the billings are prepared. Billings are generally sent monthly for coverage during the following month. In Group Insurance, premium for group life and disability products is recognized as revenue, net of allowances for uncollectable accounts, over the term of coverage. Amounts received before the period of coverage begins are recorded as unearned premiums.

Health Care billings may be subsequently adjusted to reflect changes in the number of covered employees due to terminations, etc. These adjustments are known as retroactivity adjustments. The Company estimates the amount of future retroactivity each period and adjusts the billed revenue accordingly. The estimates are based on historical trends, premiums billed, the amount of contract renewal activity during the period and other relevant information. As information regarding actual retroactivity becomes known, the Company refines its estimates and records any required adjustments at that time. A significant change in the level of retroactivity would have a significant effect on Health Care’s results of operations.

The Company also estimates the amount of uncollectable receivables each period and establishes an allowance for uncollectable amounts. The amount of the allowance is based on the age of unpaid amounts, information about the creditworthiness of customers, and other relevant information. Estimates of uncollectable amounts are revised each period, and changes are recorded in the period they become known. A significant change in the level of uncollectable amounts would have a significant effect on the Company’s results of operations.

Health Care and Insurance Liabilities

The Company establishes health care and insurance liabilities for benefit claims that have been reported but not paid, claims that have been incurred but not reported and future policy benefits earned under insurance contracts. These reserves and the related benefit expenses are developed using actuarial principles and assumptions which consider a number of factors, including historical claim payment patterns and seasonality, which are described in the Notes to the Consolidated Financial Statements. For Health Care, the factor that has the greatest impact on the Company’s financial results is the medical cost trend, which is the rate of increase in health care costs. For Group Insurance, the important factors considered are the level of interest rates, expected investment returns, mortality rates, the rate that covered individuals suffer disability, and the recovery rate of those with disabilities.

Each period, the Company estimates the relevant factors, based primarily on historical data and uses this information to determine the assumptions underlying its reserve calculations. An extensive degree of judgment is used in this estimation process. For health care costs payable, the reserve balances and the related benefit expenses are highly sensitive to changes in the assumptions used in the reserve calculations. For example, a 100 basis point change in the estimated medical cost trend for Commercial HMO Risk products would have changed annual after-tax results by approximately $50 million for 2002. Any adjustments to prior period reserves are included in the benefit expense of the period in which the need for the adjustment becomes known. Due to the considerable variability of health care costs, adjustments to health reserves occur each quarter and are sometimes significant. For Group Insurance, and specifically disability reserves, a 100 basis point change in interest rates would result in approximately a 10 basis point change in the portfolio return rate for assets supporting these liabilities, due to the long-term nature of disability liabilities and related assets supporting these liabilities. A 10 basis point change in the portfolio rate would have changed after-tax results by approximately $2 million for 2002.

Page 31

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

CRITICAL ACCOUNTING POLICIES (Continued)

The Company discontinued certain Large Case Pensions products in 1993 and established a reserve to cover losses expected during the runoff period. Since 1993, there have been several adjustments to reduce this reserve that have increased net income. These adjustments occurred primarily because investment experience as well as mortality and retirement experience have been better than was projected at the time the products were discontinued. There can be no assurance that adjustments to the discontinued products reserve will occur in the future or that they will increase net income.

In cases where estimated health care and group insurance costs are so high that future losses on a given product are expected, the Company establishes premium deficiency reserves for the amount of the expected loss in excess of expected future premiums. Any such reserves established would normally cover expected losses until the next policy renewal dates for the related policies.

Investment Securities

Investment securities are classified as available for sale and recorded at fair value, and unrealized investment gains and losses are reflected in shareholders’ equity. Investment income is recorded when earned, and capital gains and losses are recognized when investments are sold. Investments are reviewed periodically to determine if they have suffered an impairment of value that is considered other than temporary. If investments are determined to be impaired, a capital loss is recognized at the date of determination.

Testing for impairment of investments also requires significant management judgment. The identification of potentially impaired investments, the determination of their fair value and the assessment of whether any decline in value is other than temporary are the key judgment elements. The discovery of new information and the passage of time can significantly change these judgments. Revisions of impairment judgments are made when new information becomes known, and any resulting impairment adjustments are made at that time. The current economic environment and recent volatility of securities markets increase the difficulty of determining fair value and assessing investment impairment. The same influences tend to increase the risk of potentially impaired assets.

Defined Benefit Pension and Other Post-Retirement Benefit (“OPEB”) Plans

The Company sponsors defined benefit pension and other postretirement plans. Refer to Note 14 of Notes to Consolidated Financial Statements. Major assumptions used in the accounting for these plans include the expected return on pension plan assets and the discount rate. Assumptions are determined based on Company information and market indicators, and are evaluated at each annual measurement date. A change in any of these assumptions would have an effect on the Company’s pension and postretirement plan costs.

The expected return on pension plan assets considers expected capital market returns over a long term horizon (i.e., 20 years), inflation rate assumptions and actual returns on an asset allocation of approximately 65% equity securities, 28% fixed income securities and 7% private real estate investments. Lower market interest rates and plan asset returns have resulted in declines in pension plan asset performance and funded status. As a result, the expected return on plan assets was reduced to 9.00% (from 9.25% for 2002 expense recognition) and the discount rate was reduced to 6.75% (from 7.50% at the previous measurement date). Pension and postretirement expense in 2003 is expected to increase by approximately $110 million as a result of these changes, as well as the continued decline in equity markets and the resulting impact on the fair value of pension plan assets. These changes will not impact required cash contributions to the pension plan, as the Company has met all minimum funding requirements as set forth by the Employee Retirement Income Security Act of 1974 (“ERISA”) and further, will not have a minimum funding requirement in 2003.

Page 32

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

CRITICAL ACCOUNTING POLICIES (Continued)

As part of expected 2003 operating cost savings initiatives, the Company expects to reduce the approximate $110 million increase in pension and postretirement expense discussed above through actions intended to bring overall benefit costs more in line with industry peers, both in terms of costs and benefit levels. In January 2003, the Company amended its postretirement plans, eliminating the medical subsidy provided to active employees who terminate employment subsequent to January 1, 2007 and eliminating the dental subsidy for active employees who terminate employment on or after January 1, 2003. As a result of these plan amendments, the Company expects to record a curtailment benefit of approximately $35 million pretax in the first quarter of 2003.

Goodwill and Other Acquired Intangible Assets

The Company has made previous acquisitions that included a significant amount of goodwill and other intangible assets. Effective January 1, 2002, goodwill is no longer amortized but was subject to a transitional impairment test upon adoption of FAS No. 142 as well as an annual (or under certain circumstances more frequent) impairment test based on its estimated fair value. Other intangible assets that meet certain criteria continue to be amortized over their useful lives and are also subject to an impairment test, based on estimated fair value. For these evaluations, the Company is using an implied fair value approach, which uses a discounted cash flow analysis and other valuation methodologies. These evaluations use many assumptions and estimates in determining an impairment loss, including certain assumptions and estimates related to future earnings to be derived from the Company’s ongoing turnaround initiatives previously discussed. If these turnaround initiatives do not achieve their earnings objectives, the assumptions and estimates underlying these goodwill impairment evaluations could be adversely affected.

GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS

An impairment of approximately $3.0 billion resulting from the initial application of FAS No. 142 has been classified as a cumulative effect adjustment for 2002. Subsequent impairments, if any, would be classified as an operating expense. During the fourth quarter of 2002, the Company performed an annual impairment test, in conjunction with its annual planning process, and determined there were no additional impairment losses.

Upon adoption of FAS No. 142, the transition provisions of FAS No. 141, Business Combinations, also became effective. These transition provisions specify criteria for determining whether an acquired intangible asset should be recognized separately from goodwill. Intangible assets that meet certain criteria will qualify for recording on the Consolidated Balance Sheet and will continue to be amortized over their useful lives in the Consolidated Statement of Income. Such intangible assets are subject to a periodic impairment test based on estimated fair value. As a result, the Company reclassified its work force acquired intangible asset of $25.3 million at December 31, 2001 to goodwill. Refer to Notes 2 and 6 of Condensed Notes to Consolidated Financial Statements for more information on the Company’s goodwill and other acquired intangible assets.

Under accounting principles generally accepted in the United States of America in effect through December 31, 2001, these assets were amortized over their estimated useful lives, and were tested periodically to determine if they were recoverable from operating earnings on an undiscounted basis over their useful lives and to evaluate the related amortization periods. The Company wrote off goodwill of approximately $310 million ($238 million after tax) in the fourth quarter of 2000 under its accounting policy for goodwill recoverability in effect at that time, primarily related to its Medicare market exits, as well as to an investment in a medical information services business, given a re-evaluation of its strategy for this business.

Page 33

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

NEW ACCOUNTING STANDARDS

Refer to Note 2 of Notes to Consolidated Financial Statements for a discussion of recently issued accounting standards.

REGULATORY ENVIRONMENT

General

Our operations are subject to comprehensive and detailed state and federal regulation throughout the United States in the jurisdictions in which we do business. Supervisory agencies, including (depending on the state) state health, insurance, managed care and securities departments, have broad authority to:

• Grant, suspend and revoke licenses to transact business;

• Regulate many aspects of the products and services we offer;

• Assess fines, penalties and/or sanctions;

• Monitor our solvency and reserve adequacy; and

• Regulate our investment activities on the basis of quality, diversification and other quantitative criteria.

Our operations and accounts are subject to examination at regular intervals by these agencies. In addition, our current and past business practices are subject to review by other state and federal authorities. These reviews may result in changes to or clarifications of our business practices, and may result in fines, penalties or other sanctions.

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

Page 34

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

REGULATORY ENVIRONMENT (Continued)

HEALTH CARE REGULATION

General

The federal government and the governments of the states in which we conduct our health operations have adopted laws and regulations that govern our business activities in various ways. These laws and regulations may restrict how we conduct our businesses and may result in additional burdens and costs to us. Areas of governmental regulation include:

• Licensure

• Policy forms, including plan design and disclosures

• Premium rates and rating methodologies

• Underwriting rules and procedures

• Benefit mandates

• Eligibility requirements

• Service areas

• Market conduct

• Utilization review activities

• Payment of claims, including timeliness and accuracy of payment

• Member rights and responsibilities

• Sales and marketing activities

• Quality assurance procedures

• Disclosure of medical and other information

• Provider rates of payment

• Surcharges on provider payments

• Provider contract forms

• Delegation of risk and other financial arrangements

• Agent licensing

• Financial condition (including reserves) and

• Corporate governance

These laws and regulations are subject to amendments and changing interpretations in each jurisdiction.

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

Group Pricing and Underwriting Restrictions

Pricing and underwriting regulation by states includes various statutes that limit the flexibility of Aetna and other health insurers relative to their underwriting and rating practices, particularly for small employer groups. These laws vary by state. In general they apply to certain business segments and limit the ability of the Company to set prices or renew business, or both, based on specific characteristics of the group or the group’s prior claim experience.

Page 35

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

REGULATORY ENVIRONMENT (Continued)

Many of these laws limit the differentials in rates carriers may charge between new and renewal business, and/or between groups based on differing characteristics. They may also require that carriers disclose to customers the basis on which the carrier establishes new business and renewal rates, restrict the application of pre-existing condition exclusions and limit the ability of a carrier to terminate coverage of an employer group.

The federal Health Insurance Portability and Accountability Act of 1996, known as HIPAA, generally requires carriers that write small business in any market to accept for coverage any small employer group applying for a basic and standard plan of benefits. HIPAA also mandates guaranteed renewal of health care coverage for most employer groups, subject to certain defined exceptions, and provides for specified employer notice periods in connection with product and market withdrawals. The law further limits exclusions based on preexisting conditions for individuals covered under group policies to the extent the individuals had prior creditable coverage within a specified time frame. HIPAA is structured as a “floor” requirement, allowing states latitude to enact more stringent rules governing each of these restrictions. For example, certain states have modified HIPAA’s small group definition (2-50 employees) to include groups of one.

In addition, a number of states provide for a voluntary reinsurance mechanism to spread small group risk among participating carriers. In a small number of states, participation in this pooling mechanism is mandatory for all small group carriers. In general Aetna has elected not to participate in voluntary pools, but even in these states the Company may be subject to certain supplemental assessments related to the state’s small group experience.

HIPAA Administrative and Privacy Regulation; Gramm-Leach-Bliley Act

HIPAA and its regulations also impose a number of additional obligations on issuers of health insurance coverage and health benefit plan sponsors. The law authorizes the United States Department of Health and Human Services, known as HHS, to issue standards for administrative simplification, as well as privacy and security of medical records and other individually identifiable patient data. HIPAA requirements apply to self-funded group health plans, health insurers and HMOs and health care clearinghouses and health care providers that transmit member health information electronically. Regulations adopted to implement HIPAA also require that business associates acting for or on behalf of these HIPAA-covered entities be contractually obligated to meet HIPAA standards. HIPAA regulations establish significant criminal penalties and civil sanctions for noncompliance.

Although HIPAA was intended ultimately to reduce administrative expenses and burdens faced within the health care industry, we believe the law will initially bring about significant and, in some cases, costly changes. We expect that we will incur additional expenses to comply with, and that our business could be adversely affected by, these regulations in future periods.

HHS has released rules mandating the use of new standard formats with respect to certain health care transactions (e.g., health care claims information, plan eligibility, referral certification and authorization, claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments and coordination of benefits). HHS also has published rules requiring the use of standardized code sets and unique employer identifiers. We are required to comply with the transaction and code set requirements by October 16, 2003. We are required to comply with the employer identifier rules by July 30, 2004.

Page 36

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

REGULATORY ENVIRONMENT (Continued)

HHS also has developed new standards relating to the privacy of individually identifiable health information. In general, these regulations restrict the use and disclosure of medical records and other individually identifiable health information held by health plans and other affected entities in any form, whether communicated electronically, on paper or orally, subject only to limited exceptions. In addition, the regulations provide patients with new rights to understand and control how their health information is used. These regulations do not preempt more stringent state laws and regulations that may apply to us. We have to comply with the new privacy standards by April 14, 2003. HHS recently published final security regulations designed to protect member health information from unauthorized use or disclosure. We are required to comply with these security regulations by April 21, 2005.

In addition, provisions of the Gramm-Leach-Bliley Act generally require insurers to provide customers with notice regarding how their personal health and financial information is used and the opportunity to “opt out” of certain disclosures before the insurer shares non-public personal information with a non-affiliated third party. Like HIPAA, this law sets a “floor” standard, allowing states to adopt more stringent requirements governing privacy protection. The Gramm-Leach-Bliley Act also gives banks and other financial institutions the ability to affiliate with insurance companies, which may lead to new competitors in the insurance and health benefits fields.

LEGISLATIVE AND REGULATORY INITIATIVES

There has been a continuing trend of increased health care regulation at both the federal and state levels. The federal government or many states, or both, including states in which we have substantial health care membership, have enacted or are considering additional legislation or regulation related to health care plans. Legislation, regulation and initiatives relating to this trend include among other things, the following:

• Amending or supplementing the Employee Retirement Income Security Act of 1974 (“ERISA”) to impose greater requirements on the administration of employer-funded benefit plans or limit the scope of current ERISA pre-emption, which would among other things expose health plans to expanded liability for punitive and other extra-contractual damages

• Imposing assessments on health plans or health carriers, such as assessments for insolvency or high-risk pools, assessments for uncompensated care, or assessments to defray provider medical malpractice insurance costs

• Extending malpractice and other liability exposure for decisions made by health plans

• Mandating coverage for certain conditions and/or specified procedures, drugs or devices (e.g. infertility treatment, experimental pharmaceuticals)

• Prohibiting or limiting certain types of financial arrangements with providers, including among other things incentives based on utilization of services

• Imposing substantial penalties for failure to pay claims within specified time periods

• Regulating the composition of provider networks, such as any willing provider and pharmacy laws (which generally provide that providers and pharmacies cannot be denied participation in a managed care plan where the providers and pharmacies are willing to abide by the terms and conditions of that plan)

• Imposing payment levels for out-of-network care

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

Page 37

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

REGULATORY ENVIRONMENT (Continued)

• Mandating direct access to specialists for patients with chronic conditions, and direct access to OB/GYNs, chiropractors or other practitioners

• Mandating expanded consumer disclosures and notices

• Mandating expanded coverage for emergency services

• Mandating liberalized definitions of medical necessity

• Mandating internal and external grievance and appeal procedures (including expedited decision making and access to external claim review)

• Enabling the creation of new types of health plans or health carriers, which in some instances would not be subject to the regulations or restrictions that govern our operations

• Allowing individuals and small groups to collectively purchase health care coverage without any other affiliations

• Restricting health plan claim and related procedures

• Requiring the application of treatment and financial parity between mental health benefits and medical benefits within the same health plan

• Extending benefits available to workers who lose their jobs and other uninsureds

• Restricting or eliminating the use of formularies for prescription drugs

• Making health plans responsible for provider payments in the event of financial failure by a capitated physician group or other intermediary

• Creating or expanding state-sponsored health benefit purchasing pools, in which we may be required to participate

• Creating a single payer system where the government oversees or manages the provision of health care coverage

• Imposing employer or individual health coverage mandates

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

We also may be adversely impacted by court and regulatory decisions that expand the interpretations of existing statutes and regulations or impose medical malpractice or bad faith liability. Among other issues, the courts, including the United States Supreme Court and Federal and state courts, continue to consider cases addressing the preemptive effect of ERISA on state laws. In general, limitations to this pre-emption have the effect of increasing our costs or our liability exposures, or both. Legislative initiatives discussed above include state legislative activity in several states that, should it result in enacted legislation that is not preempted by ERISA, could increase our liability exposure and could result in greater state regulation of our operations.

Patients’ Bill of Rights Legislation

The U.S. Congress and various state legislatures continue to debate legislation containing various patient protection initiatives, including provisions that could expose the Company to unlimited economic damages, and certain punitive damages, for making a determination denying benefits or for delaying members’ receipt of benefits as a result of “medical necessity” and other coverage determinations. The Company cannot predict whether these measures will be enacted into law in 2003 or what form any such legislation might take.

Page 38

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

REGULATORY ENVIRONMENT (Continued)

ERISA

The provision of services to certain employee benefit plans, including certain health, group insurance and large case pensions benefit plans, is subject to ERISA, a complex set of laws and regulations subject to interpretation and enforcement by the Internal Revenue Service and the Department of Labor (the “DOL”). ERISA regulates certain aspects of the relationships between us and employers who maintain employee benefit plans subject to ERISA. Some of our administrative services and other activities may also be subject to regulation under ERISA. In addition, some states require licensure or registration of companies providing third-party claims administration services for benefit plans.

In 2001 the DOL promulgated extensive new regulations under ERISA setting out standards for claim payment and member appeals along with associated notice and disclosure requirements. These rules took affect for employers with plan years beginning on or after January 1, 2002 for disability plans, and on or after July 1, 2002 for health plans. The company has invested significant time and attention to compliance with these new standards, which represent an additional regulatory burden for the Company.

Large Case Pensions’ products and services are also subject to potential issues raised by certain judicial interpretations relating to ERISA. In December 1993, in a case involving an employee benefit plan and an insurance company, the United States Supreme Court ruled that assets in the insurance company’s general account that were attributable to a portion of a group pension contract issued to the plan that was not a “guaranteed benefit policy” were “plan assets” for purposes of ERISA and that the insurance company had fiduciary responsibility with respect to those assets. In reaching its decision, the Supreme Court declined to follow a 1975 DOL interpretive bulletin that had suggested that insurance company general account assets were not plan assets.

The Small Business Job Protection Act (the “Act”) was signed into law in 1996. The Act created a framework for resolving potential issues raised by the Supreme Court decision. The DOL issued final regulations as required by the Act on January 5, 2000. The regulations provide that insurers generally will not have ERISA fiduciary duties with respect to general account assets held under contracts that are not guaranteed benefit policies based on claims that those assets are plan assets provided certain disclosures are made to policyholders annually. The relief afforded extends to conduct that occurred before July 5, 2001. The conference report relating to the Act states that policies issued after December 31, 1998 that are not guaranteed benefit policies will be subject to ERISA’s fiduciary obligations. We are not currently able to predict how these matters may ultimately affect our businesses.

Page 39

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

REGULATORY ENVIRONMENT (Continued)

Medicare

In 1997, the federal government passed legislation establishing the Medicare+Choice program that changed the method for determining premiums that the government pays to HMOs for Medicare members. In general, the new method has reduced the premiums payable to us compared to the old method, although the level and extent of the reductions varies by geographic market and depends on other factors. The legislation also requires us to pay a “user fee.” Since 1997 the government has made a number of modifications to the payment levels, risk adjustment methodology and user fees under the Medicare+Choice program. The changes began to be phased in on January 1, 1998. As a result of these changes, as well as other factors including certain Medicare+Choice regulations issued by CMS, we decided to reduce contract service areas in certain markets effective January 1, 2003. We also had not renewed our Medicare+Choice contracts or reduced service areas in certain other areas effective January 1, 2002, January 1, 2001 and January 1, 2000. Refer to “Health Care” for more information. Uncertainty regarding future reimbursement levels and other requirements under the Medicare+Choice program make it difficult to predict whether the Company can continue to participate profitably in the program at its current level after 2003.

In 2003, Congress may add out-patient pharmaceutical products as a benefit under Medicare. We cannot predict whether Congress will add such a benefit in 2003, what form any such benefit might take or how any such benefit may ultimately affect our businesses.

HMO and Insurance Holding Company Laws

A number of states, including Pennsylvania and Connecticut, regulate affiliated groups of HMOs and insurers such as us under holding company statutes. These laws may require us and our subsidiaries to maintain certain levels of equity. Holding company laws and regulations generally require insurance companies and HMOs within an insurance holding company system to register with the insurance department of each state where they are domiciled and to file reports with those states’ insurance departments regarding capital structure, ownership, financial condition, intercompany transactions and general business operations. In addition, various notice or prior regulatory approval requirements apply to transactions between insurance companies, HMOs and their affiliates within an insurance holding company system, depending on the size and nature of the transactions. For information regarding restrictions on certain payments of dividends or other distributions by HMO and insurance company subsidiaries of our company, refer to “Liquidity and Capital Resources.”

The holding company laws for the states of domicile of Aetna and its subsidiaries also restrict the ability of any person to obtain control of an insurance company or HMO without prior regulatory approval. Under those statutes, without such approval (or an exemption), no person may acquire any voting security of an insurance holding company (such as our parent company, Aetna Inc.) that controls an insurance company or HMO, or merge with such a holding company, if as a result of such transaction such person would “control” the insurance holding company. “Control” is generally defined as the direct or indirect power to direct or cause the direction of the management and policies of a person and is presumed to exist if a person directly or indirectly owns or controls 10% or more of the voting securities of another person.

Page 40

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

REGULATORY ENVIRONMENT (Continued)

Guaranty Fund Assessments

Under guaranty fund laws existing in all states, insurers doing business in those states can be assessed (up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. Assessments generally are based on a formula relating to the Company’s premiums in the state compared to the premiums of other insurers. While we historically have recovered more than half of guaranty fund assessments through statutorily permitted premium tax offsets, significant increases in assessments could jeopardize future recovery of these assessments. Some states have similar laws relating to HMOs. In 2000, the Company incurred a $15 million after tax ($23 million pretax assessment) related to its New Jersey business. There were no material charges to earnings for guaranty fund obligations during 2002 or 2001.

FORWARD-LOOKING INFORMATION/RISK FACTORS

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

Certain information contained in this Management’s Discussion and Analysis is forward-looking within the meaning of the 1995 Act or Securities and Exchange Commission rules. This information includes, but is not limited to: (1) the information that appears under the headings “Outlook” in the discussion of results of operations of each of our businesses and (2) “Total Investments - Risk Management and Market-Sensitive Instruments”. In writing this Management’s Discussion and Analysis, where we use the following words, or variations of these words and similar expressions, we intend to identify forward-looking statements:

•
• Expects
Projects •
• Anticipates
Intends •
• Plans
Believes •
• Seeks
Estimates

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

Risk Factors

You should carefully consider each of the following risks and all of the other information set forth in this Management’s Discussion and Analysis or elsewhere in this Report. These risks and other factors may affect forward-looking statements, including those in this Management’s Discussion and Analysis or made elsewhere, and/or our business generally. The risks and uncertainties described below are not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

If any of the following risks and uncertainties develops into actual events, this could have a material adverse effect on our business, financial condition or results of operations. In that case, the trading price of our common stock could decline materially.

Page 41

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FORWARD-LOOKING INFORMATION/RISK FACTORS (Continued)

We are seeking to continue to improve the performance of our health care business by implementing a number of initiatives; if these initiatives do not achieve their objectives, our results could be materially adversely affected.

Our operating earnings improved significantly in 2002, following significant declines in 2001 and 2000, and we continue to implement a number of strategic and operational initiatives with the goal of further improving the performance of our business. These initiatives include, among other things, addressing rising medical costs, the new customer market approach we implemented in 2002, further improving the efficiency of operations, and improving relations with health care providers. The future performance of our business will depend in large part on our ability to design and implement these initiatives. If these initiatives do not achieve their objectives or result in increased medical costs, our results could be adversely affected. Refer to “Overview” for more information.

Our ability to address health care costs, implement increases in premium rates and the resulting effects on our membership affect our profitability.

Our profitability depends in large part on accurately predicting health care costs and on our ability to appropriately manage future health care costs through underwriting criteria, product design, negotiation of favorable provider contracts and medical management programs. The aging of the population and other demographic characteristics, advances in medical technology and other factors continue to contribute to rising health care costs. Government-imposed limitations on Medicare and Medicaid reimbursement have also caused the private sector to bear a greater share of increasing health care costs. Changes in health care practices, inflation, new technologies, the cost of prescription drugs and direct to consumer marketing by pharmaceutical companies, clusters of high cost cases, changes in the regulatory environment and numerous other factors affecting the cost of health care are beyond any health plan’s control and may adversely affect our ability to predict and manage health care costs, as well as our business, financial condition and results of operations.

We have taken and are taking several actions to address this situation. We are increasing premiums for business renewing in 2003. Premiums in the health business are generally fixed for one-year periods. Accordingly, future cost increases in excess of medical cost projections reflected in pricing cannot be recovered in the contract year through higher premiums. As a result, the Company’s results are particularly sensitive to the price increases it projects are necessary in advance of renewal of the business. There can be no assurances regarding the accuracy of medical cost projections assumed for pricing purposes and if the rate of increase in medical costs in 2003 were to exceed the levels projected for pricing purposes, our results would be materially adversely affected.

In addition to the challenge of managing health care costs, we face pressure to contain premium prices. Our customer contracts are subject to negotiation as customers seek to contain their costs. Alternatively, our customers may move to a competitor to obtain more favorable premiums.

Page 42

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FORWARD-LOOKING INFORMATION/RISK FACTORS (Continued)

Premium increases for 2003 renewals and other actions have reduced membership for 2003, compared to membership at December 31, 2002. The Company is taking steps to begin to increase its membership in 2003, although it expects that during the year its membership will be lower than membership at December 31, 2002. If membership declines more than expected or we lose accounts with favorable medical cost experience while retaining accounts with unfavorable medical cost experience, our business and results of operations may be adversely affected. The expected membership reductions will materially affect our revenue for 2003, and underscore our need to continue to seek to reduce our level of administrative expenses. In addition to premium increases, other factors that could contribute to a reduction in enrollment include: failure to obtain new customers; benefit changes; other market withdrawals; general economic downturn that results in reductions in workforce by existing customers or business failures; negative publicity and news coverage; and failure to attain or maintain nationally-recognized accreditations for health plans (such as accreditation by the National Committee for Quality Assurance). Refer to “Health Care - Outlook” for more information.

We hold reserves for expected claims, which are estimated, and these estimates are highly judgmental; if actual claims exceed reserve estimates (as they have in certain prior periods), our results could be materially adversely affected.

Health care costs payable reflect estimates of the ultimate cost of claims that have been incurred but not yet reported or reported but not yet paid. Health care costs payable are estimated periodically, and any resulting adjustments are reflected in the current-period operating results within health care costs. Health care costs payable are based on a number of factors, including those derived from historical claim experience. Most health care claims are not submitted to the Company until after the end of the quarter in which services are rendered by providers to members. As a result, an extensive degree of judgment is used in this estimation process, considerable variability is inherent in such estimates, and the adequacy of the estimate is highly sensitive to changes in medical claims payment patterns and changes in medical cost trends. A worsening (or improvement) of medical cost trend or changes in claim payment patterns from those that were used in estimating health care costs payable at December 31, 2002 would cause these estimates to change in the near term, and such a change could be material. For example, a 100 basis point change in the estimated medical cost trend for Commercial HMO Risk products would have changed annual after tax results for 2002 by approximately $50 million. This estimation process is a critical accounting policy for the Company. Refer to “Health Care” and “Critical Accounting Policies” for more information.

Our profitability may be adversely affected if we are unable to contract with providers on favorable terms.

Our profitability is dependent in part upon our ability to contract on favorable terms with hospitals, physicians and other health benefits providers. The failure to maintain or to secure new cost-effective health care provider contracts may result in a loss in membership or higher medical costs. In addition, our inability to contract with providers, or the inability of providers to provide adequate care, could adversely affect our business.

The health benefits industry is subject to negative publicity, which can adversely affect our profitability.

The health benefits industry is subject to negative publicity. Negative publicity may result in increased regulation and legislative review of industry practices, which may further increase our costs of doing business and adversely affect our profitability by:

• Adversely affecting our ability to market our products and services;

• Requiring us to change our products and services; or

• Increasing the regulatory burdens under which we operate.

Page 43

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FORWARD-LOOKING INFORMATION/RISK FACTORS (Continued)

We are party to a substantial amount of litigation; these cases and future cases may have a material adverse effect on us.

We are party to a number of class action lawsuits and other litigation. The majority of these cases relate to the conduct of our health care business and allege various violations of law. Many of these cases seek substantial damages (including punitive damages) and far-ranging changes in our practices. We may also be subject to additional litigation in the future. This litigation could materially adversely affect us, because of the costs of defending these cases, costs of settlement or judgments against us, or because of changes in our operations that could result from this litigation. Refer to Note 20 of Notes to Consolidated Financial Statements.

Our business activities are highly regulated and there are a number of current and planned initiatives being considered by federal and state governments; government regulation limits us in the conduct of our business and also subjects us to additional costs in complying with the requirements of governmental authorities; further regulation could also materially adversely affect our business.

Our business is subject to extensive regulation by state and federal governmental authorities. For example, there are a number of federal and state requirements restricting operations of health care plans (particularly HMOs). The federal and many state governments have enacted or are actively considering legislative and regulatory changes related to health products. At this time, we are unable to predict the impact of future changes, although we anticipate that some of these measures, if enacted, could adversely affect health operations through:

• Affecting premium rates,

• Reducing our ability to manage medical costs,

• Increasing medical costs and operating expenses,

• Increasing our exposure to lawsuits,

• Regulating levels and permitted lines of business,

• Imposing financial assessments, and

• Regulating business practices.

Recently, there has been heightened review by these regulators of the managed health care industry’s business practices, including utilization management and claim payment practices. As one of the largest national managed care organizations, we are regularly the subject of such reviews and several such reviews currently are pending, some of which may be resolved during 2003. These regulatory reviews could result in changes to or clarifications of our business practices, and also could result in material fines, penalties or other sanctions. Our business also may be adversely impacted by court and regulatory decisions that expand the interpretations of existing statutes and regulations, impose medical or bad faith liability, increase our responsibilities under ERISA, or reduce the scope of ERISA pre-emption of state law claims. For example, a federal appeals court recently held that in some circumstances ERISA does not preempt state law medical malpractice claims against health plans arising out of coverage denials on grounds of medical necessity.

It is uncertain whether we can recoup, through higher premiums or other measures, the increased costs of mandated benefits or the other increased costs that may be caused by this legislation or regulation, or by court and regulatory decisions. For more information regarding the Patients’ Bill of Rights, other important regulatory initiatives and related judicial developments, see “Regulatory Environment”.

We must comply with the requirements of the Health Insurance Portability and Accountability Act of 1996, also known as HIPAA, or face potential additional liability.

Page 44

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FORWARD-LOOKING INFORMATION/RISK FACTORS (Continued)

The Department of Health and Human Services, known as HHS, has promulgated certain regulations under HIPAA related to the privacy of individually identifiable health information, or protected health information. The new regulations require self-funded group health plans, health insurers and HMO’s, health care clearinghouses and certain providers to:

• Comply with various requirements and restrictions related to the use, storage and disclosure of protected health information;

• Adopt rigorous internal procedures to protect protected health information; and

• Enter into specific written agreements with business associates to whom protected health information is disclosed.

HHS also has recently published final security regulations designed to protect member health information from unauthorized use or disclosure. HIPAA establishes significant criminal penalties and civil sanctions for noncompliance.

For more information regarding these regulations, refer to “Regulatory Environment”.

Downgrades in our ratings may adversely affect our business, financial condition and results of operations.

Claims paying ability and financial strength ratings by recognized rating organizations have become an increasingly important factor in establishing the competitive position of insurance companies. Rating organizations continue to review the financial performance and condition of insurers, including Aetna Life Insurance Company and our other regulated subsidiaries. We believe our ratings are an important factor in marketing our products to certain of our customers, since ratings information is broadly disseminated and generally used throughout the industry. Certain of our businesses, particularly our Group Insurance business, would experience some run off of existing business or have the level of new business negatively impacted if the major rating agencies do not give a financial strength rating to the relevant subsidiary in the “A” rating category. In addition to claims paying and financial strength ratings of Aetna’s subsidiaries, rating organizations also provide ratings of Aetna Inc.’s senior debt and commercial paper. These ratings are broadly disseminated and used throughout the market place for debt instruments, and any decrease in these ratings could affect both the cost and availability of future borrowings. Each of the rating agencies reviews its ratings periodically and there can be no assurance that current ratings will be maintained in the future. Our ratings reflect each rating agency’s opinion of our financial strength, operating performance and ability to meet our debt obligations or obligations to policyholders, and are not evaluations directed toward the protection of investors in our common stock and should not be relied upon as such. For information regarding recent rating actions and the availability of borrowing, refer to “Liquidity and Capital Resources—Financings, Financing Capacity and Capitalization”.

Terrorism or the continued threat of terrorism could increase Health Care utilization and pharmacy costs and Group Insurance life and disability claims, although the Company cannot predict whether any such increases will occur.

Beyond obtaining coverage for the Company’s facilities, and some limited coverage for Group Insurance claims, there are few, if any, commercial options through which to transfer the exposure from terrorism away from the Company. For Group Insurance claims, the Company has certain reinsurance in place for certain types of catastrophic claims (and only if the losses are in excess of certain amounts, and subject to limits). However, following the events of September 11, 2001, reinsurers have generally sought to exclude many types of potential terrorism from coverage, and the Company’s reinsurance coverage excludes most types of terrorism while the Company’s Group Insurance policies generally do not contain similar exclusions. In addition, the Company’s Group Insurance members are concentrated in certain large, metropolitan areas.

Page 45

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

FORWARD-LOOKING INFORMATION/RISK FACTORS (Continued)

General market conditions affect our investments in debt and equity securities, mortgage loans and other investments, our income on those investments and our pension expenses.

Generally lower levels of interest rates on investments, such as those currently being experienced in United States financial markets, have negatively impacted the level of investment income earned by the Company in recent periods, and such lower levels of investment income would continue if these lower interest rates continue. We also expect our pension costs to increase in 2003 due to recent financial market conditions. For information regarding our expected pension costs for 2003, please refer to “Health Care – Outlook.”

In recent years, certain third parties to which we delegate selected functions, such as large physician practice management companies, have experienced financial difficulties, including bankruptcy, which may subject us to increased credit risk related to provider groups and in some cases cause us to incur duplicative claims expense.

In connection with the December 2000 spin-off of our Company from its predecessor, former Aetna, and merger of former Aetna’s international and financial services businesses with a subsidiary of ING Groep N.V., we have agreed to be liable for, and to indemnify ING for, certain former Aetna liabilities, including liabilities not related to our health care business.

In connection with the spin-off, we generally assumed all liabilities related to former Aetna’s health care and large case pensions businesses. In addition, we generally are responsible for former Aetna’s liabilities other than those arising out of former Aetna’s financial services or international businesses. These liabilities generally include the post-retirement pension and other benefits payable to all previous employees of former Aetna, liabilities arising out of significant litigation to which former Aetna is a party, all liabilities arising out of certain divestiture transactions consummated by former Aetna before the spin-off and tax liabilities relating to, or resulting from the treatment of, the spin-off. We have agreed to indemnify ING for all of these liabilities. Although management believes that it has established reserves and/or obtained insurance sufficient to cover such liabilities as we consider appropriate, we cannot assure you that these liabilities will not be materially in excess of these reserves and insurance. In that case, these liabilities may be materially adverse to our business and results of operations.

Government payors can determine premiums.

Although we have withdrawn from certain Medicare markets, we will still have operations in a number of Medicare markets. In government-funded health programs such as Medicare and Medicaid, the government payor determines the premium levels. If the government payor reduces the premium levels or increases premiums by less than our costs increase and we cannot offset these with supplemental premiums and changes in benefit plans, then we could be materially adversely affected. In addition, premiums for certain federal government employee groups are subject to retroactive adjustments by the federal government. These adjustments could materially adversely affect us.

Success of our business initiatives depends in part on continuing to develop and implement improvements in technology.

Our businesses depend in large part on our systems for processing claims and interacting with providers, employer plan sponsors and members, and our business strategy involves providing customers with easy to use products that leverage information to meet the needs of those customers. Our success is dependent in large part on implementing improvements and continuing to develop and enhance information systems that support our business processes in a cost efficient manner.

Page 46

Selected Financial Data

		For the Years Ended December 31,
(Millions, except per common share data)		2002			2001			2000			1999		1998
Total revenue		$	19,878.7		$	25,190.8		$	26,818.9		$	22,109.7	$	16,589.0
Income (loss) from continuing operations			393.2			(291.5	)		(127.4	)		399.4		450.4
Net income (loss)			(2,522.5	)		(279.6	)		127.1			716.5		846.8
Net realized capital gains (losses), net of tax (included above)			22.3			73.6			(14.2	)		21.4		189.0
Total assets			40,047.5			43,196.7			47,673.0			52,667.6		53,355.2
Total short-term debt			—			109.7			1,592.2			1,725.0		1,370.1
Total long-term debt			1,633.2			1,591.3			—			2,093.9		1,593.3
Aetna-obligated mandatorily redeemable preferred securities of subsidiary limited liability company holding primarily debentures guaranteed by former Aetna			—			—			—			—		275.0
Shareholders’ equity			6,980.0			9,890.3			10,127.1			10,703.2		11,429.5
Per common share data: (1)
Dividends declared (2)		$	.04		$	.04		$	—		$	—	$	—
Earnings (loss) per common share: (3)
Income (loss) from continuing operations:
	Basic		2.64			(2.03	)		(.90	)		2.56		2.74
	Diluted (4)		2.57			(2.03	)		(.90	)		2.54		2.72
Net income (loss):
	Basic		(16.94	)		(1.95	)		.90			4.76		5.49
	Diluted (4)		(16.49	)		(1.95	)		.90			4.72		5.40

(1)	Per common share data is based on former Aetna common shares and share equivalents through December 13, 2000 and Aetna Inc. thereafter. (Refer to Notes 1, 5 and 21.)
(2)	Prior to December 13, 2000, dividends were declared and paid by former Aetna to its shareholders and therefore such dividends are not included herein.
(3)	For 1999 (through the redemption date of July 19, 1999) and 1998, preferred stock dividends of former Aetna are deducted from income from continuing operations and net income as the preferred stock issued by former Aetna was for the acquisition of U.S. Healthcare, Inc. in 1996.
(4)	Since the Company reported a loss from continuing operations in 2001 and 2000, the effect of common stock equivalents has been excluded from earnings per common share computations for those years since including such securities would be anti-dilutive. As a result, diluted and basic per common share amounts for 2001 and 2000 are the same.

See Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations for significant events affecting the comparability of results as well as material uncertainties.

Page 47

Consolidated Statements of Income

			For the Years Ended December 31,
(Millions, except per common share data)			2002			2001			2000
Revenue:
	Health care premiums		$	15,036.1		$	19,940.4		$	21,746.6
	Other premiums			1,676.6			1,831.6			1,468.3
	Administrative services contract fees			1,842.6			1,835.2			1,925.9
	Net investment income			1,250.7			1,411.6			1,631.6
	Other income			38.4			75.9			86.6
	Net realized capital gains (losses)			34.3			96.1			(40.1	)
Total revenue				19,878.7			25,190.8			26,818.9
Benefits and expenses:
	Health care costs			12,452.8			17,938.8			18,884.1
	Current and future benefits			2,245.5			2,458.3			2,153.5
	Operating expenses:
		Salaries and related benefits		2,245.2			2,290.4			2,328.7
		Other		1,987.4			2,224.6			2,501.1
	Interest expense			119.5			142.8			248.2
	Amortization of goodwill			—			198.1			204.9
	Amortization of other acquired intangible assets			130.8			218.5			230.7
	Goodwill write-off			—			—			310.2
	Severance and facilities charges			161.0			192.5			142.5
	Reductions of reserve for anticipated future losses on discontinued products			(8.3	)		(94.5	)		(146.0	)
Total benefits and expenses				19,333.9			25,569.5			26,857.9
Income (loss) from continuing operations before income taxes (benefits)				544.8			(378.7	)		(39.0	)
Income taxes (benefits):
	Current			193.8			(13.6	)		242.1
	Deferred			(42.2	)		(73.6	)		(153.7	)
Total income taxes (benefits)				151.6			(87.2	)		88.4
Income (loss) from continuing operations				393.2			(291.5	)		(127.4	)
Discontinued operations, net of tax (Note 21):
	Income from operations			50.0			—			428.5
	Sale and spin-off related benefits (costs)			—			11.4			(174.0	)
Income (loss) before cumulative effect adjustments				443.2			(280.1	)		127.1
Cumulative effect adjustments, net of tax (Note 2)				(2,965.7	)		.5			—
Net income (loss)			$	(2,522.5	)	$	(279.6	)	$	127.1
Earnings (loss) per common share (Note 5):
Basic:
	Income (loss) from continuing operations		$	2.64		$	(2.03	)	$	(.90	)
	Income from discontinued operations, net of tax			.34			.08			1.80
	Income (loss) before cumulative effect adjustments			2.98			(1.95	)		.90
	Cumulative effect adjustments, net of tax			(19.92	)		—			—
	Net income (loss)		$	(16.94	)	$	(1.95	)	$	.90
Diluted (1):
	Income (loss) from continuing operations		$	2.57		$	(2.03	)	$	(.90	)
	Income from discontinued operations, net of tax			.33			.08			1.80
	Income (loss) before cumulative effect adjustments			2.90			(1.95	)		.90
	Cumulative effect adjustments, net of tax			(19.39	)		—			—
	Net income (loss)		$	(16.49	)	$	(1.95	)	$	.90

(1) Since the Company reported a loss from continuing operations in 2001 and 2000, the effect of common stock equivalents has been excluded from per common share computations for those years since including such securities would be anti-dilutive. As a result, diluted and basic per common share amounts for 2001 and 2000 are the same.

     See Notes to Consolidated Financial Statements.

Page 48

Consolidated Balance Sheets

		As of December 31,
(Millions, except share data)		2002			2001
Assets
Current assets:
	Cash and cash equivalents	$	1,802.9		$	1,398.2
	Investment securities		14,013.5			14,260.1
	Other investments		358.0			171.7
	Premiums receivable, net		392.0			572.7
	Other receivables, net		286.2			528.0
	Accrued investment income		214.3			232.3
	Collateral received under securities loan agreements		969.0			621.7
	Loaned securities		948.2			608.1
	Deferred income taxes		201.3			114.1
	Other current assets		163.9			185.9
Total current assets			19,349.3			18,692.8
Long-term investments			1,754.9			1,575.6
Mortgage loans			1,514.9			1,887.8
Investment real estate			308.8			359.7
Reinsurance recoverables			1,251.8			1,269.7
Goodwill, net			3,618.4			6,583.8
Other acquired intangible assets, net			546.9			703.0
Property and equipment, net			244.8			327.0
Deferred income taxes			582.5			360.5
Other long-term assets			211.0			146.8
Separate Accounts assets			10,664.2			11,290.0
Total assets		$	40,047.5		$	43,196.7
Liabilities and shareholders’ equity
Current liabilities:
	Health care costs payable	$	2,194.1		$	2,986.7
	Future policy benefits		778.1			800.5
	Unpaid claims		590.0			544.4
	Unearned premiums		184.1			208.0
	Policyholders’ funds		1,072.2			1,052.8
	Collateral payable under securities loan agreements		969.0			621.7
	Short-term debt		—			109.7
	Income taxes payable		322.5			147.4
	Accrued expenses and other current liabilities		1,608.8			1,316.1
Total current liabilities			7,718.8			7,787.3
Future policy benefits			8,333.3			8,621.5
Unpaid claims			1,177.8			1,203.6
Policyholders’ funds			1,867.3			2,245.1
Long-term debt			1,633.2			1,591.3
Other long-term liabilities			1,672.9			567.6
Separate Accounts liabilities			10,664.2			11,290.0
Total liabilities			33,067.5			33,306.4
Commitments and contingent liabilities (Notes 8 and 20)
Shareholders’ equity:
	Common stock and additional paid-in capital ($.01 par value, 756,277,772 shares authorized, 149,966,082 issued and outstanding in 2002 and $.01 par value, 759,900,000 shares authorized, 144,265,912 issued and outstanding in 2001)		4,070.9			3,913.8
	Accumulated other comprehensive income (loss)		(470.4	)		68.5
	Retained earnings		3,379.5			5,908.0
Total shareholders’ equity			6,980.0			9,890.3
Total liabilities and shareholders’ equity		$	40,047.5		$	43,196.7

See Notes to Consolidated Financial Statements.

Page 49

Consolidated Statements of Shareholders’ Equity

										Accumulated Other
										Comprehensive Income (Loss)
							Common Stock and
							Additional			Unrealized									Minimum
							Paid-in			Gains (Losses)			Foreign						Pension			Retained
(Millions, except share data)				Total			Capital			on Securities			Currency			Derivatives			Liability			Earnings
Balances at December 31, 1999				$	10,703.2		$	3,719.3		$	(206.1	)	$	(449.5	)	$	—		$	—		$	7,639.5
Comprehensive income:
	Net income				127.1																		127.1
	Other comprehensive income, net of tax:
			Net unrealized gains on securities ($486.5 pretax)(1)		316.2						316.2
			Foreign currency ($(50.9) pretax)		(39.9	)								(39.9	)
	Other comprehensive income				276.3
Total comprehensive income					403.4
Capital contributions from former Aetna					118.9			118.9
Dividends to former Aetna					(216.0	)																	(216.0	)
Outstanding shares cancelled (1,100 shares)					—			—
Sale and spin-off related transaction (141,670,551 shares issued) (Note 21)					(904.2	)		38.7			(80.7	)		495.1									(1,357.3	)
Common shares issued for benefit plans (948,000 share issued)					21.8			21.8
Balances at December 31, 2000					10,127.1			3,898.7			29.4			5.7			—			—			6,193.3
Comprehensive income:
	Net loss				(279.6	)																	(279.6	)
	Other comprehensive income, net of tax:
			Net unrealized gains on securities ($57.2 pretax) (1)		37.2						37.2
			Foreign currency ($(1.1) pretax)		(.7	)								(.7	)
			Derivative losses ($(4.8) pretax) (1)		(3.1	)											(3.1	)
	Other comprehensive income				33.4
Total comprehensive loss					(246.2	)
Common shares issued for benefit plans (4,247,361 shares)					110.7			110.7
Repurchase of common shares (2,600,000 shares)					(95.6	)		(95.6	)
Common stock dividends					(5.7	)																	(5.7	)
Balances at December 31, 2001					9,890.3			3,913.8			66.6			5.0			(3.1	)		—			5,908.0
Comprehensive income:
	Net loss				(2,522.5	)																	(2,522.5	)
		Other comprehensive loss, net of tax:
			Net unrealized gains on securities ($331.4 pretax) (1)		215.4						215.4
			Foreign currency ($.7 pretax)		.5									.5
			Derivative gains ($.6 pretax) (1)		.4												.4
			Minimum pension liability adjustment ($(1,161.8) pretax)		(755.2	)														(755.2	)
	Other comprehensive loss				(538.9	)
Total comprehensive loss					(3,061.4	)
Common shares issued for benefit plans (9,320,601 shares)					322.3			322.3
Repurchase of common shares (3,620,431 shares)					(165.2	)		(165.2	)
Common stock dividends					(6.0	)																	(6.0	)
Balances at December 31, 2002				$	6,980.0		$	4,070.9		$	282.0		$	5.5		$	(2.7	)	$	(755.2	)	$	3,379.5

(1) Net of reclassification adjustments (Refer to Note 10).

See Notes to Consolidated Financial Statements.

Page 50

Consolidated Statements of Cash Flows

				For the Years Ended December 31,
(Millions)				2002			2001			2000
Cash flows from operating activities:
	Net income (loss)			$	(2,522.5	)	$	(279.6	)	$	127.1
	Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
		Cumulative effect adjustments			2,965.7			(.7	)		—
		Income from discontinued operations			(50.0	)		(11.4	)		(254.5	)
		Severance and facilities charges			161.0			192.5			142.5
		Goodwill write-off			—			—			310.2
		Amortization of goodwill			—			198.1			204.9
		Amortization of other acquired intangible assets			130.8			218.5			230.7
		Depreciation and other amortization			170.7			181.0			190.1
		Amortization (accretion) of net investment premium (discount)			11.3			(26.3	)		(37.8	)
		Net realized capital (gains) losses			(34.3	)		(96.1	)		40.1
		Changes in assets and liabilities:
			Decrease in accrued investment income		18.0			28.0			9.2
			Decrease in premiums due and other receivables		352.9			495.8			115.2
			Net change in income taxes		218.4			(230.8	)		(13.9	)
			Net change in other assets and other liabilities		(64.8	)		(271.0	)		(231.9	)
			Net decrease in health care and insurance liabilities		(1,046.7	)		(432.0	)		(762.3	)
			Other, net		(4.1	)		—			—
Discontinued operations, net					—			—			1,457.0
Net cash provided by (used for) operating activities					306.4			(34.0	)		1,526.6
Cash flows from investing activities:
	Proceeds from sales and investment maturities of:
		Debt securities available for sale			15,679.9			17,561.8			13,093.9
		Equity securities			251.2			239.5			358.8
		Mortgage loans			602.3			400.8			534.6
		Investment real estate			74.3			6.3			29.5
		Other investments			3,321.0			4,866.5			5,166.8
		NYLCare Texas			—			—			420.0
	Cost of investments in:
		Debt securities available for sale			(15,452.3	)		(16,930.7	)		(12,081.3	)
		Equity securities			(114.9	)		(288.1	)		(235.7	)
		Mortgage loans			(296.3	)		(226.4	)		(364.8	)
		Investment real estate			(47.6	)		(17.9	)		(15.7	)
		Other investments			(3,251.4	)		(5,145.3	)		(5,395.6	)
	Increase in property and equipment				(155.5	)		(142.6	)		(36.9	)
	Other, net				—			—			7.3
Discontinued operations, net					—			—			(445.1	)
Net cash provided by investing activities					610.7			323.9			1,035.8
Cash flows from financing activities:
	Deposits and interest credited for investment contracts				127.1			170.4			237.2
	Withdrawals of investment contracts				(592.1	)		(795.0	)		(931.9	)
	Issuance of long-term debt				—			1,566.1			—
	Repayment of short-term debt				(109.7	)		(1,482.5	)		(132.8	)
	Capital contributions from former Aetna				—			—			118.9
	Dividends paid to former Aetna				—			—			(216.0	)
	Common shares issued under benefit plans				233.5			98.1			21.8
	Common shares repurchased				(165.2	)		(95.6	)		—
	Dividends paid to shareholders				(6.0	)		(5.7	)		—
	Other, net				—			—			(304.4	)
Discontinued operations, net					—			—			(296.4	)
Net cash used for financing activities					(512.4	)		(544.2	)		(1,503.6	)
Net increase in cash and cash equivalents of discontinued operations					—			—			(715.5	)
Net increase (decrease) in cash and cash equivalents of continuing operations					404.7			(254.3	)		343.3
Cash and cash equivalents, beginning of year					1,398.2			1,652.5			1,309.2
Cash and cash equivalents, end of year				$	1,802.9		$	1,398.2		$	1,652.5

See Notes to Consolidated Financial Statements

Page 51

Notes to Consolidated Financial Statements

1. Organization

The accompanying consolidated financial statements include Aetna Inc. (a Pennsylvania corporation) (“Aetna”) and its subsidiaries (collectively, the “Company”). As of December 31, 2002, the Company’s operations included three business segments: Health Care, Group Insurance and Large Case Pensions. Health Care consists of health and dental plans offered on both a risk basis (where the Company assumes all or a majority of the risk for health and dental care costs) and an employer-funded basis (where the plan sponsor under an administrative services contract (“ASC”), and not the Company, assumes all or a majority of this risk). Health plans include health maintenance organization (“HMO”), point-of-service (“POS”), preferred provider organization (“PPO”) and indemnity benefit products. The Group Insurance segment includes group life insurance products offered on a risk basis, as well as group disability and long-term care insurance products offered on both a risk and an employer-funded basis. Large Case Pensions manages a variety of retirement products (including pension and annuity products) primarily for defined benefit and defined contribution plans. These products provide a variety of funding and benefit payment distribution options and other services. The Large Case Pensions segment includes certain discontinued products. (Refer to Note 12 for additional information.)

The three segments are distinct businesses that offer different products and services. The Company’s chief operating decision maker evaluates financial performance and makes resource allocation decisions at these segment levels. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance of these business segments based on operating earnings (net income or loss, excluding net realized capital gains and losses and any other items, such as severance and facilities charges and reductions of the reserve for anticipated future losses on discontinued products).

Prior to December 13, 2000, the Company (formerly Aetna U.S. Healthcare Inc. and its subsidiaries) was a subsidiary of a Connecticut corporation named Aetna Inc. (“former Aetna”). On December 13, 2000, former Aetna spun off shares of the Company to shareholders and, as part of the same transaction, sold former Aetna’s financial services and international businesses to ING Groep N.V. (“ING”) (collectively, the “Transaction”). The sale was accomplished by the merger of former Aetna with a subsidiary of ING. The businesses sold to ING are reflected as discontinued operations, since the Company is the successor of former Aetna for accounting purposes. (Refer to Note 21 for additional information.)

2. Summary of Significant Accounting Policies

Principles of Consolidation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All significant intercompany balances have been eliminated. Certain reclassifications have been made to the 2001 and 2000 financial information to conform to the 2002 presentation.

As a result of the Transaction, the consolidated financial statements for 2000 have been prepared using the historical basis of the assets and liabilities and historical results of operations of the Health Care, Group Insurance and Large Case Pensions businesses as if the Company were a separate entity for this period. Changes in shareholders’ equity prior to December 13, 2000 represented the net income of the Company plus (less) net cash transfers from (to) former Aetna. Additionally, the consolidated financial statements for 2000 include allocations of certain assets and liabilities (including prepaid pension assets, debt and benefit obligations and pension and post-retirement benefits) and expenses (including interest), previously recorded by former Aetna, to the Health Care, Group Insurance and Large Case Pensions businesses of the Company, as well as to those businesses presented as discontinued operations. Management believes these allocations are reasonable. Accordingly, the 2000 financial information included herein may not necessarily reflect the consolidated results of operations, financial position, changes in shareholders’ equity and cash flows of the Company had it been a separate, independent company.

Page 52

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (Continued)

New Accounting Standards

Goodwill and Other Intangible Assets
As of January 1, 2002, the Company adopted Financial Accounting Standard (“FAS”) No. 142, Goodwill and Other Intangible Assets. This standard eliminated goodwill amortization from the Consolidated Statement of Income and required an evaluation of goodwill for impairment (at the reporting unit level) upon adoption of this standard, as well as an annual test, or more frequently if circumstances indicate a possible impairment. This impairment test is comprised of two steps. The initial step is designed to identify potential goodwill impairment by comparing an estimate of the fair value of the applicable reporting unit to its carrying value, including goodwill. If the carrying value exceeds fair value, a second step is performed, which compares the implied fair value of the applicable reporting unit’s goodwill with the carrying amount of that goodwill, to measure the amount of goodwill impairment, if any. The Company’s only reporting unit with goodwill and acquired intangible assets is its Health Care business, which is also a reportable segment. Upon adoption, the Company performed a transitional impairment test on its Health Care reporting unit. As a result of this impairment test, the Company recorded an impairment of approximately $3 billion during the first quarter of 2002, which is classified as a cumulative effect adjustment for the year ended December 31, 2002. Subsequent impairments, if any, would be classified as an operating expense. During the fourth quarter of 2002, the Company performed an annual impairment test, in conjunction with its annual planning process, and determined there were no impairment losses related to goodwill and other acquired intangible assets.

The Company’s measurement of fair value, utilized in its transitional impairment test, was based on an evaluation of future discounted cash flows, public company trading multiples and merger and acquisition transaction multiples. The Company’s fourth quarter 2002 annual impairment test was based on an evaluation of future discounted cash flows. These evaluations utilized the best information available in the circumstances, including reasonable and supportable assumptions and projections. The discounted cash flow evaluations considered several earnings scenarios and the likelihood of possible outcomes. Collectively, these evaluations were management’s best estimates of projected future cash flows. The Company’s discounted cash flow evaluations used a range of discount rates that corresponds to the Company’s weighted-average cost of capital. These discount rate ranges are consistent with that used for investment decisions and take into account the specific and detailed operating plans and strategies of the Health Care reporting unit. Certain other key assumptions utilized, including changes in membership, revenue, medical costs, operating expenses and effective tax rates, are based on reasonable estimates related to the Company’s turnaround initiatives. Such assumptions also are consistent with those utilized in the Company’s annual planning process. If the Company’s turnaround initiatives do not achieve their earnings objectives, the assumptions and estimates underlying these goodwill impairment evaluations could be adversely affected.

Upon adoption of FAS No. 142, the transition provisions of FAS No. 141, Business Combinations, also became effective. FAS No. 141 specified criteria for determining whether an acquired intangible asset should be recognized separately from goodwill. Intangible assets that meet certain criteria qualify for recording on the balance sheet and continue to be amortized over their useful lives in the Consolidated Statement of Income. Such intangible assets are subject to a periodic impairment test based on estimated fair value. As a result of adopting FAS No. 141, the Company reclassified the carrying value of its work force acquired intangible asset of $25.3 million at December 31, 2001 to goodwill. Refer to Note 6 for more detail on the Company’s goodwill and other acquired intangible assets.

Page 53

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (Continued)

Prior to the Company’s adoption of FAS No. 142, goodwill and other intangible assets were amortized over their estimated useful lives, and were tested periodically to determine if they were recoverable from operating earnings on an undiscounted basis over their useful lives and to evaluate the related amortization periods. If it was probable that undiscounted projected operating income (before amortization of goodwill and other acquired intangible assets) was not sufficient to recover the carrying value of the asset, the carrying value was written down through results of operations and, if necessary, the amortization period was adjusted. Operating income considered in such an analysis was either that of the entity acquired, if separately identifiable, or the business segment that acquired the entity.

Accounting for the Impairment or Disposal of Long-Lived Assets
Effective January 1, 2002, the Company adopted FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This standard supercedes previous related accounting standards. It addresses the accounting and reporting for impairment of long-lived assets to be held and used, as well as long-lived assets to be disposed of. It also broadens the presentation of discontinued operations on the income statement to include a component of an entity (rather than a segment of a business). This standard requires that long-lived assets to be held and used be written down to fair value when they are considered impaired. Long-lived assets to be disposed of are to be carried at the lower of carrying value or fair value less estimated cost to sell. The adoption of this standard did not have a material effect on the Company’s financial position or results of operations.

Accounting and Disclosure of Guarantees
In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”), modifying the recognition and disclosure requirements of a company’s guarantee arrangements. Effective January 1, 2003, FIN 45 requires a company that enters into or modifies existing guarantee arrangements to recognize a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also requires disclosure of all guarantees, regardless of when the guarantee originated, effective December 31, 2002 (Refer to Note 20). The adoption of the accounting provisions of FIN 45 is not expected to have a material effect on the Company’s financial position or results of operations.

Accounting for Stock-Based Compensation
In December 2002, the FASB issued FAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123, which amends FAS No. 123, Accounting for Stock Based Compensation. FAS No. 148 provides transition alternatives to companies that have elected to account for stock options under the fair value expense recognition model prescribed by FAS No. 123. FAS No. 148 also amends the required disclosure of a company’s accounting policy regarding stock compensation to employees as well as requiring additional annual and quarterly footnote disclosure regarding unvested stock options. The Company does not account for stock-based compensation under the fair value expense recognition model, but rather under the intrinsic value method as permitted by FAS No. 123.

Future Application of Accounting Standards

Accounting for Costs Associated with Exit or Disposal Activities
In July 2002, the Financial Accounting Standards Board (“FASB”) issued FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This standard supercedes the accounting guidance provided by Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). FAS No. 146 requires companies to recognize costs associated with exit activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The adoption of FAS No. 146 will impact the timing of recognition for severance and facilities charges for actions initiated after December 31, 2002.

Page 54

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (Continued)

Accounting for Variable Interest Entities (“VIE”)
In January 2002, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). This interpretation will require a company to consolidate its VIE (formerly referred to as special purpose entities) if the entities meet certain criteria and is considered the primary beneficiary of the VIE (such as a direct or indirect ability to make significant decisions of that entity or the obligation to absorb a majority of the entity’s expected losses). FIN 46 also requires additional disclosure of an entity’s relationship with a VIE. The consolidation provisions of this interpretation are required for all VIE’s created after January 31, 2003. For VIE’s in existence prior to January 31, 2003, the consolidation provisions of FIN 46 are effective July 1, 2003.

As of December 31, 2002, the Company had a leasing program with an independent third party grantor trust primarily for the lease of a corporate aircraft and certain office furniture. The total value of the assets owned by the trust under this leasing program at December 31, 2002 was approximately $54 million. For 2002, this arrangement was classified as an operating lease under existing accounting requirements and therefore the related assets and liabilities are not included in the Company’s Consolidated Balance Sheet. The Company may terminate the lease program at any time by purchasing the assets at cost or dissolving the grantor trust through liquidation. If the assets were sold to a third party at less than cost, the Company’s maximum exposure under a residual value guarantee was approximately $48 million at December 31, 2002 (Refer to Note 20 for further information). Upon adoption of FIN 46, on July 1, 2003, the Company expects it will consolidate this VIE as it is the primary beneficiary of these assets. The adoption of this Interpretation is expected to increase reported assets and liabilities on the Company’s Consolidated Balance Sheets, but is not expected to have any effect on the Company’s results of operations.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. The Company considers the following accounting policies, requiring significant estimates, critical when preparing its consolidated financial statements: Revenue Recognition (Allowance for Estimated Terminations and Uncollectable Accounts), Health Care and Insurance Liabilities, Investments, Goodwill and Other Acquired Intangible Assets, and Defined Benefit Pension and Other Post-Retirement Benefit Plans.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and other debt securities with a maturity of 90 days or less when purchased. The carrying value of cash equivalents approximates fair value due to the short-term maturity of these instruments.

Page 55

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (Continued)

Investments

Investment Securities
Investment securities consist primarily of U.S. Treasury and agency securities, mortgage-backed securities, corporate and foreign bonds, money market instruments and other debt and equity securities. The Company has determined that its investment securities are available for use in current operations and, accordingly, has classified such securities as current without regard to contractual maturity dates. The cost for mortgage-backed and other asset-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. The Company regularly reviews its debt and equity securities to determine whether a decline in fair value below the carrying value is other than temporary. If a decline in fair value is considered other than temporary, the cost basis/carrying amount of the security is written down and the amount of the write-down is included in earnings. The Company does not accrue interest on debt securities when management believes the collection of interest is unlikely.

Long-Term Investments
Long-term investments consist primarily of equity securities subject to restrictions on disposition, limited partnerships and restricted assets. Limited partnerships are generally carried on an equity basis. Restricted assets consist of debt securities on deposit as required by regulatory authorities.

Fair Value of Investments
The Company has classified its investment securities as available for sale and carries them at fair value. Fair values for such securities are based on quoted market prices or dealer quotes. Non traded debt securities are priced independently by a third party vendor and non traded equity securities are priced based on an internal analysis of the investment’s financial statements and cash flow projections.

Securities Lending
The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Such securities are classified as loaned securities on the Consolidated Balance Sheets. The fair value of the loaned securities is monitored on a daily basis, with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. Initial collateral, primarily cash, is required at a rate of 102% of the market value of a loaned domestic security and 105% of the market value of a loaned foreign security. The collateral is deposited by the borrower with an independent lending agent, and retained and invested by the lending agent according to the Company’s guidelines to generate additional income.

Mortgage Loans
Mortgage loans are carried at unpaid principal balances, net of impairment reserves. A mortgage loan may be impaired when it is a problem loan (i.e., more than 60 days delinquent, in bankruptcy or in process of foreclosure), a potential problem loan (i.e., high probability of default within 3 years) or a restructured loan. For impaired loans, a specific impairment reserve is established for the difference between the recorded investment in the loan and the estimated fair value of the collateral. The Company applies its loan impairment policy individually to all loans in the portfolio and does not aggregate loans for the purpose of applying such policy. The Company records full or partial charge-offs of loans at the time an event occurs affecting the legal status of the loan, typically at the time of foreclosure or upon a loan modification giving rise to forgiveness of debt. The Company accrues interest income on impaired loans to the extent it is deemed collectible and the loan continues to perform under its original or restructured terms. Interest income on problem loans is generally recognized on a cash basis. Cash payments on loans in the process of foreclosure are generally treated as a return of principal. Mortgage loans with a maturity date of less than one year from the balance sheet date are reported in other investments on the Consolidated Balance Sheets.

Page 56

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (Continued)

Mortgage Loan Securitizations
The Company may, from time to time, securitize and sell certain commercial mortgage loans and retain an interest in the securitized mortgage loans. Gains or losses on the sale of these loans would depend on the previous carrying amount of the transferred loans, allocated between the portion of the loans sold and the retained interests based on their relative fair value at the date of transfer. Fair values are based on quoted market prices or dealer quotes.

Investment Real Estate
Investment real estate, which the Company intends to hold for the production of income, is carried at depreciated cost, including capital additions, net of write-downs for other than temporary declines in fair value. Depreciation is generally calculated using the straight-line method based on the estimated useful life of each asset. Properties held for sale (primarily acquired through foreclosure) are carried at the lower of carrying value or fair value less estimated selling costs. Adjustments to the carrying value of properties held for sale are recorded in a valuation reserve when the fair value less estimated selling costs is below carrying value. Fair value is generally estimated using a discounted future cash flow analysis in conjunction with comparable sales information. Property valuations are reviewed by the Company’s investment management group. At the time of the sale, the difference between the sales price and the carrying value is recorded as a realized capital gain or loss.

Net Investment Income and Realized Capital Gains and Losses

Net investment income and realized capital gains and losses on investments supporting Group Insurance and Health Care’s liabilities and Large Case Pensions’ non-experience-rated products are reflected in the Company’s results of operations. Realized capital gains and losses are determined on a specific identification basis. Unrealized capital gains and losses are computed on a specific identification basis and are reflected in shareholders’ equity, net of related income taxes, as a component of accumulated other comprehensive income. Purchases and sales of debt and equity securities are recorded on the trade date. Sales of mortgage loans and investment real estate are recorded on the closing date. Net investment income supporting Large Case Pensions experience-rated products is included in net investment income, which is credited to contractholders in current and future benefits.

Realized and unrealized capital gains and losses on investments supporting experience-rated products in the Large Case Pensions business are reflected in policyholders’ funds and are determined on a specific identification basis. Experience-rated products are products in the Large Case Pensions business where the contract holder, not the Company, assumes investment (including realized capital gains and losses) and other risks, subject to, among other things, minimum guarantees provided by the Company in some instances. The effect of investment performance is allocated to contractholders’ accounts daily, based on the underlying investment’s experience and, therefore, does not impact the Company’s results of operations (as long as minimum guarantees are not triggered).

When the Company discontinued the sale of its fully guaranteed large case pensions products, it established a reserve for anticipated future losses from these products and segregated the related investments. These investments are managed as a separate portfolio. Investment income and net realized capital gains and losses on this separate portfolio are ultimately credited/charged to the reserve and, therefore, do not impact the Company’s results of operations. Unrealized capital gains or losses on this separate portfolio are reflected in other current assets or other current liabilities on the Consolidated Balance Sheets. (Refer to Note 12)

Page 57

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (Continued)

Derivative Instruments

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

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

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

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

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

Effective January 1, 2001, with the implementation of FAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, derivatives are recognized on the Company’s Consolidated Balance Sheets in other investments at fair value. The fair value of derivatives is estimated based on quoted market prices, dealer quotes or internal price estimates believed to be comparable to dealer quotes. These fair value amounts reflect the estimated amounts that the Company would have to pay or would receive if the contracts were terminated.

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

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

Page 58

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (Continued)

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

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

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

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

Reinsurance

The Company utilizes reinsurance agreements to reduce its exposure to large losses in certain aspects of its insurance business as well as the acquisition or disposition of certain insurance contracts. These reinsurance agreements permit recovery of a portion of losses from reinsurers, although they do not discharge the Company’s primary liability as direct insurer of the risks reinsured. Only those reinsurance recoverables deemed probable of recovery are reflected as assets. In the normal course of business, the Company enters into agreements with other insurance companies to assume reinsurance, primarily related to its health and group life products (Refer to Note 18). The Company does not transfer any portion of the financial risk associated with our HMO business to third parties.

Page 59

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (Continued)

Property and Equipment and Other Acquired Intangible Assets

Property and equipment and other acquired intangible assets are reported at historical cost net of accumulated depreciation/amortization. At December 31, 2002 and 2001, historical cost of property and equipment was approximately $.9 billion, and the related accumulated depreciation was approximately $.7 billion. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the respective assets ranging from three to forty years.

The Company regularly evaluates whether events or changes in circumstances indicate that the carrying amount of property and equipment and other acquired intangible assets may not be recoverable. If it is determined that an asset may not be recovered, the Company estimates the future undiscounted cash flows (grouped at the lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities) expected to result from future use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss will be recognized for the amount by which the carrying amount of the asset exceeds its fair value.

Separate Accounts

Separate Accounts assets and liabilities in the Large Case Pensions business generally represent funds maintained to meet specific investment objectives of contract holders who bear the investment risk. Investment income and investment gains and losses generally accrue directly to such contractholders. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. These assets and liabilities are carried at market value. Deposits, net investment income and realized capital gains and losses on Separate Accounts assets are not reflected on the Consolidated Statements of Income. Management fees charged to contractholders are included in other income and recognized over the period earned.

Health Care and Insurance Liabilities

Health care costs payable consist principally of unpaid fee-for-service health care and pharmacy claims, capitation costs and other amounts due to health care providers pursuant to risk-sharing arrangements related to Health Care’s HMO, POS, PPO and traditional indemnity plans. Unpaid health care claims include estimates of payments to be made on claims reported but not yet paid and health care services rendered but not yet reported to the Company as of the balance sheet date. Also included in these estimates is the cost of services that will continue to be rendered after the balance sheet date if the Company is obligated to pay for such services in accordance with contractual or regulatory requirements. Such estimates are developed using actuarial principles and assumptions which consider, among other things, contractual requirements, historical utilization trends, persistency of membership and payment patterns, medical inflation, product mix, seasonality, membership and other relevant factors. Changes in estimates are recorded in health care costs on the Consolidated Statements of Income in the period they are determined. Capitation costs represent contractual monthly fees paid to participating physicians and other medical providers for providing medical care. Amounts due under risk-sharing arrangements are based on the terms of the underlying contracts with the providers and consider experience under the contracts through the balance sheet date.

Page 60

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (Continued)

Unpaid claims consist primarily of reserves associated with certain short-duration group disability and term life insurance contracts, including an estimate for claims incurred but not reported as of the balance sheet date. Reserves associated with certain short-duration group disability and term life insurance contracts are based upon the present value of future benefits, which is based on assumed investment yields and assumptions regarding mortality, morbidity and recoveries from government programs. Reserves for claims incurred but not reported are developed using actuarial principles and assumptions which consider, among other things, contractual requirements, historical payment patterns, seasonality and other relevant factors. The Company discounts certain claim liabilities related to group long-term disability and premium waiver contracts. The discounted unpaid claim liabilities were $1.3 billion as of December 31, 2002 and $1.4 billion as of December 31, 2001. Generally, the discount rates reflect the expected investment returns for the asset portfolios that support these liabilities and ranged from 6.3% to 6.9% in 2002 (except for experience-rated contracts where the discount rates are set at contractually specified levels). The estimates of unpaid claims are subject to change due to changes in the underlying experience of the contracts, changes in investment yields or other factors, and these changes are recorded in current and future benefits on the Consolidated Statements of Income in the period they are determined.

Future policy benefits consist primarily of reserves for limited payment pension and annuity contracts in the Large Case Pensions business and long-duration group paid-up life and long-term care insurance contracts in the Group Insurance business. Reserves for limited payment contracts are computed in accordance with actuarial principles and are based upon assumptions reflecting anticipated mortality, retirement, expense and interest rate experience. Such assumptions generally vary by plan, year of issue and policy duration. Assumed interest rates on such contracts ranged from 2.0% to 15.9% in 2002. Mortality assumptions are periodically reviewed against both industry standards and experience. Reserves for group paid-up life and long-term care contracts represent the present value of future benefits to be paid to or on behalf of policyholders less the present value of future net premiums. Assumed interest rates on such contracts ranged from 2.5% to 9.5% in 2002. The present value of future benefits is based upon mortality, morbidity and interest rate assumptions.

Policyholders’ funds consist primarily of reserves for pension and annuity investment contracts in the Large Case Pensions business and customer funds associated with group life and health contracts in the Health Care and Group Insurance businesses. Reserves on such contracts are equal to cumulative deposits less withdrawals and charges plus credited interest thereon, net of adjustments for investment experience that the Company is entitled to reflect in future credited interest. In 2002, interest rates for pension and annuity investment contracts ranged from 1.6% to 15.9% and rates for group life and health contracts ranged from 1.3% to 6.8%. Reserves on contracts subject to experience rating reflect the rights of policyholders, plan participants and the Company.

Health care and insurance liabilities are reviewed periodically, with any necessary adjustments reflected during the current period in results of operations. While the ultimate amount of claims and related expenses are dependent on future developments, it is management’s opinion that the liabilities that have been established are adequate to cover such costs. The health care and insurance liabilities that are expected to be paid within one year from the balance sheet date are classified as current liabilities on the Consolidated Balance Sheets.

Deferred Acquisition Costs

Acquisition costs related to the Company’s prepaid health care and health indemnity contracts are expensed as incurred. The Company defers certain acquisition costs related to its long-term care products. Such deferred costs were not material to the Company’s financial position or results of operations as of December 31, 2002 or 2001 and are included in Other long-term assets in the Company’s Consolidated Balance Sheets.

Page 61

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (Continued)

Premium Deficiency

The Company evaluates its health care and insurance contracts to determine if it is probable that a loss will be incurred. A premium deficiency loss is recognized when it is probable that expected future claims, including maintenance costs (e.g. claim processing costs), will exceed existing reserves plus anticipated future premiums and reinsurance recoveries on existing contracts. Anticipated investment income is considered in the calculation of premium deficiency losses for short-duration contracts. For purposes of determining premium deficiency losses, contracts are grouped in a manner consistent with the Company’s method of acquiring, servicing and measuring the profitability of such contracts. For all periods presented, no deficiency losses were recorded.

Revenue Recognition

Health care premiums associated with the Company’s prepaid and other health care plans are recognized as income in the month in which the enrollee is entitled to receive health care services. Health care premiums are reported net of an allowance for estimated terminations (retroactivity adjustments) and uncollectable amounts. Other premium revenue for group life, long-term care and disability products is recognized as income, net of allowances for termination and uncollectable accounts, over the term of the coverage. Other premium revenue for Large Case Pensions’ limited payment pension and annuity contracts is recognized as revenue in the period received. Premiums related to unexpired contractual coverage periods are reported as unearned premiums on the Consolidated Balance Sheets.

The balance of the allowance for estimated terminations and uncollectable accounts on premiums receivable was $127 million and $172 million at December 31, 2002 and 2001, respectively, and is included in premiums receivable on the Consolidated Balance Sheets. The balance of the allowance for uncollectable accounts on other receivables was $91 million and $104 million at December 31, 2002 and 2001, respectively, and is included in other receivables on the Consolidated Balance Sheets.

Some group contracts allow for premiums to be adjusted to reflect actual experience. Such adjustments are reasonably estimable (based on actual experience of the customer emerging under the contract and the terms of the underlying contract) and are recognized as the experience emerges.

ASC fees are received in exchange for performing certain claims processing and member services for self-insured health and disability members and are recognized as revenue over the period the service is provided. Some of the Company’s contracts include guarantees with respect to certain functions such as customer service response time, claim processing accuracy and claim processing turnaround time, as well as certain guarantees that claim expenses to be incurred by plan sponsors will fall within a certain range. With any of these guarantees, the Company is financially at risk if the conditions of the arrangements are not met, although the maximum amount at risk is typically limited to a percentage of fees for the customer involved.

Other income includes charges assessed against contractholders’ funds for contract fees, participant fees and asset charges related to pension and annuity products in the Large Case Pensions business. Other amounts received on pension and annuity contracts are reflected as deposits and are not recorded as revenue. When annuities with life contingencies are purchased under contracts that were initially investment contracts, the accumulated balance related to the purchase is treated as a single premium and reflected as an offsetting amount in both other premiums and current and future benefits on the Consolidated Statements of Income.

Page 62

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (Continued)

Allocation of Expenses

The Company allocates to the business segments centrally incurred costs associated with specific internal goods or services provided to the Company, such as employee services, technology services and rent, based on a reasonable method for each specific cost (such as usage, headcount, compensation or square footage occupied). Interest expense on third-party borrowings is not allocated to the reporting segments since it is not used as a basis for measuring the operating performance of the segments. Such amounts are reflected in Corporate Interest. (Refer to Note 19).

Income Taxes

The Company is taxed at regular corporate rates after adjusting income reported for financial statement purposes for certain items. The Company was included in the consolidated federal income tax returns of former Aetna through December 13, 2000. As a result of the Transaction, for the period December 14 through December 31, 2000 and the years ended December 31, 2001 and 2002, the Company is responsible for filing two separate consolidated and various standalone federal income tax returns. The results of these separate tax filings are combined for financial reporting purposes.

Deferred income tax assets and liabilities are recognized for the differences between the financial and income tax reporting basis of assets and liabilities based on enacted tax rates and laws. Valuation allowances are provided when it is considered unlikely that deferred tax assets will be realized. Deferred income tax expense or benefit primarily reflects the net change in deferred income tax assets and liabilities during the year. The current income tax provision reflects the tax results of revenues and expenses currently taxable or deductible.

Stock-Based Compensation

At December 31, 2002, the Company had various stock-based employee incentive plans, which are described more fully in Note 14. The Company uses the intrinsic value method of accounting for stock-based awards granted to employees. Accordingly, compensation cost is not recognized when the exercise price of an employee stock option equals or exceeds the fair market value of the stock on the date the option is granted. The following table illustrates the pro forma net income (loss) and pro forma earnings per share as if the Company had applied the fair value based method of accounting to all awards of stock-based employee compensation.

(Millions, except per common share data)		2002			2001			2000
Net income (loss), as reported		$	(2,522.5	)	$	(279.6	)	$	127.1
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects			27.4			2.1			13.9
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(59.4	)		(13.0	)		(136.4	)
Pro forma net income (loss)		$	(2,554.5	)	$	(290.5	)	$	4.6
Earnings (loss) per common share (1):
	Basic - as reported	$	(16.94	)	$	(1.95	)	$	.90
	Basic - pro forma		(17.15	)		(2.03	)		.03
	Diluted - as reported		(16.49	)		(1.95	)		.90
	Diluted - pro forma		(16.88	)		(2.03	)		.03

(1) Since the Company reported a loss from continuing operations in 2001 and 2000, the effect of common stock equivalents has been excluded from per common share computations for those years since including such securities would be anti-dilutive. As a result, diluted and basic per common share amounts for 2001 and 2000 are the same.

Page 63

Notes to Consolidated Financial Statements

2. Summary of Significant Accounting Policies (Continued)

The fair value of the stock options included in the pro forma amounts was estimated as of the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2002			2001			2000
Dividend yield		.1	%		.1	%		1	%
Expected volatility		40	%		40	%		39	%
Risk-free interest rate		4	%		5	%		7	%
Expected life	5 years			5 years			4 years

The weighted-average grant date fair values for the Company’s options granted in 2002 and 2001 and former Aetna options granted in 2000 were $15.06, $11.68, and $16.43, respectively.

3. Dispositions

Exit of Certain Medicare Service Areas

The Company’s Medicare+Choice contracts with the federal government are renewed for a one-year period each January 1. In September 2002, the Company notified the Centers for Medicare and Medicaid Services (“CMS”) of its intent not to renew its Medicare+Choice contracts for 2003 for individuals in a number of Medicare service areas affecting approximately 9,000 members, or approximately 8% of the Company’s total Medicare membership prior to this exit. The termination of these Medicare+Choice contracts became effective on January 1, 2003. In September 2001, the Company notified CMS of its intent to exit a number of Medicare service areas affecting approximately 95,000 members, or approximately 37% of the Company’s total Medicare membership prior to this exit. The termination of these Medicare+Choice contracts became effective on January 1, 2002. Effective January 1, 2001, the Company exited a number of Medicare service areas affecting approximately 260,000 members, or approximately 47% of the Company’s total Medicare membership prior to this exit. In the fourth quarter of 2000, the Company recorded an after-tax charge of approximately $194 million ($266 million pretax) for the write-off of goodwill that was still separately identifiable with such service areas.

Sale of Certain Medicaid Membership

On August 1, 2001, the Company completed the sale of its New Jersey Medicaid and New Jersey Family Care membership to AmeriChoice. The agreement covered approximately 118,000 New Jersey Medicaid beneficiaries and members of the New Jersey Family Care program for uninsured children and adults. Proceeds from this sale of approximately $20 million pretax were included in other income for 2001. The operating results of these Medicaid markets sold, which include the proceeds from the sale, were not material to the Company’s results of operations.

Sale of NYLCare Texas

In connection with the acquisition of the Prudential health care business (“PHC”) from The Prudential Insurance Company of America (“Prudential”), the Company agreed with the U.S. Department of Justice and the State of Texas to divest certain Texas HMO/POS and other related businesses (“NYLCare Texas”) that had been acquired by the Company as part of the 1998 acquisition of New York Life Insurance Company’s health care business. Pursuant to this agreement, on March 31, 2000, the Company completed the sale of NYLCare Texas to Blue Cross and Blue Shield of Texas, a division of Health Care Service Corporation (“HCSC”), for approximately $420 million in cash. The sale resulted in an after-tax capital loss of $35 million, which was recognized in the fourth quarter of 1999. The after-tax loss included operating losses from October 1, 1999 through closing. In March 2001, HCSC provided the Company with a letter demanding arbitration of claims arising from its acquisition of NYLCare Texas. In May 2002, the Company and HCSC settled this action. The settlement amount was not material to the financial condition of the Company. The results of operations of NYLCare Texas were not material to the Health Care segment or to the Company’s consolidated results of operations.

Page 64

Notes to Consolidated Financial Statements

4. Health Care Costs Payable

The following table shows the components of the change in health care costs payable.

(Millions)		2002			2001			2000
Health care costs payable, beginning of the period		$	2,986.7		$	3,171.1		$	3,238.7
Less: Reinsurance recoverables			10.3			32.8			66.2
Health care costs payable, beginning of the period — net			2,976.4			3,138.3			3,172.5
Less: Disposition of NYLCare Texas			—			—			(71.9	)
Add: components of incurred health care costs
	Current period health care costs		12,523.7			17,894.9			18,861.5
	Changes in prior periods’ estimates (1)		(70.9	) (2)		43.9	(3)		22.6
Total incurred health care costs			12,452.8			17,938.8			18,884.1
Less: claims paid
	Current period		10,668.2			15,266.3			15,935.9
	Prior periods		2,573.6			2,834.4			2,910.5
Total claims paid			13,241.8			18,100.7			18,846.4
Health care costs payable, end of period — net			2,187.4			2,976.4			3,138.3
Add: Reinsurance recoverables			6.7			10.3			32.8
Health care costs payable, end of period		$	2,194.1		$	2,986.7		$	3,171.1

(1)	Changes in prior periods’ estimates represents the effect of unfavorable (favorable) development of prior period medical cost estimates on current year results of operations, at each financial statement date.
(2)	Reflects favorable development of prior period medical cost estimates of approximately $40 million ($26 million after tax) for Commercial HMO and approximately $35 million ($23 million after tax) for Medicare HMO.
(3)	Reflects primarily unfavorable development of prior period medical cost estimates related to certain Medicare markets the Company exited on January 1, 2001.

5. Earnings Per Common Share

A reconciliation of the numerator and denominator of the basic and diluted earnings per common share (“EPS”) is as follows:

			Income (Loss)			Shares		Per Common
(Millions, except EPS data)			(Numerator)			(Denominator)		Share Amount
2002
Basic EPS:
	Income from continuing operations		$	393.2			148.9	$	2.64
Effect of dilutive securities:
		Stock options and other (1)					4.0
Diluted EPS:
	Income from continuing operations and assumed conversions		$	393.2			152.9	$	2.57
2001
	Basic and Diluted EPS:
	Loss from continuing operations (2)		$	(291.5	)		143.2	$	(2.03	)
2000
	Basic and Diluted EPS:
	Loss from continuing operations (3)		$	(127.4	)		141.3	$	(.90	)

(1)	Options to purchase shares of common stock for 2002 of 7.2 million shares (with exercise prices ranging from $40.90 to $54.21) were not included in the calculation of diluted earnings per common share because the options’ exercise prices were greater than the average market price of common shares during such period.
(2)	Since the Company reported a loss from continuing operations for 2001, options to purchase 30.0 million shares (with exercise prices ranging from $12.89 to $54.21) were not included in per common share calculations, since including such securities would be anti-dilutive. As a result, diluted and basic per common share amounts for 2001 are the same.
(3)	Since the Company reported a loss from continuing operations for 2000, options to purchase 31.7 million shares (with exercise prices ranging from $7.14 to $54.21) were not included in per common share calculations, since including such securities would be anti-dilutive. As a result, diluted and basic per common share amounts for 2000 are the same.

65

Notes to Consolidated Financial Statements

5. Earnings Per Common Share (Continued)

As a result of the Transaction, the former Aetna stock options held by employees of the Company and retirees of former Aetna were converted into options to purchase shares of the Company with adjustments made to both the number of options and the exercise prices to maintain the intrinsic in- or out-of-the-money value immediately before the spin-off. The in-the-money former Aetna stock options held by employees of the sold businesses were settled for cash while the out-of-the-money former Aetna stock options for such employees were cancelled. (Refer to Note 14)

For the period January 1, 2000 through December 13, 2000, the common stock outstanding and the dilutive effect of all outstanding stock options, where appropriate, of former Aetna are reflected in the weighted average share calculation. For the period from December 14, 2000 through December 31, 2000 and the years ended December 31, 2001 and 2002, only the common stock outstanding of the Company is reflected in the weighted average share calculation.

6. Goodwill and Other Acquired Intangible Assets

On January 1, 2002, the Company adopted FAS No. 142 and the transition provisions of FAS No. 141, as discussed in more detail in Note 2. As a result, the Company recorded an impairment loss, ceased amortizing goodwill and reclassified the December 31, 2001 carrying value of its work force acquired intangible asset to goodwill. The Company’s only reporting unit with goodwill and other acquired intangible assets is its Health Care business, which also is a reportable segment. Changes in the carrying amount of goodwill were as follows:

(Millions)
Balance at December 31, 2000	$	6,781.9
Amortization		(198.1	)
Balance at December 31, 2001		6,583.8
Impairment loss		(2,965.7	)
Reclassification of work force		25.3
Goodwill adjustment (1)		(25.0	)
Balance at December 31, 2002	$	3,618.4

(1) Represents the post-acquisition adjustment of deferred tax liabilities established in purchase accounting relating to former Aetna’s 1996 acquisition of U.S. Healthcare, Inc. This post-acquisition adjustment was the result of the conclusion of several Internal Revenue Service audit issues during the first quarter of 2002.

Page 66

Notes to Consolidated Financial Statements

6. Goodwill and Other Acquired Intangible Assets (Continued)

For comparative purposes, the following table adjusts net loss and basic and diluted EPS for the year ended December 31, 2001, as if the work force asset were reclassified and amortization of goodwill had ceased at the beginning of 2001.

(Millions, except EPS data)	2002			2001
Reported net loss	$	(2,522.5	)	$	(279.6	)
Add back: Goodwill amortization		—			195.3
Add back: Work force amortization		—			8.1
Adjusted net loss	$	(2,522.5	)	$	(76.2	)
Basic EPS:
Reported net loss	$	(16.94	)	$	(1.95	)
Add back: Goodwill amortization		—			1.36
Add back: Work force amortization		—			.06
Adjusted net loss	$	(16.94	)	$	(.53	)
Diluted EPS: (1)
Reported net loss	$	(16.49	)	$	(1.95	)
Add back: Goodwill amortization		—			1.36
Add back: Work force amortization		—			.06
Adjusted net loss	$	(16.49	)	$	(.53	)

(1) Since the Company reported a loss from continuing operations for 2001, the effect of common stock equivalents has been excluded from per common share computations, since including such securities would be anti-dilutive. As a result, diluted and basic per common share amounts for 2001 are the same.

Other acquired intangible assets at December 31, 2002 and December 31, 2001 were as follows:

December 31, 2002 (Millions)		Cost		Accumulated Amortization		Net Balance		Amortization Period (Years)
Other acquired intangible assets:
	Provider networks	$	677.2	$	169.3	$	507.9		20-25
	Customer lists		919.0		880.2		38.8		5-7
	Other		69.2		69.0		.2		3-5
Total other acquired intangible assets		$	1,665.4	$	1,118.5	$	546.9
December 31, 2001
Other acquired intangible assets:
	Provider networks	$	677.2	$	141.5	$	535.7		20-25
	Customer lists		919.0		784.4		134.6		5-7
	Work force		88.0		62.7		25.3		3-6
	Other		69.2		61.8		7.4		3-5
Total other acquired intangible assets		$	1,753.4	$	1,050.4	$	703.0

Annual pretax amortization for other acquired intangible assets over the next five calendar years is estimated to be as follows:

(Millions)
2003	$	50.8
2004		42.5
2005		29.4
2006		27.8
2007		27.8

Page 67

Notes to Consolidated Financial Statements

7. Investments

Investment securities at December 31 were as follows:

(Millions)	2002		2001
Debt securities available for sale	$	13,379.1	$	13,446.0
Equity securities		29.1		124.9
Other investment securities		605.3		689.2
Total investment securities	$	14,013.5	$	14,260.1

Page 68

Notes to Consolidated Financial Statements

7. Investments (Continued)

Debt securities available for sale (including loaned securities) at December 31 were as follows:

						Gross		Gross
				Amortized		Unrealized		Unrealized		Fair
2002 (Millions)				Cost		Gains		Losses		Value
Bonds:
	U.S. government and government agencies and authorities			$	991.7	$	13.9	$	—	$	1,005.6
	States, municipalities and political subdivisions				1,033.5		44.7		.4		1,077.8
	U.S. corporate securities:
		Utilities			610.0		35.8		18.8		627.0
		Financial			1,697.5		118.6		6.7		1,809.4
		Transportation/Capital goods			835.6		82.7		15.5		902.8
		Health care/Consumer products			808.1		63.3		10.8		860.6
		Natural resources			851.6		87.5		1.2		937.9
		Other corporate securities			1,463.3		130.4		8.9		1,584.8
			Total U.S. corporate securities		6,266.1		518.3		61.9		6,722.5
	Foreign:
		Government, including political subdivisions			609.4		30.3		4.8		634.9
		Utilities			28.2		.7		.6		28.3
		Other			1,281.5		122.2		5.7		1,398.0
			Total foreign securities		1,919.1		153.2		11.1		2,061.2
	Residential mortgage-backed securities:
		Pass-throughs			1,572.5		64.0		—		1,636.5
		Collateralized mortgage obligations			20.8		.2		—		21.0
			Total residential mortgage-backed securities		1,593.3		64.2		—		1,657.5
	Commercial/Multifamily mortgage-backed securities (1)(2)				1,199.5		127.8		11.1		1,316.2
	Other asset-backed securities				309.8		10.9		3.3		317.4
Total bonds					13,313.0		933.0		87.8		14,158.2
Redeemable preferred stocks					154.9		16.5		2.3		169.1
Total available-for-sale debt securities (3)				$	13,467.9	$	949.5	$	90.1	$	14,327.3
2001
Bonds:
	U.S. government and government agencies and authorities			$	782.7	$	.3	$	9.5	$	773.5
	States, municipalities and political subdivisions				882.1		12.6		5.5		889.2
	U.S. corporate securities:
		Utilities			743.8		24.1		13.6		754.3
		Financial			1,777.9		62.1		15.3		1,824.7
		Transportation/Capital goods			1,156.3		66.8		39.6		1,183.5
		Health care/Consumer products			798.0		34.3		8.5		823.8
		Natural resources			794.8		32.8		10.2		817.4
		Other corporate securities			1,494.3		57.6		32.4		1,519.5
			Total U.S. securities		6,765.1		277.7		119.6		6,923.2
	Foreign:
		Government, including political subdivisions			458.9		19.3		4.2		474.0
		Utilities			61.2		1.3		3.5		59.0
		Other			1,245.8		57.5		25.6		1,277.7
			Total foreign securities		1,765.9		78.1		33.3		1,810.7
	Residential mortgage-backed securities:
		Pass-throughs			1,781.5		32.6		4.4		1,809.7
		Collateralized mortgage obligations			72.5		3.7		.1		76.1
			Total residential mortgage-backed securities		1,854.0		36.3		4.5		1,885.8
	Commercial/Multifamily mortgage-backed securities (1)(2)				1,270.0		45.2		28.8		1,286.4
	Other asset-backed securities				256.2		9.4		.6		265.0
Total bonds					13,576.0		459.6		201.8		13,833.8
Redeemable preferred stocks					212.5		10.0		2.2		220.3
Total available-for-sale debt securities (3)				$	13,788.5	$	469.6	$	204.0	$	14,054.1

(1)	Includes approximately $154.2 million and $151.2 million of subordinate and residual certificates at December 31, 2002 and 2001, respectively, from a 1997 commercial mortgage loan securitization which were retained by the Company.
(2)	Includes approximately $89.8 million and $85.2 million of subordinate and residual certificates at December 31, 2002 and 2001, respectively, from a 1995 commercial mortgage loan securitization which were retained by the Company.
(3)	Includes approximately $948.2 million and $608.1 million of loaned securities at December 31, 2002 and 2001, respectively.

Page 69

Notes to Consolidated Financial Statements

7. Investments (Continued)

Debt securities available for sale (including loaned securities) supporting discontinued, experience-rated and remaining products at December 31 were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
2002 (Millions)	Cost		Gains		Losses		Value
Supporting discontinued products	$	3,353.5	$	333.3	$	38.7	$	3,648.1
Supporting experience-rated products		2,144.7		174.1		15.6		2,303.2
Supporting remaining products		7,969.7		442.1		35.8		8,376.0
Total available-for-sale debt securities	$	13,467.9	$	949.5	$	90.1	$	14,327.3

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
2001 (Millions)	Cost		Gains		Losses		Value
Supporting discontinued products	$	3,598.7	$	179.6	$	72.6	$	3,705.7
Supporting experience-rated products		2,103.2		89.2		25.0		2,167.4
Supporting remaining products		8,086.6		200.8		106.4		8,181.0
Total available-for-sale debt securities	$	13,788.5	$	469.6	$	204.0	$	14,054.1

At December 31, 2002 and 2001, net unrealized appreciation on debt securities included $295 million and $107 million, respectively, related to discontinued products (refer to Note 12) and $159 million and $64 million, respectively, related to experience-rated contracts, which were not reflected in shareholders’ equity.

The carrying and fair value of debt securities is shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called or prepaid.

		Amortized		Fair
2002 (Millions)		Cost		Value
Due to mature:
	One year or less	$	760.1	$	782.5
	After one year through five years		2,356.9		2,461.5
	After five years through ten years		2,982.2		3,150.0
	After ten years		4,266.1		4,642.2
	Mortgage-backed securities		2,792.8		2,973.7
	Other asset-backed securities		309.8		317.4
Total		$	13,467.9	$	14,327.3

At December 31, 2002 and 2001, debt securities carried at $748 million and $692 million, respectively, were on deposit as required by regulatory authorities. These securities are considered restricted assets and were included in long-term investments on the Consolidated Balance Sheets.

Investments in equity securities at December 31 were as follows:

(Millions)	2002			2001
Cost	$	91.3		$	234.3
Gross unrealized capital gains		6.5			23.5
Gross unrealized capital losses		(4.6	)		(15.7	)
Fair value		93.2			242.1
Less: amount included in long-term investments		64.1			117.2
Equity securities (included in investment securities)	$	29.1		$	124.9

Page 70

Notes to Consolidated Financial Statements

7. Investments (Continued)

Investment real estate holdings at December 31 were as follows:

(Millions)	2002			2001
Properties held for sale	$	25.9		$	232.7
Investment real estate		356.2			192.3
Gross carrying value of real estate		382.1			425.0
Valuation reserve		(73.3	)		(65.3	)
Investment real estate	$	308.8		$	359.7

Accumulated depreciation for investment real estate was $67 million and $18 million at December 31, 2002 and 2001, respectively.

Total real estate write-downs included in the net carrying value of the Company’s real estate holdings at December 31, 2002 and 2001 were $117 million and $122 million, respectively (including $100 million and $102 million attributable to assets supporting discontinued products for 2002 and 2001, respectively).

At December 31, 2002 and 2001, the Company’s mortgage loan balances, net of specific impairment reserves, by geographic region and property type were as follows:

(Millions)	2002		2001
South Atlantic	$	456.0	$	395.6
Middle Atlantic		601.6		599.8
New England		91.1		158.1
South Central		64.8		45.5
North Central		247.4		237.4
Pacific and Mountain		311.9		615.2
Non-U.S		.4		.5
Total		1,773.2		2,052.1
Less: general impairment reserve		—		7.1
Net mortgage loan balance		1,773.2		2,045.0
Less: amount included in other investments		258.3		157.2
Mortgage loans	$	1,514.9	$	1,887.8

(Millions)	2002			2001
Office		$	673.6	$	960.8
Retail			382.9		453.1
Apartment			205.3		118.4
Hotel/Motel			151.3		143.7
Industrial			315.7		339.7
Mixed Use			32.3		32.8
Other			12.1		3.6
Total			1,773.2		2,052.1
Less: general impairment reserve			—		7.1
Net mortgage loan balance			1,773.2		2,045.0
Less: amount included in other investments			258.3		157.2
Mortgage loans		$	1,514.9	$	1,887.8

At December 31, 2002 and 2001, the total recorded investment in mortgage loans that are considered to be impaired (including problem, restructured and potential problem loans) and related specific reserves were as follows:

	2002				2001
	Total				Total
	Recorded		Specific		Recorded		Specific
(Millions)	Investment		Reserves		Investment		Reserves
Supporting discontinued products	$	18.3	$	—	$	104.2	$	14.9
Supporting experience-rated products		23.4		6.9		55.4		5.9
Supporting remaining products		9.2		4.5		14.7		4.7
Total impaired loans (1)	$	50.9	$	11.4	$	174.3	$	25.5

(1) Includes impaired loans at December 31, 2002 and 2001 of $31.3 million and $60.2 million, respectively, for which no specific reserves are considered necessary.

Page 71

Notes to Consolidated Financial Statements

7. Investments (Continued)

The activity in the specific and general mortgage loan impairment reserves for the periods indicated is summarized below:

				Supporting
	Supporting			Experience-			Supporting
	Discontinued			Rated			Remaining
(Millions)	Products			Products			Products			Total
Balance at December 31, 1999	$	28.9		$	13.6		$	3.4		$	45.9
Principal write-offs		(.5	)		(.8	)		(.6	)		(1.9	)
Balance at December 31, 2000	$	28.4		$	12.8		$	2.8		$	44.0
Provision (charged to realized capital loss)		.2			—			5.4			5.6
Principal write-offs		(13.7	)		(.4	)		(2.9	)		(17.0	)
Balance at December 31, 2001 (1)	$	14.9		$	12.4		$	5.3		$	32.6
Provision (charged to realized capital loss)		—			.3			.3			.6
Recoveries of previously charged off amounts		(6.2	)		(4.5	)		(.7	)		(11.4	)
Principal write-offs		(8.7	)		(1.3	)		(.4	)		(10.4	)
Balance at December 31, 2002 (1)	$	—		$	6.9		$	4.5		$	11.4

(1) Total reserves at December 31, 2001 include $25.5 million of specific reserves and $7.1 million of general reserves. There was no general reserve at December 31, 2002.

Income earned (pretax) and cash received on the average recorded investment in impaired loans for the years ended December 31 were as follows:

	2002						2001						2000
	Average						Average						Average
	Impaired		Income		Cash		Impaired		Income		Cash		Impaired		Income		Cash
(Millions)	Loans		Earned		Received		Loans		Earned		Received		Loans		Earned		Received
Supporting discontinued products	$	20.4	$	1.6	$	1.6	$	118.1	$	10.6	$	12.2	$	149.9	$	9.4	$	8.7
Supporting experience-rated products		41.1		2.9		2.6		44.7		3.9		4.3		65.3		6.0		6.0
Supporting remaining products		13.4		.8		.6		29.6		1.6		3.0		42.1		9.6		9.8
Total	$	74.9	$	5.3	$	4.8	$	192.4	$	16.1	$	19.5	$	257.3	$	25.0	$	24.5

Significant non-cash investing and financing activities include the acquisition of real estate through foreclosures of mortgage loans amounting to $7 million and $20 million for 2002 and 2001, respectively. There were also certain significant noncash activities related to the Transaction. (Refer to Note 21.)

Page 72

Notes to Consolidated Financial Statements

8. Financial Instruments

Estimated Fair Value

The carrying values and estimated fair values of certain of the Company’s financial instruments at December 31, 2002 and 2001 were as follows:

			2002				2001
			Cost Basis/				Cost Basis/
			Carrying		Estimated Fair		Carrying		Estimated Fair
(Millions)			Value		Value		Value		Value
Assets:
	Debt securities		$	14,170.9	$	15,074.8	$	14,476.6	$	14,745.7
	Equity securities			91.3		93.2		234.3		242.1
	Mortgage loans			1,773.2		1,806.2		2,045.0		2,071.7
	Derivatives			82.9		82.9		14.4		14.4
Liabilities:
	Investment contract liabilities:
		With a fixed maturity		887.4		904.5		1,365.3		1,386.7
		Without a fixed maturity		765.5		675.0		793.0		678.0
	Derivatives			—		—		4.0		4.0
	Long-term debt			1,633.2		1,769.0		1,591.3		1,571.1

Fair value estimates are made at a specific point in time, based on available market information and judgments about a given 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, and do not consider the tax impact of the realization of unrealized capital gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, and the disclosed value cannot be realized upon immediate settlement of the instrument. In evaluating the Company’s management of interest rate, price and liquidity risks, the fair values of all financial instruments are taken into consideration.

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

Debt and equity securities: Fair values are based on quoted market prices or dealer quotes. Non-traded debt securities are priced independently by a third party vendor and non-traded equity securities are priced based on an internal analysis of the investment’s financial statements and cash flow projections. 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 and any collateral shortfall issues.

Mortgage loans: Fair values are estimated by discounting expected mortgage loan cash flows at market rates that reflect the rates at which similar loans would be made to similar borrowers. These rates reflect management’s assessment of the credit quality and the remaining duration of the loans. The fair value estimates of mortgage loans of lower credit quality, including problem and restructured loans, are based on the estimated fair value of the underlying collateral.

Derivatives: Fair values are estimated based on quoted market prices, dealer quotes or internal price estimates believed to be comparable to dealer quotes.

Page 73

Notes to Consolidated Financial Statements

8. Financial Instruments (Continued)

Investment contract liabilities:

• 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 that may ultimately result in paying an amount different than that determined to be payable on demand.

Long-term debt: Fair values are based on quoted market prices for the same or similar issued debt or, if no quoted market prices were available, on the current rates estimated to be available to the Company for debt of similar terms and remaining maturities.

Derivative Financial Instruments

The Company is using interest rate swap agreements to manage certain exposures related to changes in interest rates on investments supporting experience-rated and discontinued products in the Large Case Pensions business. The use of these derivatives does not impact the Company’s results of operations.

In December 2002, the Company entered into an interest rate swap agreement to convert the fixed rate of 8.5% on $200 million of its senior notes to a variable rate of three-month LIBOR plus 254.0 basis points (approximately 3.95% at December 31, 2002). In December 2001, the Company entered into an interest rate swap agreement to convert the fixed rate of 8.5% on $350 million of its senior notes to a variable rate of three-month LIBOR plus 159.5 basis points (approximately 3.02% at December 31, 2002). As a result of these swap agreements, the Company’s effective interest rate on its long-term debt was 6.99% during 2002. The change in the fair value of the interest rate swaps and the loss or gain on the hedged senior notes attributable to the hedged interest rate risk are recorded in current period earnings. Because the terms of the interest rate swap agreements match the terms of the senior notes, the gain or loss on the swaps and the senior notes will generally be offsetting (no material change in value occurred during the periods ended December 31, 2002 or 2001). The swap agreements contain bilateral credit protection covenants which, depending on credit ratings, obligate each party to post collateral equal to the fair value of the swap. As of February 26, 2003, the Company was not required to post collateral for the $350 million interest rate swap, but did post $2 million for the $200 million interest rate swap.

During the first quarter of 2001, the Company expected to issue approximately $1 billion of five- and ten-year fixed-rate debt securities to replace a portion of its outstanding commercial paper. Prior to the transaction, the Company’s risk management objective was to secure financing based on the then five- and ten-year U.S. Treasury rates. Accordingly, the Company entered into certain forward contracts on U.S. Treasury securities prior to the actual issuance of long-term debt of approximately $900 million, which were designated as cash flow hedges in anticipation of the debt offering and determined to be highly effective under the Company’s accounting policy.

Upon issuance of the long-term debt (refer to Note 15) and termination of these forward contracts, the Company recognized a loss of approximately $5 million pretax related to these derivatives, which is included in accumulated other comprehensive income. During 2002 and 2001, the amount of the loss that was reclassified from accumulated other comprehensive income and recognized as part of interest expense was not material.

Page 74

Notes to Consolidated Financial Statements

9. Net Investment Income

Sources of net investment income were as follows:

(Millions)	2002		2001		2000
Debt securities	$	954.4	$	1,104.8	$	1,161.6
Mortgage loans		224.0		184.9		208.2
Other		115.4		147.8		189.9
Investment real estate (1)		66.6		62.8		63.8
Cash equivalents		28.3		26.2		26.7
Equity securities		14.6		2.3		6.8
Other investment securities		14.6		69.9		104.7
Gross investment income		1,417.9		1,598.7		1,761.7
Less: investment expenses		167.2		187.1		130.1
Net investment income (2)	$	1,250.7	$	1,411.6	$	1,631.6

(1)	Includes $16.4 million and $14.0 million from real estate held for sale during 2001 and 2000, respectively.
(2)	Includes amounts related to experience-rated contractholders of $221.5 million, $237.5 million and $293.6 million during 2002, 2001 and 2000, respectively. Interest credited to contractholders is included in current and future benefits.

10. Capital Gains and Losses on Investments and Other

Net realized capital gains (losses), excluding amounts related to experience-rated contractholders and discontinued products, on investments were as follows:

(Millions)	2002			2001			2000
Debt securities	$	25.6		$	30.6		$	(110.3	)
Equity securities		(15.1	)		(.6	)		15.7
Mortgage loans		4.8			29.8			.7
Investment real estate		(10.5	)		(4.7	)		(.2	)
Sales of subsidiaries (1)		46.0			59.0			78.8
Other		(16.5	)		(18.0	)		(24.8	)
Pretax realized capital gains (losses)	$	34.3		$	96.1		$	(40.1	)
After-tax realized capital gains (losses)	$	22.3		$	73.6		$	(14.2	)

(1) Includes a pretax realized capital gain of approximately $60.0 million in 2002, 2001 and 2000 related to contingent consideration earned by the Company following the sale of its behavioral health subsidiary, Human Affairs International, in 1997.

Net realized capital gains (losses) of $8 million, $11 million and $(44) million for 2002, 2001 and 2000, respectively, related to experience-rated contractholders were deducted from net realized capital gains (losses) and an offsetting amount was reflected in policyholders’ funds. Net realized capital gains (losses) of $(58) million, $19 million and $(31) million for 2002, 2001 and 2000, respectively, related to discontinued products were deducted from net realized capital gains (losses) and an offsetting amount was reflected in the reserve for anticipated future losses on discontinued products.

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

(Millions)	2002		2001		2000
Proceeds on sales	$	15,679.9	$	17,561.8	$	13,093.9
Gross gains		225.2		225.6		70.2
Gross losses		129.0		133.5		120.8

Page 75

Notes to Consolidated Financial Statements

10. Capital Gains and Losses on Investments and Other (Continued)

Changes in shareholders’ equity related to changes in accumulated other comprehensive income (loss) (excluding those related to experience-rated contractholders and discontinued products) were as follows:

(Millions)	2002			2001			2000
Net unrealized gains on debt securities	$	339.0		$	109.3		$	543.4
Net unrealized losses on equity securities and other		(7.6	)		(52.1	)		(152.8	)
Foreign currency		.7			(1.1	)		(39.9	)
Derivatives		.6			(4.8	)		—
Minimum pension liability adjustment		(1,161.8	)		—			—
Subtotal		(829.1	)		51.3			350.7
Less: changes in deferred income taxes		290.2			(17.9	)		74.4
Subtotal		(538.9	)		33.4			276.3
Sale and spin-off transaction		—			—			414.4
Net changes in accumulated other comprehensive income (loss)	$	(538.9	)	$	33.4		$	690.7

Shareholders’ equity included the following accumulated other comprehensive income (loss) (excluding amounts related to experience-rated contractholders and discontinued products) at December 31:

(Millions)		2002			2001
Debt securities:
	Gross unrealized capital gains	$	477.3		$	211.2
	Gross unrealized capital losses		(35.8	)		(108.7	)
Net unrealized capital gains on debt securities			441.5			102.5
Equity securities and other:
	Gross unrealized capital gains		12.3			27.8
	Gross unrealized capital losses		(20.0	)		(27.9	)
Net unrealized capital losses on equity securities and other			(7.7	)		(.1	)
Foreign currency			8.5			7.8
Derivatives			(4.2	)		(4.8	)
Minimum pension liability adjustment			(1,161.8	)		—
Deferred income taxes			253.3			(36.9	)
Net accumulated other comprehensive income (loss)		$	(470.4	)	$	68.5

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

(Millions)	2002			2001		2000
Net unrealized holding gains arising during the period (1)	$	214.9		$	76.7	$	293.0
Less: reclassification adjustment for gains (losses) and other items included in net income (loss) (2)		(.5	)		39.5		(23.2	)
Net unrealized gains on securities	$	215.4		$	37.2	$	316.2

(1)	Pretax net unrealized holding gains arising during the period were $330.6 million, $118.0 million and $450.8 million for 2002, 2001 and 2000, respectively.
(2)	Pretax reclassification adjustments for gains (losses) and other items included in net income were $(.8) million, $60.8 million and $(35.7) million for 2002, 2001 and 2000, respectively.

Page 76

Notes to Consolidated Financial Statements

11.     Severance and Facilities Charges

In the fourth quarter of 2001, the Company recorded an after-tax severance and facilities charge of $125 million ($193 million pretax) related to the implementation of initiatives intended to improve the Company’s overall future performance (the “2001 Charge”). These initiatives included reductions to operating expenses, reorganization and realignment of Health Care operations to better align our business resources with our customer market-focused approach, business process improvements, product market withdrawals, continued migration off the Prudential health care systems and vacating certain facilities (primarily customer service related locations). The 2001 Charge consisted of two types of costs: those related to actions under a plan for the involuntary termination of employees and those related to an exit plan with respect to certain leased facilities. The severance portion of $130 million pretax was based on a plan to eliminate 4,395 positions (primarily customer service and regional field management functions). The facilities portion of $63 million pretax represented the present value of the difference between rent required to be paid by the Company and future sublease rentals expected to be received by the Company related to certain leased facilities, or portions of such facilities, that were vacated. Severance actions and the vacating of leased facilities relating to the 2001 Charge, as aligned to better reflect service operations consistent with the Company’s customer market approach, were completed as of December 31, 2002. The remaining lease payments (net of expected sublease rentals) on these vacated facilities are payable over approximately the next six years.

In the second quarter of 2002, the Company recorded an after-tax severance charge of $18 million ($27 million pretax) related to the implementation of ongoing initiatives intended to improve the Company’s overall future performance (the “Second Quarter 2002 Charge”). The initiatives included further reductions to operating expenses and the continued reorganization and realignment of Health Care operations. This charge consisted of costs that related to actions under a plan of involuntary termination of employees and included the elimination of approximately 600 employee positions (primarily regional field management, information technology and medical service functions). Severance actions related to the Second Quarter 2002 Charge were substantially completed by December 31, 2002.

In the third quarter of 2002, the Company recorded an after-tax severance and facilities charge of $58 million ($89 million pretax) related to the implementation of ongoing initiatives intended to improve the Company’s overall future performance (the “Third Quarter 2002 Charge”). These initiatives included further reductions to operating expenses and the continued reorganization and realignment of Health Care and Group Insurance operations. This charge consisted of two types of costs: those that relate to actions under a plan for the involuntary termination of approximately 2,750 employee positions (primarily customer service, plan sponsor services, patient management, sales, network management and certain Group Insurance related positions) representing approximately $81 million pretax of this charge and those actions that relate to an exit plan with respect to certain leased facilities representing approximately $8 million pretax of this charge. The facilities portion represents the present value of the difference between rent required to be paid by the Company and future sublease rentals expected to be received by the Company related to certain leased facilities, or portions of such facilities, that will be vacated. Severance actions and the vacating of leased facilities relating to the Third Quarter Charge 2002 are expected to be completed by September 30, 2003. The remaining lease payments (net of expected sublease rentals) on these vacated facilities are payable over approximately the next seven years.

Page 77

Notes to Consolidated Financial Statements

11. Severance and Facilities Charges (Continued)

In the fourth quarter of 2002, the Company recorded an after-tax severance and facilities charge of $29 million ($45 million pretax) related to the implementation of ongoing initiatives intended to improve the Company’s overall future performance (the “Fourth Quarter 2002 Charge”). These initiatives include further reductions to operating expenses and the continued reorganization and realignment of Health Care and Group Insurance operations. This charge consists of two types of costs: those that relate to actions under a plan for the involuntary termination of approximately 680 employee positions (primarily customer service, information technology and certain Group Insurance related positions) representing approximately $31 million pretax of this charge and those actions that relate to an exit plan with respect to certain leased facilities representing approximately $14 million pretax of this charge. The facilities portion represents the present value of the difference between rent required to be paid by the Company and future sublease rentals expected to be received by the Company related to certain leased facilities, or portions of such facilities, that will be vacated. Severance actions and the vacating of leased facilities relating to the Fourth Quarter Charge 2002 are expected to be completed by December 31, 2003. The remaining lease payments (net of expected sublease rentals) on these vacated facilities are payable over approximately the next seven years.

The activity within the severance and facilities reserves and the related number of positions eliminated were as follows:

							Second Quarter						Third Quarter						Fourth Quarter
	2001 Charge						2002 Charge						2002 Charge						2002 Charge
(Millions, pretax)	Reserve			Positions			Reserve			Positions			Reserve			Positions			Reserve			Positions
Balance at December 31, 2001	$	142.6			3,638		$	—			—		$	—			—		$	—			—
Reserve additions		—			—			27.0			598			89.0			2,744			45.0			678
Actions taken (1)		(142.6	)		(3,487	)		(27.0	)		(527	)		(72.8	)		(1,805	)		(21.6	)		(321	)
Balance at December 31, 2002	$	—			151	(2)	$	—			71	(2)	$	16.2			939		$	23.4			357

(1)

Actions taken relating to the 2001 Charge include $103.3 million of severance-related actions and $39.3 million related to vacating certain leased facilities. Actions taken relating to the Second Quarter 2002 Charge were all severance related. Actions taken relating to the Third Quarter 2002 Charge include $70.6 million of severance-related actions and $2.2 million related to vacating certain leased facilities. Actions taken relating to the Fourth Quarter 2002 Charge were all severance related.

(2)

The Company eliminated substantially all of the positions expected under the Company’s plans for involuntary termination related to the 2001 Charge and the Second Quarter 2002 Charge and considers these plans now complete.

12. Discontinued Products

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

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

Page 78

Notes to Consolidated Financial Statements

12. Discontinued Products (Continued)

At the time of discontinuance, a receivable from Large Case Pensions’ continuing products equivalent to the net present value of the anticipated cash flow shortfalls was established for the discontinued products. Interest on the receivable is accrued at the discount rate that was used to calculate the reserve. The offsetting payable, on which interest is similarly accrued, is reflected in continuing products. Interest on the payable generally offsets the investment income on the assets available to fund the shortfall. At December 31, 2002, the receivable from continuing products, net of related deferred taxes payable of $96 million on the accrued interest income, was $357 million. At December 31, 2001, the receivable from continuing products, net of the related deferred taxes payable of $87 million on the accrued interest income, was $345 million. These amounts were eliminated in consolidation.

Results of discontinued products were as follows (pretax):

					Charged (Credited)
					to Reserve
(Millions)		Results			Future Losses			Net(1)
2002
Net investment income		$	375.2		$	—		$	375.2
Net realized capital losses			(57.5	)		57.5			—
Interest earned on receivable from continuing products			26.8			—			26.8
Other income			28.4			—			28.4
	Total revenue		372.9			57.5			430.4
Current and future benefits			393.9			23.8			417.7
Operating expenses			12.7			—			12.7
	Total benefits and expenses		406.6			23.8			430.4
Results of discontinued products		$	(33.7	)	$	33.7		$	—
2001
Net investment income		$	397.6		$	—		$	397.6
Net realized capital gains			18.9			(18.9	)		—
Interest earned on receivable from continuing products			27.2			—			27.2
Other income			32.2			—			32.2
	Total revenue		475.9			(18.9	)		457.0
Current and future benefits			423.7			21.1			444.8
Operating expenses			12.2			—			12.2
	Total benefits and expenses		435.9			21.1			457.0
Results of discontinued products		$	40.0		$	(40.0	)	$	—
2000
Net investment income		$	438.0		$	—		$	438.0
Net realized capital losses			(31.1	)		31.1			—
Interest earned on receivable from continuing products			30.2			—			30.2
Other income			27.2			—			27.2
	Total revenue		464.3			31.1			495.4
Current and future benefits			453.7			28.9			482.6
Operating expenses			12.8			—			12.8
	Total benefits and expenses		466.5			28.9			495.4
Results of discontinued products		$	(2.2	)	$	2.2		$	—

(1) Amounts are reflected in the 2002, 2001 and 2000 Consolidated Statements of Income, except for interest earned on the receivable from continuing products, which was eliminated in consolidation.

Net realized capital gains (losses) from the sale of bonds supporting discontinued products were $(82) million, $46 million and $(90) million (pretax) for 2002, 2001 and 2000, respectively.

Page 79

Notes to Consolidated Financial Statements

12. Discontinued Products (Continued)

Assets and liabilities supporting discontinued products at December 31 were as follows: (1)

(Millions)		2002		2001
Assets:
	Debt securities available for sale	$	3,481.0	$	3,573.8
	Equity securities		73.4		211.0
	Mortgage loans		763.2		822.1
	Investment real estate		95.0		130.4
	Loaned securities		167.1		131.9
	Other investments (2)		505.7		481.4
	Total investments		5,085.4		5,350.6
	Collateral received under securities loan agreements		170.8		135.2
	Current and deferred income taxes		94.4		93.0
	Receivable from continuing products (3)		453.1		431.7
Total assets		$	5,803.7	$	6,010.5
Liabilities:
	Future policy benefits	$	4,361.1	$	4,512.6
	Policyholders’ funds		82.9		261.5
	Reserve for anticipated future losses on discontinued products		902.9		944.9
	Collateral payable under securities loan agreements		170.8		135.2
	Other liabilities		286.0		156.3
Total liabilities		$	5,803.7	$	6,010.5

(1)	Assets supporting the discontinued products are distinguished from assets supporting continuing products.
(2)	Includes debt securities on deposit as required by regulatory authorities of $68.3 million and $55.7 million at December 31, 2002 and 2001, respectively. These securities are considered restricted assets and were included in long-term investments on the Consolidated Balance Sheets.
(3)	The receivable from continuing products is eliminated in consolidation.

At December 31, 2002 and 2001, net unrealized capital gains on available-for-sale debt securities are included above in other liabilities and are not reflected in consolidated shareholders’ equity. The reserve for anticipated future losses is included in future policy benefits on the Consolidated Balance Sheets.

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

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

Page 80

Notes to Consolidated Financial Statements

12. Discontinued Products (Continued)

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

The Company’s assumptions about the cost of asset management and customer service reflect actual investment and general expenses allocated over invested assets.

The activity in the reserve for anticipated future losses on discontinued products was as follows (pretax):

(Millions)
Reserve at December 31,1999	$	1,147.6
Operating income		16.1
Net realized capital losses		(31.1	)
Mortality and other		12.8
Reserve reduction		(146.0	)
Reserve at December 31, 2000		999.4
Operating income		3.2
Net realized capital gains		18.9
Mortality and other		17.9
Reserve reduction		(94.5	)
Reserve at December 31, 2001		944.9
Operating income		8.2
Net realized capital losses		(57.5	)
Mortality and other		15.6
Reserve reduction		(8.3	)
Reserve at December 31, 2002	$	902.9

Management reviews the adequacy of the discontinued products reserve quarterly and, as a result, $8 million ($5 million after tax) of the reserve was released in the second quarter of 2002, primarily due to favorable mortality and retirement experience and certain reductions in administrative expenses, partially offset by lower portfolio returns. For 2001, $95 million ($61 million after tax) of the reserve was released primarily due to favorable investment performance that included equity gains and mortgage loan prepayment penalty income, as well as favorable mortality and retirement experience. For 2000, $146 million pretax ($95 million after tax) of the reserve was released primarily due to favorable investment performance related to certain equity investments, favorable mortality and retirement experience and the decrease in size of the overall bond portfolio, which decreased default risk. The current reserve reflects management’s best estimate of anticipated future losses.

The anticipated run off of the December 31, 2002 reserve balance (assuming that assets are held until maturity and that the reserve run off is proportional to the liability run off) is as follows:

(Millions)
2003	$	30.8
2004		31.2
2005		31.5
2006		31.7
2007		31.8
2008 – 2012		163.2
2013 – 2017		155.2
2018 – 2022		133.1
2023 – 2027		104.2
Thereafter		190.2

Page 81

Notes to Consolidated Financial Statements

12.     Discontinued Products (Continued)

The expected (as of December 31, 1993) and actual liability balances for the GIC and SPA liabilities at December 31 are as follows:

	Expected				Actual
(Millions)	GIC		SPA		GIC		SPA
2000	$	690.7	$	4,357.9	$	548.8	$	4,462.5
2001		352.9		4,238.9		261.5		4,512.6
2002		169.5		4,114.6		82.9		4,361.1

The GIC balances were lower than expected in each period as several contractholders redeemed their contracts prior to contract maturity. The SPA balances in each period were higher than expected because of additional amounts received under existing contracts. The increase in the 2001 actual SPA balance, when compared to 2000, is due to the transfer of funds from separate accounts to purchase guaranteed annuities in the Company’s general account, under an existing contract.

13. Income Taxes

Income taxes (benefits) consist of the following:

(Millions)		2002			2001			2000
Current taxes (benefits):
	Federal	$	216.6		$	(43.9	)	$	194.9
	State		(22.8	)		30.3			47.2
Total current taxes (benefits)			193.8			(13.6	)		242.1
Deferred taxes (benefits):
	Federal		(43.1	)		(74.7	)		(152.8	)
	State		.9			1.1			(.9	)
Total deferred tax benefits			(42.2	)		(73.6	)		(153.7	)
Total income taxes (benefits)		$	151.6		$	(87.2	)	$	88.4

Income taxes were different from the amount computed by applying the federal income tax rate to income before income taxes as follows:

(Millions)		2002			2001			2000
Income (loss) from continuing operations before income taxes		$	544.8		$	(378.7	)	$	(39.0	)
Tax rate			35	%		35	%		35	%
Application of the tax rate			190.7			(132.5	)		(13.7	)
Tax effect of:
	Tax-exempt interest		(10.5	)		(10.3	)		(10.1	)
	Goodwill amortization and write-off		—			66.9			103.6
	State income taxes		(14.2	)		20.4			30.1
	Sale of subsidiaries		—			(11.6	)		(10.8	)
	Tax credits		(18.5	)		(17.1	)		(14.4	)
	Other, net		4.1			(3.0	)		3.7
Income taxes (benefits)		$	151.6		$	(87.2	)	$	88.4

Page 82

Notes to Consolidated Financial Statements

13. Income Taxes (Continued)

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

(Millions)		2002			2001
Deferred tax assets:
	Reserve for anticipated future losses on discontinued products	$	176.2		$	263.6
	Employee and retirement benefits (including minimum pension liability)		552.4			123.5
	Severance and facilities reserve		54.4			90.2
	Deferred income		20.5			20.5
	Expenses not currently deductible		21.0			33.9
	Allowance for doubtful accounts		6.4			28.0
	Deferred policy costs		37.4			33.1
	Investments, net		85.0			37.4
	Depreciation and amortization		9.5			1.5
	Net operating loss carry forwards		33.9			17.4
	Insurance reserves		86.7			6.8
	Other		18.8			20.4
Total gross assets			1,102.2			676.3
Less: valuation allowance			33.9			16.2
Assets, net of valuation allowance			1,068.3			660.1
Deferred tax liabilities:
	Amortization of goodwill and other acquired intangible assets		103.0			117.6
	Accumulated other comprehensive income		153.4			36.9
	Other		28.1			31.0
Total gross liabilities			284.5			185.5
Net deferred tax asset		$	783.8	(1)	$	474.6	(1)

(1) Includes $201.3 million and $114.1 million classified as current assets in 2002 and 2001, respectively, and $582.5 million and $360.5 million classified as noncurrent assets in 2002 and 2001, respectively.

Valuation allowances are provided when it is considered unlikely that deferred tax assets will be realized. Management believes that it is more likely than not that the Company will realize its net deferred tax asset of $784 million, net of a valuation allowance of $34 million. The valuation allowance is principally on acquired net operating losses and state net operating losses, which are subject to limitations as to future utilization. The Company has recognized $384 million of net deferred tax assets on Aetna Life Insurance Company (which is not consolidated for tax purposes) and $400 million on the remaining consolidated group. Management’s beliefs are based on historic and anticipated taxable income for each group. However, the amount of the deferred tax asset considered realizable could be adjusted in the future if estimates of taxable income are revised.

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 $918 million at December 31, 2002, adjusted for Internal Revenue Service (the “Service”) audits finalized to date. This amount would be taxed only under certain conditions. No income taxes have been provided on this amount, since management believes under current tax law the conditions under which such taxes would become payable are remote.

Page 83

Notes to Consolidated Financial Statements

13. Income Taxes (Continued)

In 2002, the Service completed its audit of the consolidated federal income tax returns of former Aetna and its affiliates for the years 1979 through 1983. The Service is presently completing its audit of former Aetna’s 1984 through 1997 returns. As a result of these audits, the Service proposed certain adjustments. The majority of these adjustments have been agreed to by the Company, and as a result, in 2002 the Company reduced liabilities held for potential tax exposure by $50 million for federal taxes associated with the discontinued Property and Casualty insurance operations and by $25 million related to its acquisition of U.S. Healthcare, Inc. in 1996, which was credited to goodwill. However, several key issues have not yet been resolved, although the Company expects to resolve these issues during 2003. In addition, several state audits were also completed during 2001, resulting in the reduction of related liabilities by $20 million.

The Service recently began its audit of former Aetna’s 1998 through 2000 (prior to December 13, 2000) and the Company’s 2000 (subsequent to December 13, 2000) through 2001 returns. The Company expects to receive any proposed adjustments for these years in late 2003 (as the audits progress to completion).

The Company believes that it has established adequate reserves for additional taxes and interest that may result from the ultimate resolution of the audits noted above. These reserves will be adjusted as necessary upon the resolution of the related issues with the Service.

The Company paid (received refunds of) net income taxes of $(65) million, $106 million and $196 million in 2002, 2001 and 2000, respectively.

14. Benefit Plans

The Company is responsible for pension and post-retirement benefits for actively employed individuals, as well as retired or inactive United States employees of the Company and former Aetna. (Refer to Note 21). For periods prior to December 13, 2000, accrued pension cost has been allocated to continuing and discontinued operations (for those businesses sold by former Aetna) under an allocation method based on eligible salaries. As of the Transaction date, data on a separate company basis regarding the proportionate share of the projected benefit obligation and plan assets for pension and post-retirement plans was not available.

Defined Benefit Pension Plans

The Company’s noncontributory defined benefit pension plans cover substantially all of its employees. Effective January 1, 1999, the Company, in conjunction with former Aetna, changed the formula from the previous final average pay formula to a cash balance formula, which will credit employees annually with an amount equal to a percentage of eligible pay based on age and years of service, as well as an interest credit based on individual account balances. The formula also provides for a transition period until December 31, 2006, which allows certain employees to receive vested benefits at the higher of the previous final average pay or cash balance formula. For employees hired after January 1, 2002, the Company changed the cash balance formula to provide greater initial credits and make the benefit less dependent on length of service. Existing employees will receive the larger of the pension credit under the previous formula or this new formula. These changes did not have a material effect on the Company’s results of operations, liquidity or financial condition.

Page 84

Notes to Consolidated Financial Statements

14. Benefit Plans (Continued)

Components of the net periodic benefit income (cost) of the Company’s (former Aetna, prior to December 13, 2000) noncontributory defined benefit pension plan were as follows:

(Millions)	2002			2001			2000
Service cost	$	(74.3	)	$	(82.0	)	$	(93.1	)
Interest cost		(259.9	)		(263.8	)		(258.0	)
Expected return on plan assets		295.6			375.4			350.7
Amortization of prior service cost		(4.0	)		(4.5	)		(5.8	)
Recognized net actuarial gain (loss)		(6.9	)		11.9			7.5
Net periodic benefit income (cost)	$	(49.5	)	$	37.0		$	1.3

The allocated pretax benefit to operations for the pension plan (based on the Company’s total salary cost as a percentage of former Aetna’s total salary cost) was approximately $6 million for 2000.

As of the measurement date (September 30), the status of the Company’s defined benefit pension plans was as follows:

(Millions)	2002			2001
Projected benefit obligation, beginning of year	$	3,580.6		$	3,519.4
Service cost		74.3			82.0
Interest cost		259.9			263.8
Actuarial loss (gain)		261.2			(66.7	)
Benefits paid		(230.3	)		(217.9	)
Projected benefit obligation, end of year	$	3,945.7		$	3,580.6
Fair value of plan assets, beginning of year	$	3,301.5		$	4,163.9
Actual return on plan assets		(246.3	)		(662.1	)
Employer contributions		118.3			17.6
Benefits paid		(230.3	)		(217.9	)
Fair value of plan assets, end of year	$	2,943.2		$	3,301.5
Fair value of plan assets less than projected benefit obligation	$	(1,002.5	)	$	(279.1	)
Unrecognized net loss		1,230.7			441.3
Unrecognized prior service cost		41.5			38.7
Net amount recognized	$	269.7		$	200.9
Amounts recognized in the statement of financial position consist of:
Prepaid pension asset	$	—		$	200.9
Accrued pension liability		(934.5	)		—
Intangible asset		42.4			—
Accumulated other comprehensive income		1,161.8			—
Net amount recognized	$	269.7		$	200.9
Weighted average discount rate		6.75	%		7.50	%
Expected return on plan assets		9.00	%		9.25	%
Rate of compensation increase		3.75	%		4.50	%

For 2002 and 2001, defined benefit plans included above with benefit obligations in excess of assets had accumulated benefit obligations of approximately $3.9 billion and $3.5 billion, respectively. The above projected benefit and accumulated benefit obligations reflect revised assumptions made as of the 2001 measurement date related to cost of living adjustments, average retirement age and the form of payment elections, including deferral options. These revised assumptions reflect the Company’s experience and plan design, and reduced the 2001 projected benefit obligation by $212 million and the accumulated benefit obligation by $208 million.

Page 85

Notes to Consolidated Financial Statements

14. Benefit Plans (Continued)

Other Post-Retirement Benefit Plans

In addition to providing pension benefits, the Company currently provides certain health care, dental and life insurance benefits for retired employees, including those of former Aetna. A comprehensive medical and dental plan is offered to all full-time employees, who terminate employment at age 45 or later with 10 or more years of service. The Company provides subsidized benefits to certain employees as of December 31, 2002 whose sum of age and service is at least equal to 65 (due to a plan amendment, employees hired after January 1, 2002 and all employees under the age of 35 at that date are not eligible for subsidized retiree health benefits). There is a cap on the portion of the cost paid by the Company relating to medical and dental benefits. The plan assets are held in trust and administered by Aetna Life Insurance Company (“ALIC”).

In January 2003, the Company amended this plan, reducing the subsidy provided to individuals retiring subsequent to January 1, 2004. Beginning January 1, 2004, the Company will begin to phase-out the retiree medical subsidy for active employees (and eligible dependents) who terminate employment after December 31, 2003. The subsidy will decrease 25% each year until it is eliminated for employees terminating employment on or after January 1, 2007. Beginning January 1, 2004, the Company will eliminate the retiree dental subsidy for active employees who terminate employment on or after January 1, 2003. However, Company employees who terminate employment at age 45 or later with at least 10 years of service will be eligible to participate in the Company’s group health plans at their own cost. As a result of these plan amendments announced in January of 2003, the Company expects to record a curtailment benefit of approximately $35 million pretax in the first quarter of 2003.

Components of the net periodic benefit cost of the Company’s (former Aetna, prior to December 13, 2000) postretirement plans were as follows:

(Millions)	2002			2001			2000
Service cost	$	(7.8	)	$	(6.7	)	$	(7.4	)
Interest cost		(31.8	)		(31.7	)		(32.0	)
Expected return on plan assets		4.8			4.8			4.4
Curtailment benefit		11.8	(1)		—			—
Amortization of prior service cost		4.4			15.7			23.0
Recognized net actuarial gain		—			.3			.8
Net periodic benefit cost	$	(18.6	)	$	(17.6	)	$	(11.2	)

(1) Reflects a plan amendment, effective January 1, 2002, whereby the Company no longer provides subsidized benefits to employees who had not reached age 35 by this date.

Allocated pre-tax charges to the Company associated with the postretirement plans of former Aetna were $(10) million in 2000.

Page 86

Notes to Consolidated Financial Statements

14. Benefit Plans (Continued)

As of the measurement date (September 30), the status of the Company’s postretirement benefit plans (other than pensions) was as follows:

(Millions)	2002			2001
Accumulated benefit obligation, beginning of year	$	469.9		$	425.9
Service cost		7.8			6.7
Interest cost		31.8			31.7
Actuarial (gain) loss		71.8			43.7
Curtailment benefit		(1.4	)		—
Benefits paid		(38.7	)		(38.1	)
Accumulated benefit obligation, end of year	$	541.2		$	469.9
Fair value of plan assets, beginning of year	$	78.2		$	78.4
Actual return on plan assets		—			1.8
Employer contribution		37.3			36.1
Benefits paid		(38.7	)		(38.1	)
Fair value of plan assets, end of year	$	76.8		$	78.2
Accumulated benefit obligation in excess of fair value of plan assets	$	464.4		$	391.6
Unrecognized net gain (loss)		(96.6	)		4.8
Prior service cost		29.0			19.0
Accrued postretirement benefit costs	$	396.8		$	415.4
Weighted average discount rate		6.75	%		7.50	%
Expected return on plan assets		7.00	%		7.00	%

The health care cost trend rate for the 2002 valuation decreased gradually from 9.0% for pre-65 and 11% for post-65 for 2003 to 5.0% by the year 2007 for pre-65 and 5.0% by the year 2009 for post-65. For the 2001 valuation, the rates decreased gradually from 7.0% for 2002 to 5.5% by the year 2005. This assumption reflects the Company’s historical as well as expected future trend rates. In addition, trend assumption reflects factors specific to the Company’s retiree medical plan, such as plan design, cost-sharing provisions, benefits covered, and the presence of subsidy caps. As a result of the Transaction (refer to Note 21), the Company retained the postretirement benefit obligation for all Company employees and existing retirees of former Aetna, except for a specific plan that was retained by former Aetna.

A one-percentage-point change (increase or decrease) in assumed health care cost trend rates would have the following effects:

(Millions)	Increase		Decrease
Effect on total of service and interest cost components	$	1.0	$	(.7	)
Effect on postretirement benefit obligation		11.3		(10.0	)

Page 87

Notes to Consolidated Financial Statements

14. Benefit Plans (Continued)

Incentive Savings Plans – Substantially all of the Company’s employees are eligible to participate in a savings plan under which designated contributions, which may be invested in common stock of the Company or certain other investments, are matched by the Company. On January 1, 2002, the Company changed its match to 50% of the first 6% of eligible pay contributed to the plan. Effective January 2003, matching contributions by the Company are made in cash and invested according to each participant’s investment elections. For the period August 2001 through December 2002, matching contributions by the Company were made in Aetna Common Stock instead of being contributed in cash. In addition, the plan provides for an annual performance-based contribution by the Company of up to 3% of eligible pay (up to a maximum of $6,000), provided the Company exceeds specified performance targets for the year. The performance-based contribution may be made in cash, stock, or a combination of both at the election of the Company. Based on the Company’s results for 2002, a performance-based contribution of 3% of eligible pay (up to a maximum of $6,000) was contributed by the Company in February of 2003. Prior to January 1, 2002, the Company provided for a match of up to 100% on the first 5% of eligible pay contributed. The costs to the Company (allocated costs for 2000) associated with these plans, including the performance-based contribution for 2002, were $79 million, $65 million and $67 million for 2002, 2001 and 2000, respectively. The plan trustee held 5,383,324, 5,206,210 and 4,889,945 shares of the Company’s common stock for plan participants at December 31, 2002, 2001 and 2000, respectively.

Stock-Based Employee Incentive Plans

Stock-based Employee Incentive Plans - The Company’s Stock-based Employee Incentive Plans (the “Plans”) provide for stock option awards (see “Stock Options” below), deferred contingent common stock (see “Performance Units” below), restricted stock awards to employees and the ability for employees to purchase common stock at a discount. At December 31, 2002, 17,404,769 shares were available for grant under the Plans.

Stock Options - Executive, middle management and nonmanagement employees may be granted options to purchase common stock of the Company 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. From time to time, the Company has issued options with different vesting provisions. Vested options may be exercised at any time during the 10 years after grant, except in certain circumstances, generally related to employment termination or retirement. At the end of the 10-year period, any unexercised options expire.

Page 88

Notes to Consolidated Financial Statements

14. Benefit Plans (Continued)

Prior to December 13, 2000, the Company’s employees participated in former Aetna’s stock option plan. Since the Company is the successor of former Aetna for accounting purposes, the following table reflects stock option transactions of former Aetna for periods prior to December 13, 2000 and for the Company subsequent to that date.

	2002					2001					2000
				Weighted					Weighted					Weighted
				Average					Average					Average
	Number			Exercise		Number			Exercise		Number			Exercise
	of Shares			Price		of Shares			Price		of Shares			Price
Outstanding, beginning of year		32,256,675		$	30.72		31,709,870		$	30.42		15,581,995		$	68.30
Granted		5,280,044		$	36.28		5,299,825		$	28.21		5,425,592		$	44.32
Exercised		(8,393,059	)	$	27.82		(3,558,748	)	$	22.90		(619,027	)	$	44.04
Expired or forfeited		(865,709	)	$	31.77		(1,194,272	)	$	34.91		(1,526,884	)	$	59.48
Outstanding at December 13, 2000												18,861,676		$	63.20
Settlement of stock options held by employees of sold businesses												(3,207,604	)		—
Conversion to Company stock options												16,824,872			—
Granted												207,744		$	35.01
Exercised												(948,000	)	$	23.15
Expired or forfeited												(28,818	)	$	24.32
Outstanding, end of year		28,277,951		$	32.55		32,256,675		$	30.72		31,709,870		$	30.42
Options exercisable, end of year		20,535,382		$	32.21		26,126,828		$	31.23		30,352,471		$	30.42

As a result of the Transaction, the former Aetna stock options held by employees of the Company and existing retirees of former Aetna were converted into options to purchase shares of the Company with adjustments made to both the number of options and the exercise prices to maintain the intrinsic in- or out-of-the-money value immediately before the spin-off. As a result of the change in control of former Aetna, substantially all prior stock option grants became fully vested during 2000. The in-the-money former Aetna stock options held by employees of the sold businesses were settled for cash while the out-of-the-money former Aetna stock options for such employees were cancelled.

The following is a summary of information regarding options outstanding and options exercisable at December 31, 2002:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted				Weighted
			Remaining		Average				Average
	Number		Contractual		Exercise		Number		Exercise
Range of Exercise Prices	Outstanding		Life (Years)		Price		Exercisable		Price
$12.89 - $16.26		25,694		.7	$	15.66		25,694	$	15.66
$16.26 - $21.69		2,409,442		6.7	$	19.70		2,409,442	$	19.70
$21.69 - $27.11		9,083,021		6.8	$	25.37		7,039,310	$	25.05
$27.11 - $32.53		1,188,042		6.7	$	29.46		801,629	$	29.72
$32.53 - $37.95		7,818,072		6.9	$	35.34		2,872,159	$	34.65
$37.95 - $43.37		4,981,766		3.4	$	41.68		4,843,000	$	41.66
$43.37 - $48.79		2,487,100		5.5	$	43.93		2,259,334	$	43.51
$48.79 - $54.21		284,814		3.3	$	53.16		284,814	$	53.16
		28,277,951						20,535,382

Page 89

Notes to Consolidated Financial Statements

14. Benefit Plans (Continued)

Performance Units – During 2002 and 2001, the Company granted performance stock units to certain executives as part of a long-term incentive program. The value of the performance stock units is equal to the Company’s stock price, although the units are not actual shares of stock and do not pay dividends (but may be paid in shares of stock or cash, except as discussed below). The performance stock units granted in 2002 and 2001 were established with the ability to vest as early as December 31, 2003 and December 31, 2002, respectively, (“accelerated vesting”) if the Company meets or exceeds performance goals set by the Board of Directors. If performance does not meet the accelerated vesting goal, the performance measurement period for these grants may be as long as four and one-half years from the grant date. The Board of Director’s Committee on Compensation and Organization determines if the performance goals have been achieved and resets the performance goal each year, if it is not achieved in the prior year. The number of performance stock units that may vest at the end of the performance measurement period is dependent upon the degree to which the Company achieves the performance goals. The vesting may go as high as 200% of target for 2002 and 2001 grants, if operating earnings, as defined, are 25% above performance goals. If performance accelerated vesting is not obtained, 50% of the grant will vest, regardless of performance, at the end of the four and one-half year measurement period if the participant is actively employed by the Company on such date. Performance stock units which vest pursuant to time vesting (rather than solely performance vesting) will be payable solely in shares. The compensation expense related to time vested performance stock awards will be amortized over the vesting period. For the 50% of the performance stock units subject solely to performance goals, compensation expense is recognized over the vesting period based on the Company’s stock price.

In 2002, the Company determined that accelerated vesting at 200% of target applied to grants made in 2001 as the Company exceeded performance goals set by the Board of Directors. Accordingly, the Company recognized all remaining compensation expense associated with these grants in 2002. Distributions to participants occurred after approval by the Board of Director’s Committee on Compensation and Organization in the first quarter of 2003.

Incentive Units - Prior to December 13, 2000, the Company’s executives participated in former Aetna’s incentive unit plan. These incentive units were rights to receive common stock or an equivalent value in cash. Of the two cycles of former Aetna incentive unit grants outstanding during 2000, each cycle was due to vest at the end of a four-year vesting period (2000 and 2002), conditioned upon the employee’s continued employment during that period and achievement of specified performance goals related to the total return to shareholders over the four-year measurement period. Incentive units could vest within a range from 0% to 175% at the end of the four-year period based on the attainment of these performance goals. Interim measurements of compensation expense were made at each reporting period based on the estimated periodic stock price and estimated forfeitures, over the four-year vesting period. Compensation expense was recognized over the four-year vesting period and no compensation expense was recognized at the date of grant. The incentive unit holders were not entitled to dividends during the vesting period. On December 13, 2000, as a result of the change in control of former Aetna (refer to Note 21), the cycle which ended on December 31, 2000 became fully vested while the cycle which would have ended on December 31, 2002 became vested on a pro-rated basis. These awards were paid in cash. As a result, there were no incentive units outstanding as of December 31, 2000.

Page 90

Notes to Consolidated Financial Statements

14. Benefit Plans (Continued)

The Company’s (former Aetna prior to December 13, 2000) performance and incentive unit transactions are as follows:

	Number of Incentive Units
	2002			2001			2000
Outstanding, beginning of year		442,325			—			708,275
Granted		531,140			444,250			16,800
Vested		(482,665	)		—			(382,834	)
Expired or forfeited		(24,400	)		(1,925	)		(342,241	)
Outstanding, end of year		466,400			442,325			—

The weighted-average grant date fair values for incentive units granted in 2002, 2001 and 2000 were $46.48, $26.55 and $56.01, respectively.

The costs to the Company associated with the Company’s (former Aetna, prior to December 13, 2000) performance and incentive units for 2002, 2001 and 2000 were $39 million, $2 million and $9 million, respectively.

Employee Stock Purchase Plan - The Company’s shareholders approved the Aetna Inc. Employee Stock Purchase Plan (the “ESPP”) at the Company’s Annual Meeting on April 26, 2002. Under the ESPP, 6.5 million of the Company’s common shares are authorized for purchase by eligible employees in accordance with the ESPP’s provisions. All employees of the Company are eligible to participate in the ESPP if employed immediately prior to the first day of the offering period. Employees may contribute a percentage of their base salary through payroll deductions. Contributions are accumulated for a six-month period and used to purchase stock at the end of the offering period (the “Purchase Date”). On the Purchase Date, stock is purchased for all participating employees based on the contributions accumulated (subject to a $25,000 annual limit per employee). The purchase price of the stock is based on a discounted percentage (such discount may not exceed 15%) of the lesser of the stock price at the beginning or the end of the offering period. The first six-month accumulation period commenced July 5, 2002 and ended December 20, 2002. The purchase price for this offering was at a 10% discount from the lesser of the stock’s fair market value on July 5, 2002 or December 20, 2002. For the period ended December 31, 2002, approximately 136,000 shares of common stock were purchased under the ESPP at the purchase price of $36.85 per share. On January 3, 2003, the second six-month accumulation period commenced. This accumulation period ends on June 20, 2003 and the purchase price for this offering is at a 10% discount from the lesser of the stock’s fair market value on January 3, 2003 or June 20, 2003.

Page 91

Notes to Consolidated Financial Statements

15. Debt

The carrying value of long-term debt at December 31, was as follows:

(Millions)		2002		2001
Long-term debt:
	Senior notes, 7.375% due 2006	$	449.1	$	448.8
	Senior notes, 7.875% due 2011		446.9		446.6
	Senior notes, 8.50% due 2041		737.2		695.9
Total		$	1,633.2	$	1,591.3

On February 14, 2001, the Company filed a shelf registration statement with the Securities and Exchange Commission to sell debt securities, from time to time, up to a total of $2 billion, with the amount, price and terms to be determined at the time of the sale. On March 2, 2001, the Company issued $900 million of senior notes under this shelf registration statement consisting of $450 million of 7.375% senior notes due in 2006 and $450 million of 7.875% senior notes due in 2011. On June 18, 2001, the Company issued, under this shelf registration statement, an additional $700 million of 8.5% senior notes due in 2041 (Refer to Note 8 for information on the Company’s interest rate swap agreements and effective interest rate for 2002 relating to these senior notes). Net proceeds from these issuances totaled approximately $1.6 billion and were used to reduce outstanding commercial paper borrowings.

During 2002, the maximum amount of domestic short-term borrowings outstanding was $145 million. The Company’s short-term borrowings consist of a commercial paper program that relies on backup revolving credit facilities, which together provide for an aggregate borrowing capacity of $800 million. The Company’s credit facilities consist of a $300 million credit facility which terminates in November 2003 and a $500 million credit facility which terminates in November 2005. Various interest rate options are available under these facilities. Any revolving borrowings mature on the termination date of the applicable credit facility, however the Company may convert any amounts outstanding under the $300 million facility when it terminates into a term loan that matures in November 2004 upon the satisfaction of certain conditions. The Company pays facility fees on each facility ranging from .1% to .5% per annum, depending upon its long-term senior unsecured debt rating. The facility fee at December 31, 2002 is at an annual rate of .18% for the credit facility terminating in 2003 and .23% for the credit facility terminating in 2005. There were no borrowings under these facilities as of December 31, 2002.

Under the terms of its revolving credit facilities, the Company is required to maintain a minimum level of shareholders’ equity, excluding net unrealized capital gains and losses, as of each fiscal quarter end. The required minimum level is increased by 50% of the Company’s consolidated net income each quarter beginning with the quarter ending March 31, 2003, and is decreased by up to $150 million for certain non-recurring after-tax charges (“excluded charges”). At December 31, 2002, the Company met its required minimum level of approximately $5 billion. The Company is also required to maintain its ratio of total debt to consolidated earnings as of each fiscal quarter end at or below 3.0. For this purpose, consolidated earnings equals, for the period of four consecutive quarters, net income plus interest expense, income tax expense, depreciation expense, amortization expense, certain excluded charges, the goodwill impairment resulting from the adoption of FAS No. 142 and any extraordinary gains or losses. The Company met this requirement at December 31, 2002.

Total interest paid by the Company was $119 million, $118 million and $333 million in 2002, 2001 and 2000, respectively.

Page 92

Notes to Consolidated Financial Statements

16. Capital Stock

On October 25, 2002, the Company’s Board of Directors (“the Board”) voted to terminate the Company’s shareholder rights plan. The plan was terminated by changing its 2010 expiration date to October 31, 2002, although the Board retained the right to adopt a new plan at a future date in the event of changed circumstances.

On September 27, 2002, the Board declared an annual cash dividend of $.04 per common share to shareholders of record at the close of business on November 15, 2002. The dividend was paid on November 29, 2002.

In addition to the capital stock disclosed on the Consolidated Balance Sheets, Aetna has authorized 7,625,000 shares of Class A voting preferred stock, $.01 par value per share. There are also 61,222,228 undesignated shares that the Board has the power to divide into such classes and series, with such voting rights, designations, preferences, limitations and special rights as the Board determines. At December 31, 2002, 39,799,877 common shares of Aetna were reserved for issuance under its stock option plans and 8,542,369 common shares were reserved for issuance under its incentive savings plan.

In December 2000, the Board had authorized the repurchase of up to 5 million shares of common stock (not to exceed an aggregate purchase price of $200 million). The Company repurchased 2.6 million shares of common stock at a cost of approximately $96 million during the first quarter of 2001 pursuant to this authorization, and then suspended repurchases until April 2002. In April 2002, the Company re-initiated share repurchases pursuant to this authorization, and during the second quarter of 2002, the Company repurchased approximately 2.1 million shares of common stock at a cost of approximately $104 million, completing this share repurchase program. On June 28, 2002, the Board authorized a new share repurchase program for the repurchase of up to 5 million shares of common stock (not to exceed an aggregate purchase price of $250 million). During the remainder of 2002, the Company repurchased approximately 1.5 million shares of common stock at a cost of approximately $61 million under this new share repurchase program.

On January 25, 2002, the Board authorized the issuance of approximately 7.5 million of the Company’s common shares to eligible employees in accordance with the 2002 Stock Incentive Plan. On January 25, 2002, the Board of Directors’ Committee on Compensation and Organization approved a grant of approximately 5 million stock options to purchase common shares of the Company at $35.78 per share. During 2002, the Company issued approximately 9.3 million shares of common stock for benefit plans (approximately 8.4 million shares related to stock option exercises).

17. Dividend Restrictions and Shareholders’ Equity

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

Under regulatory requirements, the amount of dividends that may be paid during 2003 to Aetna by its domestic insurance and HMO subsidiaries without prior approval by state regulatory authorities as calculated at December 31, 2002 is approximately $505 million in the aggregate. There are no such restrictions on distributions from Aetna to its shareholders.

Page 93

Notes to Consolidated Financial Statements

17. Dividend Restrictions and Shareholders’ Equity (Continued)

The combined statutory net income for the years ended and statutory surplus as of December 31 for the domestic insurance and HMO subsidiaries of the Company, reflecting intercompany eliminations, were as follows:

(Millions)	2002		2001		2000
Statutory net income	$	689.2	$	20.9	$	382.3
Statutory surplus		3,606.7		3,598.6		3,371.3

Effective January 1, 2001, the Company’s insurance and HMO subsidiaries were required to prepare their statutory financial statements in accordance with the National Association of Insurance Commissioners’ (the “NAIC”) Statements of Statutory Accounting Principles (“Codification”), subject to the adoption of Codification by their respective domicilary states.

As of December 31, 2002, the Company does not have state prescribed or permitted statutory accounting practices which would result in reported statutory surplus being materially different from the statutory surplus that would have been reported had Codification been followed.

18. Reinsurance

The Company utilizes reinsurance agreements primarily to reduce its exposure to large losses in certain aspects of its insurance business. These reinsurance agreements permit recovery of a portion of losses from reinsurers, although they do not discharge the Company’s primary liability as direct insurer of the risks reinsured. Failure of reinsurers to indemnify the Company could result in losses, however, management does not expect charges for unrecoverable reinsurance to have a material effect on the Company’s results of operations or financial position. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of its reinsurers. As of December 31, 2002, reinsurance recoverables consisted primarily of amounts due from third parties that maintain independent agency ratings that are consistent with those companies that are considered to have a strong ability to meet their obligations.

Page 94

Notes to Consolidated Financial Statements

18. Reinsurance (Continued)

Earned premiums for the years ended December 31 were as follows:

										Percentage
				Ceded to		Assumed				of Amount
		Direct		Other		from Other		Net		Assumed
(Millions)		Amount		Companies		Companies		Amount		to Net
2002 (1)
Accident and Health Insurance — HMO (2)		$	11,876.5	$	—	$	3.6	$	11,880.1		—
Accident and Health Insurance — Other (3)			3,482.3		28.8		67.0		3,520.5		1.9	%
Life Insurance			1,318.7		68.7		62.1		1,312.1		4.7	%
	Total premiums	$	16,677.5	$	97.5	$	132.7	$	16,712.7		.8	%
2001 (1)
Accident and Health Insurance — HMO (2)		$	16,210.6	$	—	$	276.1	$	16,486.7		1.7	%
Accident and Health Insurance — Other (3)			3,121.3		43.7		702.6		3,780.2		18.6	%
Life Insurance			1,547.6		98.9		56.4		1,505.1		3.7	%
	Total premiums	$	20,879.5	$	142.6	$	1,035.1	$	21,772.0		4.8	%
2000 (1)
Accident and Health Insurance — HMO (2)		$	17,041.0	$	—	$	1,373.3	$	18,414.3		7.5	%
Accident and Health Insurance — Other (3)			2,657.9		38.7		994.4		3,613.6		27.5	%
Life Insurance			1,195.5		61.4		52.9		1,187.0		4.5	%
	Total premiums	$	20,894.4	$	100.1	$	2,420.6	$	23,214.9		10.4	%

(1)	Excludes intercompany transactions.
(2)	Includes Commercial HMO (includes premiums related to POS members who access primary care physicians and referred care through an HMO network), Medicare HMO and Medicaid HMO Business. Earned premiums assumed from other companies includes Commercial HMO premiums of $3.6 million, $276.1 million and $847.3 million in 2002, 2001 and 2000, respectively assumed from PHC pursuant to the Coinsurance Agreement discussed below and $526 million in 2000 of Medicare premium assumed from Health Care Services Corporation related to the NYLCare Texas transaction.
(3)	Includes all other Medical, Dental and Group Insurance products offered by the Company. Earned premiums assumed from other companies includes $33.8 million, $676.8 million and $975.1 million of premium assumed from PHC pursuant to the Coinsurance Agreement discussed below in 2002, 2001 and 2000, respectively.

Prior to the Company’s acquisition of PHC, certain of PHC’s medical and dental contracts were underwritten directly by Prudential and HMO contracts were underwritten by Prudential’s HMO legal entities. The Company acquired Prudential’s HMO legal entities, but did not acquire Prudential, the legal entity that wrote certain of PHC’s medical and dental business. Concurrent with the acquisition, ALIC entered into a reinsurance agreement (in the form of a coinsurance agreement) in order to assume the business underwritten by Prudential (the “Coinsured Business”). In order to provide for an orderly transition of the Coinsured Business to products underwritten by legal entities of the Company, the terms of the coinsurance agreement permitted the Company to renew such business in Prudential’s name until August 2001.

Effective November 1, 1999, the Company reinsured certain policyholder liabilities and obligations related to paid-up group life insurance. Effective October 1, 1998, the Company reinsured certain policyholder liabilities and obligations related to individual life insurance (in conjunction with former Aetna’s sale of this business). These transactions were in the form of indemnity reinsurance arrangements, whereby the assuming companies contractually assumed certain policyholder liabilities and obligations, although the Company remains directly obligated to policyholders. The liability related to the Company’s obligation is recorded in future policy benefits. Assets related to and supporting these policies were transferred to the assuming companies and the Company recorded a reinsurance recoverable. Reinsurance recoverables related to these obligations were approximately $1.1 billion and approximately $1.2 billion at December 31, 2002 and 2001, respectively.

There is not a material difference between premiums on a written basis versus an earned basis. Reinsurance recoveries were approximately $120 million, $154 million and $134 million in 2002, 2001 and 2000, respectively. At December 31, 2002, reinsurance recoverables with a carrying value of approximately $1.1 billion were associated with three reinsurers.

Page 95

Notes to Consolidated Financial Statements

19. Segment Information

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

				Group			Large Case			Corporate			Discontinued		Total
2002 (Millions)	Health Care			Insurance			Pensions			Interest			Operations		Company
Revenues from external customers (1)	$	16,858.3		$	1,497.4		$	238.0		$	—		$	—	$	18,593.7
Net investment income		295.7			269.5			685.5			—			—		1,250.7
Total revenue excluding realized capital gains (losses)	$	17,154.0		$	1,766.9		$	923.5		$	—		$	—	$	19,844.4
Interest expense	$	—		$	—		$	—		$	119.5		$	—	$	119.5
Amortization of other intangible assets	$	130.8		$	—		$	—		$	—		$	—	$	130.8
Income taxes (benefits)	$	119.5		$	57.6		$	16.3		$	(41.8	)	$	—	$	151.6
Operating earnings (losses) from continuing operations (2)	$	361.6		$	142.2		$	24.2		$	(77.7	)	$	—	$	450.3
Other items (3)		(81.6	)		(3.2	)		5.4			—			—		(79.4	)
Realized capital gains (losses), net of tax		36.4			(14.0	)		(.1	)		—			—		22.3
Income (loss) from continuing operations		316.4			125.0			29.5			(77.7	)		—		393.2
Discontinued operations, net of tax (4)		—			—			—			—			50.0		50.0
Cumulative effect adjustment, net of tax		(2,965.7	)		—			—			—			—		(2,965.7	)
Net income (loss)	$	(2,649.3	)	$	125.0		$	29.5		$	(77.7	)	$	50.0	$	(2,522.5	)
Segment assets (5)	$	13,805.6		$	5,409.0		$	20,832.9		$	—		$	—	$	40,047.5
Expenditures for long-lived assets	$	39.6		$	—		$	2.9		$	—		$	—	$	42.5

(1)	Revenues from external customers include revenues earned from one major customer (the federal government, primarily CMS) amounting to 9.4% of total revenue from external customers.
(2)	Operating earnings (loss) from continuing operations is comprised of income (loss) from continuing operations excluding net realized capital gains or losses, any other items and the cumulative effect adjustment. While operating earnings is the measure of profit or loss used by the Company’s management when assessing performance or making operating decisions, it does not replace net income (loss) as a measure of profitability.
(3)	The following other items were excluded from operating earnings (losses) from continuing operations: a $19.8 million income tax benefit resulting from the release of state income tax related reserves in connection with the favorable conclusion of several state tax audits in the Health Care segment, severance and facilities charges of $104.6 million after tax consisting of $101.4 million after tax in the Health Care segment and $3.2 million after tax in the Group Insurance segment and $5.4 million after tax from reductions of the reserve for anticipated future losses on discontinued products in the Large Case Pensions segment.
(4)	As discussed in more detail in Note 21, the Company released $50.0 million of federal income tax reserves resulting from the resolution of several Internal Revenue Service audit issues during the first quarter of 2002 that related to the property and casualty insurance business of one of Aetna’s predecessors, which was sold in 1996.
(5)	Large Case Pensions assets include $5.4 billion attributable to discontinued products.

Page 96

Notes to Consolidated Financial Statements

19. Segment Information (Continued)

					Group			Large Case			Corporate			Discontinued		Total
2001 (Millions)		Health Care			Insurance			Pensions			Interest			Operations		Company
Revenues from external customers (1)		$	21,793.9		$	1,414.9		$	474.3		$	—		$	—	$	23,683.1
Net investment income			373.9			286.0			751.7			—			—		1,411.6
Total revenue excluding realized capital gains (losses)		$	22,167.8		$	1,700.9		$	1,226.0		$	—		$	—	$	25,094.7
Interest expense		$	—		$	—		$	—		$	142.8		$	—	$	142.8
Amortization of goodwill and other intangible assets		$	416.6		$	—		$	—		$	—		$	—	$	416.6
Income taxes (benefits)		$	(157.3	)	$	71.2		$	48.9		$	(50.0	)	$	—	$	(87.2	)
Operating earnings (losses) from continuing operations (2)		$	(365.3	)	$	160.1		$	31.6		$	(92.8	)	$	—	$	(266.4	)
Other items (3)			(151.1	)		(9.0	)		61.4			—			—		(98.7	)
Realized capital gains (losses), net of tax			77.4			.3			(4.1	)		—			—		73.6
Income (loss) from continuing operations			(439.0	)		151.4			88.9			(92.8	)		—		(291.5	)
Discontinued operations, net of tax:
	Reduction of the reserve for sale and spin-off related costs (4)		—			—			—			—			11.4		11.4
Cumulative effect adjustment, net of tax			.5			—			—			—			—		.5
Net income (loss)		$	(438.5	)	$	151.4		$	88.9		$	(92.8	)	$	11.4	$	(279.6	)
Segment assets (5)		$	16,593.4		$	4,683.5		$	21,919.8		$	—		$	—	$	43,196.7
Expenditures for long-lived assets		$	29.1		$	—		$	33.7		$	—		$	—	$	62.8

(1)	Revenues from external customers include revenues earned from one major customer (the federal government, primarily CMS) amounting to 12.6% of total revenue from external customers.
(2)	Operating earnings (loss) from continuing operations is comprised of income (loss) from continuing operations excluding net realized capital gains or losses, any other items and the cumulative effect adjustment. While operating earnings is the measure of profit or loss used by the Company’s management when assessing performance or making operating decisions, it does not replace net income (loss) as a measure of profitability.
(3)	The following other items were excluded from operating earnings (losses) from continuing operations: a $125.1 million after-tax severance and facilities charge, $26.0 million after-tax charge for unfavorable reserve developments related to exited Medicare markets in the Health Care segment, an after-tax charge of $9.0 million for events of September 11, 2001 in the Group Insurance segment; and a $61.4 million after-tax benefit from reductions of the reserve for anticipated future losses on discontinued products in the Large Case Pensions segment.
(4)	In connection with the Transaction, as more fully described in Note 21, the Company recorded a reserve of approximately $174 million for net costs associated with this transaction. In the fourth quarter of 2001, the Company reduced the reserve for such costs by approximately $11 million.
(5)	Large Case Pensions assets include $5.6 billion attributable to discontinued products.

Page 97

Notes to Consolidated Financial Statements

19. Segment Information (Continued)

					Group			Large Case		Corporate			Discontinued			Total
2000 (Millions)		Health Care			Insurance			Pensions		Interest			Operations			Company
Revenues from external customers (1)		$	23,694.9		$	1,367.0		$	165.5	$	—		$	—		$	25,227.4
Net investment income			428.5			300.9			902.2		—			—			1,631.6
Total revenue excluding realized capital gains (losses)		$	24,123.4		$	1,667.9		$	1,067.7	$	—		$	—			26,859.0
Interest expense		$	—		$	—		$	—	$	248.2		$	—		$	248.2
Amortization of goodwill and other intangible assets		$	435.6		$	—		$	—	$	—		$	—		$	435.6
Income taxes (benefits)		$	.4		$	82.6		$	92.3	$	(86.9	)	$	—		$	88.4
Operating earnings (losses) from continuing operations (2)		$	95.5		$	193.4		$	66.0	$	(161.3	)	$	—		$	193.6
Other items (3)			(401.4	)		(.3	)		94.9		—			—			(306.8	)
Realized capital gains (losses), net of tax			13.1			(31.8	)		4.5		—			—			(14.2	)
Income (loss) from continuing operations			(292.8	)		161.3			165.4		(161.3	)		—			(127.4	)
Discontinued operations, net of tax:
	Income from operations		—			—			—		—			428.5			428.5
	Sale and spin-off related costs		—			—			—		—			(174.0	)		(174.0	)
Net income (loss)		$	(292.8	)	$	161.3		$	165.4	$	(161.3	)	$	254.5		$	127.1
Segment assets (4)		$	17,114.9		$	4,788.5		$	25,769.6	$	—		$	—		$	47,673.0
Expenditures for long-lived assets		$	34.8		$	—		$	82.8	$	—		$	—		$	117.6

(1)	Revenues from external customers include revenues earned from one major customer (the federal government, primarily CMS) amounting to 20.3% of total revenue from external customers.
(2)	Operating earnings (loss) from continuing operations is comprised of income (loss) from continuing operations excluding net realized capital gains or losses and any other items. While operating earnings is the measure of profit or loss used by the Company’s management when assessing performance or making operating decisions, it does not replace net income (loss) as a measure of profitability.
(3)	The following other items were excluded from operating earnings (losses) from continuing operations: an after-tax charge of $238.3 million from the write-off of goodwill, a $92.6 million after-tax severance and facilities charge, a $14.6 million after-tax charge related to the New Jersey insolvency assessment, a $5.2 million after-tax charge related to a shareholder litigation settlement agreement and an after-tax charge of $50.7 million, primarily change-in-control related costs, in the Health Care segment; an after-tax charge of $.3 million for change-in-control related costs in the Group Insurance segment; and a $94.9 million after-tax benefit from reductions of the reserve for anticipated future losses on discontinued products in the Large Case Pensions segment.
(4)	Large Case Pensions assets include $5.8 billion attributable to discontinued products.

Revenues from external customers (all within the United States) by product were as follows:

(Millions)	2002		2001		2000
Health risk	$	15,039.4	$	19,972.5	$	21,756.2
Health ASC		1,818.9		1,821.4		1,938.7
Group life		1,097.0		1,056.1		1,050.4
Group disability		336.0		299.7		272.1
Group long-term care		64.4		59.1		44.5
Large case pensions		238.0		474.3		165.5
Total revenue from external customers	$	18,593.7	$	23,683.1	$	25,227.4

Long-lived assets, all within the United States, were $245 million and $327 million at December 31, 2002 and 2001, respectively.

Page 98

Notes to Consolidated Financial Statements

20. Commitments and Contingent Liabilities

The Company has entered into operating leases for office space and certain computer and other equipment. Rental expenses for these items were $168 million, $217 million and $273 million for 2002, 2001 and 2000, respectively. The future net minimum payments under noncancelable leases for 2003 through 2007 are estimated to be $182 million, $148 million, $112 million, $82 million and $68 million, respectively.

The Company also has funding obligations relating to equity limited partnership investments and commercial mortgage loans. The funding requirements for equity limited partnership investments for 2003 through 2007 are estimated to be $152 million, $51 million, $32 million, $30 million and $14 million, respectively. The funding requirements for commercial mortgage loans for 2003 are estimated to be $44 million. At December 31, 2002, the Company was not obligated to fund any commercial loans beyond 2003.

As discussed in Aetna Inc.’s 2002 Annual Report on Form 10-K, the Company has been able to earn contingent consideration under a long-term strategic provider relationship with Magellan Health Services Inc. (“Magellan”), the purchaser of HAI. The Company recognized the final installment of this contingent consideration under this agreement of approximately $60 million pretax during the second quarter of 2002. This amount was due in February 2003 but was not paid, and Magellan announced that it is experiencing financial difficulties. Based on the Company’s discussions with Magellan regarding their plans to address these issues, the Company currently believes it will ultimately recover the full amount due.

Guarantees

The Company has the following guarantee arrangements as of December 31, 2002.

Mortgage-Backed Securities Obligation - In June of 1992, the Company securitized 98 apartment mortgage loans totaling $325 million into 21 FNMA (“Fannie Mae”) mortgage-backed securities (“MBS”). The Company subsequently sold those MBSs for cash. Fannie Mae required that the Company continue to retain a portion of the risk of default of the underlying loans, and therefore the Company guaranteed the first $59 million of such losses. As of December 31, 2002, $50 million of the original mortgage loans were outstanding. Therefore, the maximum exposure the Company had on its guarantee to Fannie Mae for loans default, as of December 31, 2002 was $50 million. The Company has no recourse for this guarantee.

Operating Lease Residual Value Guarantee - The Company has a leasing program with an independent third party grantor trust primarily for the lease of a corporate aircraft and certain office furniture. The total value of the assets under lease as of December 31, 2002 was $54 million. Under current accounting guidance, this arrangement is an operating lease, and therefore the related assets and liabilities are not recorded on the Company’s Consolidated Balance Sheet. However, under the guidance of FIN 46 (see Note 2 for a discussion of new accounting standards) the Company will consolidate this VIE beginning with its third quarter 2003 interim financial statements. The Company may terminate the lease program at any time by purchasing the assets at cost or dissolving the grantor trust through liquidation. If the assets were sold to a third party at less than the cost to the grantor trust, the Company’s maximum exposure under a residual value guarantee was approximately $48 million as of December 31, 2002.

ASC Claim Funding Accounts - The Company has arrangements with certain banks for the processing of claim payments for its ASC customers. The banks maintain accounts to fund ASC customer’s claims. The customer is responsible to fund the amount paid by the bank each day. In these arrangements, the Company guarantees that the banks will not sustain losses if the responsible ASC customer does not properly fund their account. The aggregate maximum exposure under these arrangements is $258 million. The Company could limit its exposure to this guarantee by suspending the payment of claims for ASC customers that have not adequately funded the amount paid by the bank.

Page 99

Notes to Consolidated Financial Statements

20. Commitments and Contingent Liabilities (Continued)

Indemnification Agreements - In connection with certain acquisitions and dispositions of assets and/or businesses (e.g., the Transaction), the Company has incurred certain customary indemnification obligations to the applicable seller or purchaser, respectively. In general, the Company has agreed to indemnify the other party for certain losses relating to the assets or business that the Company purchased or sold. Certain portions of the Company’s indemnification obligations are capped at the applicable purchase price, while other arrangements are not subject to such a limit. As of December 31, 2002, the Company believes it has established reserves and/or obtained insurance sufficient to cover such potential losses. Refer to Notes 13 and 21 for more information and the Company’s indemnification obligations related to the Transaction.

Intercompany Obligations – The Company has guaranteed certain of the obligations of certain of its HMO and dental maintenance organizations (“DMO”) subsidiaries. For certain HMOs and DMOs, Aetna guarantees the payment of substantially all the legal entities’ expenses and claims in the event of that legal entity’s insolvency. The Company’s maximum exposure under these arrangements is the payment of such expense and claim obligations of the applicable legal entities, which totaled approximately $800 million as of December 31, 2002. These obligations are reflected on the applicable legal entity’s balance sheets and are included in the Consolidated Balance Sheet. Aetna also has agreed to maintain the capital of certain HMOs at or above the minimum level required by law. The aggregate of all such minimum capital requirements at December 31, 2002 was $11 million; however, the capital of each of these HMOs exceeded the required level at December 31, 2002. There are no recourse provisions to offset payments made under either of these types of arrangements.

Guaranty Fund Assessments, Market Stabilization and Other Non-voluntary Risk Sharing Pools

Under guaranty fund laws existing in all states, insurers doing business in those states can be assessed (up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. Assessments generally are based on a formula relating to the Company’s premiums in the state compared to the premiums of other insurers. While we historically have recovered more than half of guaranty fund assessments through statutorily permitted premium tax offsets, significant increases in assessments could jeopardize future recovery of these assessments. Some states have similar laws relating to HMOs. HMOs in certain states in which the Company does business are subject to assessments, including market stabilization and other risk sharing pools for which the Company is assessed charges based on incurred claims, demographic membership mix and other factors. The Company establishes liabilities for these assessments based on applicable laws and regulations. In certain states, the ultimate assessments to be paid by the Company are dependent upon the Company’s experience relative to other entities subject to the assessment and the ultimate liability is not known at the balance sheet date. While the ultimate amount of the assessment is dependent upon the experience of all pool participants, the Company has adequate reserves to cover such assessments. There were no material charges to earnings for guaranty fund and other assessments during 2002 or 2001.

Litigation

Managed Care Class Action Litigation
Since 1999, the Company has been involved in purported class action lawsuits that are part of a wave of similar actions targeting the health care payor industry and, in particular, the conduct of business by managed care companies (the “Managed Care Class Action Litigation”).

Page 100

Notes to Consolidated Financial Statements

20. Commitments and Contingent Liabilities (Continued)

The Judicial Panel on Multi-district Litigation has transferred all of the federal actions, including several actions originally filed in state courts, to the United States District Court for the Southern District of Florida (the “Florida Federal Court”) for consolidated pretrial proceedings. The Florida Federal Court has divided these cases into two tracks – one for cases brought on behalf of subscribers (collectively, the “Subscriber Cases”) and the other for cases brought on behalf of health care providers (collectively, the “Provider Cases”).

Twelve Subscriber Cases currently are pending in the Florida Federal Court. The Subscriber Cases seek various forms of relief, including unspecified damages, treble damages, injunctive relief and restitutionary relief for unjust enrichment, for alleged violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and the Employee Retirement Income Security Act of 1974 (“ERISA”), and seek similar relief under common law theories and/or state unfair trade statutes. Each of former Aetna, the Company (including certain health maintenance organizations that Aetna acquired from Prudential) and Richard L. Huber (the former chairman of former Aetna) are named as defendants in one or more of the Subscriber Cases. The Subscriber Case complaints allege generally that defendants failed to adequately inform members about defendants’ managed care practices, including capitated payments to providers and utilization management practices. Certain Subscriber Cases also contain charges relating to the disclosure and determination of usual, customary and reasonable charges for claims and related claims payment practices.

On September 26, 2002, the Florida Federal Court denied the plaintiffs’ motion to certify a class for the Subscriber Cases. Merits discovery on the Subscriber Cases commenced in September 2002, and the Florida Federal Court has scheduled trial for the Subscriber Cases commencing September 22, 2003. The Company intends to continue to defend the Subscriber Cases vigorously.

Eleven Provider Cases currently are pending in the Florida Federal Court, and a similar action is pending in Louisiana state court. The Provider Cases allege generally that the Company and each of the other defendant managed care organizations employ coercive economic power to force physicians to enter into economically unfavorable contracts, impose unnecessary administrative burdens on providers and improperly deny claims in whole or in part, and that the defendants do not pay claims timely or do not pay claims at proper rates. The Provider Cases further charge that the Company and the other defendant managed care organizations conspired and aided and abetted one another in the alleged wrongdoing. In addition, a Provider Case brought on behalf of the American Dental Association alleges improper disclosure and determination of usual, customary and reasonable charges for dental claims and related claims payment practices. The Provider Cases allege violations of RICO, ERISA, state unfair trade statutes, state consumer fraud statutes, state laws regarding the timely payment of claims, and various common law doctrines. The Provider Cases seek various forms of relief, including unspecified damages, treble damages, punitive damages and injunctive relief.

The plaintiffs in the Provider Cases generally seek to represent purported nationwide classes and subclasses of physicians and other providers who currently or formerly provided services to members of the Company and/or Prudential. Certain Provider Cases also purport to bring class actions on behalf of physicians and/or other providers in a particular state, and plaintiffs in cases originally filed in state courts seek to have those cases remanded to state courts for separate trial. On September 26, 2002, the Florida Federal Court issued an order certifying a global RICO class and certain sub-classes in the matter it has designated as the lead Provider Case. That order is the subject of a pending appeal before the United States Court of Appeals for the Eleventh Circuit. Merits discovery on the Provider Cases commenced in September 2002, and the Florida Federal Court has scheduled the Provider Cases for trial commencing December 8, 2003. The Company intends to continue to defend vigorously the Provider Cases and similar state court actions.

Page 101

Notes to Consolidated Financial Statements

20. Commitments and Contingent Liabilities (Continued)

In addition to the Subscriber and Provider Cases consolidated before the Florida Federal Court, a complaint was filed in the Superior Court of the State of California, County of San Diego (the “California Superior Court”) on November 5, 1999 by Linda Ross and The Stephen Andrew Olsen Coalition for Patients Rights, purportedly on behalf of the general public of the State of California (the “Ross Complaint”). The Ross Complaint, as amended, seeks injunctive relief against former Aetna, Aetna, Aetna Health of California Inc. and additional unnamed “John Doe” defendants for alleged violations of California Business and Professions Code Sections 17200 and 17500. The Ross Complaint alleges that defendants are liable for alleged misrepresentations and omissions relating to advertising, marketing and member materials directed to the Company’s HMO members and the general public and for alleged unfair practices relating to contracting of doctors. This action is in the discovery phase, and trial currently is scheduled to begin on December 5, 2003. Defendants intend to continue to defend this action vigorously.

Securities Class Action Litigation
Laborers Tri-County Pension Fund, Goldplate Investment Partners Ltd. and Sheila Shafran filed a consolidated and amended purported class action complaint (“Securities Complaint”) on June 7, 2002 in the United States District Court for the Southern District of New York. The Securities Complaint supplanted several complaints, filed beginning November 6, 2001, which have been voluntarily dismissed or consolidated. Plaintiffs contend that the Company and two of its current or former officers and directors, William H. Donaldson and John W. Rowe, M.D., violated federal securities laws. Plaintiffs allege misrepresentations and omissions regarding, among other things, the Company’s ability to manage and control medical costs and the appropriate reserve for medical costs as of December 31, 2000, for which they seek unspecified damages, among other remedies. On October 15, 2002, the Court heard argument on defendants’ motion to dismiss the Securities Complaint. Defendants intend to continue vigorously defending this action, which is in its preliminary stages.

The Company is unable to predict at this time the ultimate outcome of the Managed Care Class Action Litigation or Securities Class Action Litigation. It is reasonably possible that their outcome could be material to the Company.

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

In addition, the Company’s current and past business practices are subject to review by various state insurance and health care regulatory authorities and other state and federal authorities. There continues to be heightened review by these authorities of the managed health care industry’s business practices, including utilization management, delegated arrangements and claim payment practices. As a leading national managed care organization, the Company regularly is the subject of such reviews. These reviews may result in changes to or clarifications of the Company’s business practices, and may result in fines, penalties or other sanctions.

While the ultimate outcome of this other litigation and these regulatory proceedings cannot be determined at this time, after consideration of the defenses available to the Company, applicable insurance coverage and any related reserves established, they are not expected to result in liability for amounts material to the financial condition of the Company, although they may adversely affect results of operations in future periods.

Page 102

Notes to Consolidated Financial Statements

21. Discontinued Operations

As discussed in Note 13, in the first quarter of 2002 the Company released $50 million of federal income tax reserves resulting from the resolution of Service audit issues that related to the property and casualty insurance business of former Aetna, which was sold in 1996.

On December 13, 2000, former Aetna sold its financial services and international businesses to ING in a transaction valued at approximately $7.7 billion. Under the terms of the agreement and in an integrated transaction, former Aetna spun off to its shareholders the shares of the Company, which is comprised primarily of the Health Care, Group Insurance and Large Case Pensions businesses. Simultaneously, former Aetna, which then was comprised of Aetna Financial Services and Aetna International, was merged with a newly formed subsidiary of ING. In exchange for each share of former Aetna, shareholders received one share of the Company and $35.33 per share in cash. When ING acquired former Aetna, that entity included approximately $3.0 billion of net liabilities, primarily comprised of $2.7 billion of long-term debt. As part of the sale consideration and the spin-off transaction, these net liabilities were acquired by ING.

In December 2000, the Company established a reserve for the net costs associated with the Transaction of approximately $174 million after tax. These costs, which were directly associated with the sale of the financial services and international businesses, were included in the results of discontinued operations for 2000 and related to certain compensation-related arrangements, costs for outside financial and legal advisors, income taxes related to legal entity realignment, payments for the settlement of certain former Aetna employee stock options held by employees of the sold businesses and various other expenses related to the change in control of former Aetna. During the fourth quarter of 2001, the Company reduced the reserve for such costs by approximately $11 million after tax, which management determined were no longer necessary. Included in the cost associated with the Transaction was the release of approximately $53 million of previously established reserves in connection with prior dispositions of businesses reflected as discontinued operations.

In connection with its spin-off from former Aetna, the Company assumed all liabilities related to the Health Care, Group Insurance and Large Case Pensions businesses. In addition, the Company generally is responsible for the liabilities of former Aetna other than those arising out of the financial services and international businesses sold to ING. Those liabilities include the post-retirement pension and other benefits payable to all former employees of former Aetna, liabilities arising out of health litigation and certain corporate-level litigation to which former Aetna is a party, and all liabilities arising out of certain divestiture transactions consummated by former Aetna prior to the closing of the Company’s spin-off. The Company also provided certain administrative services on behalf of ING through June 2002.

Page 103

Notes to Consolidated Financial Statements

21. Discontinued Operations (Continued)

The Company is the successor of former Aetna for accounting purposes and, accordingly, the account balances and activities of the financial services and international businesses have been segregated and reported as discontinued operations. Operating results of these discontinued operations for the year ended December 31, 2000 were as follows:

(Millions)			2000
Revenue:
	Premiums		$	3,105.2
	Total net investment income			1,370.4
	Fees and other income			727.2
	Net realized capital gains			280.5
Total revenue				5,483.3
Benefits and expenses:
	Current and future benefits			3,255.4
	Operating expenses:
		Salaries and related benefits		481.8
		Other		665.2
	Interest expense			49.7
	Amortization of goodwill and other acquired intangible assets			28.6
	Amortization of deferred policy acquisition costs			224.3
Total benefits and expenses				4,705.0
Income before taxes				778.3
Income taxes:
	Current			210.6
	Deferred			139.2
Total income taxes				349.8
Income from discontinued operations before sale and spin-off related costs				428.5
Sale and spin-off related costs, net of $16.0 million of income taxes				(174.0	)
Income from discontinued operations			$	254.5

Page 104

Management’s Responsibility for Financial Statements

Management is responsible for the financial statements of Aetna Inc., which have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial statements are the products of a number of processes that include the gathering of financial data developed from the records of the Company’s day-to-day business transactions. Informed judgments and estimates are used for those transactions not yet complete or for which the ultimate effects cannot be measured precisely. The Company emphasizes the selection and training of personnel who are qualified to perform these functions. In addition, Company personnel are subject to rigorous standards of ethical conduct that are widely communicated throughout the organization.

The Company’s internal controls are designed to reasonably assure that Company assets are safeguarded from unauthorized use or disposition and that Company transactions are authorized, executed and recorded properly. Company personnel maintain and monitor these internal controls on an ongoing basis. In addition, the Company’s internal auditors review and report upon the functioning of these controls with the right of full access to all Company personnel.

The Company engages KPMG LLP as independent auditors to audit its financial statements and express their opinion thereon. Their audits include reviews and tests of the Company’s internal controls to the extent they believe necessary to determine and conduct the audit procedures that support their opinion. Members of that firm also have the right of full access to each member of management in conducting their audits. The report of KPMG LLP appears below.

The Company’s Board of Directors has an Audit Committee composed solely of independent directors. The Committee meets regularly with management, the internal auditors and KPMG LLP to oversee and monitor the work of each and to inquire of each as to their assessment of the performance of the others in their work relating to the Company’s financial statements. Both the independent and internal auditors have, at all times, the right of full access to the Audit Committee, without management present, to discuss any matter they believe should be brought to the attention of the Committee.

Page 105

Independent Auditors’ Report

The Shareholders and Board of Directors
Aetna Inc.:

We have audited the accompanying consolidated balance sheets of Aetna Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2002. 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 auditing standards generally accepted in the United States of America. 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 Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

Hartford, Connecticut
February 10, 2003

Page 106

Quarterly Data (Unaudited)

2002 (Millions, except per common share data)		First (1)			Second (2)		Third (3)		Fourth (4)
Total revenue		$	5,264.7		$	5,064.2	$	4,832.1	$	4,717.7
Income from continuing operations before income taxes		$	97.7		$	159.6	$	143.5	$	144.0
Income taxes			9.7			51.4		44.7		45.8
Income from continuing operations			88.0			108.2		98.8		98.2
Income from discontinued operations			50.0			—		—		—
Cumulative effect adjustment, net of tax			(2,965.7	)		—		—		—
Net income (loss)		$	(2,827.7	)	$	108.2	$	98.8	$	98.2
Per common share results: (5)
Net income (loss)
	Basic	$	(19.50	)	$	.73	$	.66	$	.65
	Diluted		(19.00	)		.70		.64		.63
Common stock data:
	Dividends declared	$	—		$	—	$	.04	$	—
	Common stock prices, high		38.82			51.76		47.04		43.97
	Common stock prices, low		30.76			38.66		35.81		31.69

(1)	First quarter includes a release of $19.8 million of state income taxes related reserves.
(2)	Second quarter includes an after-tax severance and facilities charge of $17.5 million ($27.0 million pretax) (refer to Note 11) and a $5.4 million after tax benefit ($8.3 million pretax) from a reduction of the reserve for loss on discontinued products.
(3)	Third quarter includes an after-tax severance and facilities charge of $57.9 million ($89.0 million pretax) (refer to Note 11).
(4)	Fourth quarter includes an after-tax severance and facilities charge of $29.2 million ($45.0 million pretax) (refer to Note 11).
(5)	Calculation of the earnings per share is based on weighted average shares outstanding during each quarter and, accordingly, the sum may not equal the total for the year.

2001 (Millions, except per common share data)		First			Second (1)		Third			Fourth (2)
Total revenue		$	6,428.7		$	6,536.4	$	6,183.2		$	6,042.5
Income (loss) from continuing operations before income taxes (benefits)		$	(48.5	)	$	43.6	$	(62.0	)	$	(311.8	)
Income taxes (benefits)			.2			33.0		(7.6	)		(112.8	)
Income (loss) from continuing operations			(48.7	)		10.6		(54.4	)		(199.0	)
Income from discontinued operations			—			—		—			11.4
Cumulative effect adjustment, net of tax			.5			—		—			—
Net income (loss)		$	(48.2	)	$	10.6	$	(54.4	)	$	(187.6	)
Per common share results: (3)(4)
Net income (loss)
	Basic	$	(.34	)	$	.07	$	(.38	)	$	(1.30	)
	Diluted		(.34	)		.07		(.38	)		(1.30	)
Common stock data:
	Dividends declared	$	—		$	—	$	.04		$	—
	Common stock prices, high		41.50			36.55		30.05			33.71
	Common stock prices, low		33.81			23.23		24.68			27.64

(1)	Second quarter includes a $61.4 million after-tax benefit ($94.5 million pretax) from a reduction of the reserve for loss on discontinued products.
(2)	Fourth quarter includes an after-tax severance and facilities charge of $125.1 million ($192.5 million pretax) (refer to Note 11).
(3)	Calculation of the earnings per share is based on weighted average shares outstanding during each quarter and, accordingly, the sum may not equal the total for the year.
(4)	Since the Company reported a loss from continuing operations in the first, third and fourth quarters, the effect of common stock equivalents has been excluded from per common share computations for these quarters, since including such securities would be anti-dilutive. As a result, diluted and basic per common share amounts for these quarters are the same.

107 EX-21 9 y83806exv21.htm SUBSIDIARIES

Exhibit 21

	State of
Subsidiary	Incorporation	Ownership (1)
Aetna Inc.	PA		—
Aetna Risk Indemnity Company Limited	Bermuda	100%	Owned by Aetna Inc.
Aetna Life Insurance Company	CT	100%	Owned by Aetna Inc.
Aetna Health and Life Insurance Company	CT	100%	Owned by Aetna Inc.
AUSHC Holdings, Inc.	CT	100%	Owned by Aetna Inc.
Aetna Dental Inc.	PA	100%	Owned by Aetna Inc.
Aetna Dental Inc.	NJ	100%	Owned by Aetna Inc.
Aetna Dental Inc.	DE	100%	Owned by Aetna Inc.
Aetna Health Insurance Company of New York	NY	100%	Owned by Aetna Inc.
Primary Holdings, Inc.	DE	100%	Owned by Aetna Inc.
Corporate Health Insurance Company	PA	100%	Owned by Aetna Inc.
Aetna Health Inc.	NJ	100%	Owned by Aetna Inc.
Aetna Health Inc.	NY	100%	Owned by Aetna Inc.
Aetna Health Inc.	CT	100%	Owned by Aetna Inc.
Aetna Health Inc.	MA	100%	Owned by Aetna Inc.
Aetna Health Inc.	DE	100%	Owned by Aetna Inc.
Aetna Health Inc.	NH	100%	Owned by Aetna Inc.
U.S. Healthcare Financial Services, LLC	DE	100%	Owned by Aetna Inc.
Prudential Health Care Plan, Inc.	TX	100%	Owned by Aetna Inc.
Aetna Health Holdings, LLC	DE	100%	Owned by Aetna Inc.
Criterion Communications, Inc.	DE	100%	Owned by Aetna Inc.
Luettgens Limited	CT	100%	Owned by Aetna Inc.
ASI Wings, L.L.C	DE	100%	Owned by Aetna Inc.
Aetna Health Management, LLC	DE	100%	Owned by Aetna Inc.
NYLCare Health Plans, Inc.	DE	100%	Owned by Aetna Inc.
Aelan Inc.	CT	100%	Owned by Aetna Inc.
CMBS Holdings, L.L.C	CT	99%	Owned by Aetna Life Insurance Company (2)
AHP Holdings, Inc.	CT	100%	Owned by Aetna Life Insurance Company
Circulation L.L.C	CT	100%	Owned by Aetna Life Insurance Company
Tanker Six, LLC	DE	100%	Owned by Aetna Life Insurance Company
Azalea Mall, L.L.C	DE	100%	Owned by Aetna Life Insurance Company
BPC Equity, Inc.	DE	100%	Owned by Aetna Life Insurance Company (3)
BPC Equity, LLC	DE	99%	Owned by Aetna Life Insurance Company (3)
Canal Place, LLC	DE	100%	Owned by Aetna Life Insurance Company
Aetna Government Health Plans, LLC	DE	100%	Owned by Aetna Life Insurance Company
Spatium, LLC	DE	100%	Owned by Aetna Life Insurance Company
Trumbull One, Inc.	CT	100%	Owned by Aetna Life Insurance Company
Trumbull Four, Inc.	CT	100%	Owned by Aetna Life Insurance Company
Aetna Health Administrators, LLC	PA	100%	Owned by Aetna Life Insurance Company
Koll Center Newport A	CA	50%	Owned by Aetna Life Insurance Company
Koll Center Newport Number 8	CA	50%	Owned by Aetna Life Insurance Company
Koll Center Newport Number 9	CA	50%	Owned by Aetna Life Insurance Company
Koll Center Newport Number 10	CA	50%	Owned by Aetna Life Insurance Company
Koll Center Newport Number 11	CA	50%	Owned by Aetna Life Insurance Company
Koll Center Newport Number 14	CA	60%	Owned by Aetna Life Insurance Company
Mall Owners LLC	DE	50%	Owned by Aetna Life Insurance Company
Aetna RX Home Delivery, LLC	DE	100%	Owned by Aetna Health Holdings, LLC
PHPSNE Parent Corporation	DE	55%	Owned by AUSHC Holdings, Inc.
Primary Investments, Inc.	DE	100%	Owned by Primary Holdings, Inc.
U.S. Healthcare Advantage, LLC	DE	100%	Owned by U.S. Healthcare Financial Services, LLC
U.S. Patroitcare, Inc.	DE	100%	Owned by U.S. Healthcare Financial Services, LLC
@Credentials Inc.	DE	100%	Owned by U.S. Healthcare Financial Services, LLC
U.S. Health Aviation Corp.	PA	100%	Owned by U.S. Healthcare Financial Services, LLC
U.S. Healthcare Properties, Inc.	PA	100%	Owned by U.S. Healthcare Financial Services, LLC
Intelihealth Inc.	DE	100%	Owned by U.S. Healthcare Financial Services, LLC
Integrated Pharmacy Solutions, Inc.	FL	100%	Owned by U.S. Healthcare Financial Services, LLC

	State of
Subsidiary	Incorporation	Ownership (1)
Bentana Technologies, Inc.	CT	20%	Owned by U.S. Healthcare Financial Services, LLC (4)
Aetna Health Inc.	OH	100%	Owned by Aetna Health Management, LLC
Aetna Health Inc.	MD	41%	Owned by Aetna Health Management, LLC (5)
Aetna Health Inc.	FL	100%	Owned by Aetna Health Management, LLC
Aetna Health of California Inc.	CA	100%	Owned by Aetna Health Management, LLC
Aetna Health Inc.	LA	100%	Owned by Aetna Health Management, LLC
Aetna Health Inc.	AZ	100%	Owned by Aetna Health Management, LLC
Aet Health Care Plan of California, Inc.	CA	100%	Owned by Aetna Health Management, LLC
Aetna Dental Maintenance Organization, Inc.	TX	100%	Owned by Aetna Health Management, LLC
Aetna Health Inc.	GA	30%	Owned by Aetna Health Management, LLC (6)
Aetna Dental of California Inc.	CA	100%	Owned by Aetna Health Management, LLC
Aetna Health of Illinois Inc.	IL	100%	Owned by Aetna Health Management, LLC
Aetna Health Inc.	TX	100%	Owned by Aetna Health Management, LLC
Aetna Health Inc.	TN	100%	Owned by Aetna Health Management, LLC
Aetna Dental Inc.	TX	100%	Owned by Aetna Health Management, LLC
Informed Health, Inc.	DE	100%	Owned by Aetna Health Management, LLC
Aetna Health Inc.	MD	44%	Owned by NYLCare Health Plans, Inc. (5)
Aetna Health Inc.	ME	100%	Owned by NYLCare Health Plans, Inc.
The Ethix Corporation	DE	100%	Owned by NYLCare Health Plans, Inc.
New York Life and Health Insurance Company	DE	100%	Owned by NYLCare Health Plans, Inc.
NYLCare of Texas, Inc.	TX	100%	Owned by NYLCare Health Plans, Inc.
NYLCare of New England, Inc.	DE	100%	Owned by NYLCare Health Plans, Inc.
One Liberty Plaza Holdings, Inc.	DE	100%	Owned by NYLCare Health Plans, Inc.
Sanus of New York and New Jersey, Inc.	NY	100%	Owned by NYLCare Health Plans, Inc.
Managed Care Coordinators, Inc.	DE	100%	Owned by U.S. Healthcare Advantage, LLC
U. S. Quality Algorithms, Inc.	PA	100%	Owned by U.S. Healthcare Advantage, LLC
Aetna Health Inc.	MO	100%	Owned by Primary Investments, Inc.
Aetna Health Inc.	PA	100%	Owned by Primary Investments, Inc.
Aetna Health Inc.	MD	15%	Owned by Primary Investments, Inc. (5)
Aetna Health of the Carolinas Inc.	NC	100%	Owned by Primary Investments, Inc.
Aetna Health Inc.	GA	70%	Owned by Primary Investments, Inc. (6)
Aetna Health Insurance Company of Connecticut	CT	100%	Owned by Primary Investments, Inc.
Aetna U.S. Healthcare Holdings, Inc.	DE	100%	Owned by Primary Investments, Inc.
Aetna Health Inc.	WA	100%	Owned by Primary Investments, Inc.
Aetna Health Inc.	MI	100%	Owned by Primary Investments, Inc.
Aetna Health Inc.	OK	100%	Owned by Primary Investments, Inc.
Chickering Claims Administrators, Inc.	MA	47%	Owned by Primary Investments, Inc.
Aetna Insurance Company of Connecticut	CT	100%	Owned by AHP Holdings, Inc.
CMBS Holdings, Inc.	TX	100%	Owned by AHP Holdings, Inc.
CMBS Holdings, Inc. – II	CT	100%	Owned by AHP Holdings, Inc. (2)
Aetna Affordable Housing, Inc.	CT	100%	Owned by AHP Holdings, Inc.
AE Fourteen, Incorporated	CT	100%	Owned by AHP Holdings, Inc.
Aetna Life Assignment Company	CT	100%	Owned by AHP Holdings, Inc.
Aetna/Area Corporation	CT	100%	Owned by AHP Holdings, Inc.
Aetna Real Estate Properties, Inc.	CT	100%	Owned by AHP Holdings, Inc.
Bentana Technologies, Inc.	CT	80%	Owned by AHP Holdings, Inc. (4)

2

	State of
Subsidiary	Incorporation	Ownership (1)
ETHIX Northwest, Inc.	WA	100%	Owned by The Ethix Corporation
Aetna Health Inc.	CO	100%	Owned by Aetna U.S. Healthcare Holdings, Inc.
Aetna Health of Washington Inc.	WA	100%	Owned by Ethix Northwest, Inc.
Aetna Life & Casualty (Bermuda) Limited	Bermuda	100%	Owned by Aelan Inc.

(1)	Percentages are rounded to the nearest whole percent and are based on ownership of voting rights.
(2)	CMBS Holdings, Inc. - II owns 1% of CMBS Holdings, L.L.C.
(3)	BPC Equity, Inc. owns 1% of BPC Equity, LLC
(4)	U.S. Healthcare Financial Services, LLC owns 20% and Aetna Health Management, LLC owns 80% of Bentana Technologies, Inc.
(5)	NYLCare Health Plans, Inc. owns 44%, Aetna Health Management, LLC owns 41% and Primary Investments, Inc. owns 15% of Aetna Health Inc. (MD).
(6)	Primary Investments, Inc. owns 70% and Aetna Health Management, LLC owns 30% of Aetna Health Inc. (GA).

3 EX-23 10 y83806exv23.htm CONSENT OF EXPERTS AND COUNSEL

Exhibit 23

Independent Auditors’ Consent

The Board of Directors
Aetna Inc.:

We consent to the incorporation by reference in the registration statement (No. 333-54046) on Form S-3 and the registration statements (No. 333-52120, 52122, 52124, 73052, 87722, 87726) on Form S-8 of Aetna Inc. of our report dated February 10, 2003, with respect to the consolidated balance sheets of Aetna Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2002, and all related financial statement schedules, which report appears in the December 31, 2002, annual report on Form 10-K of Aetna Inc.

/s/ KPMG LLP                           

Hartford, Connecticut
February 10, 2003

EX-24.1 11 y83806exv24w1.htm POWERS OF ATTORNEY

Exhibit 24.1

POWER OF ATTORNEY

We, the undersigned directors and officers of Aetna Inc. (the “Company”), hereby severally constitute and appoint Alan M. Bennett, William J. Casazza and Ronald M. Olejniczak, and each of them individually, our true and lawful attorneys, with full power to them and each of them to sign for us, and in our names and in the capacities indicated below, the Company’s 2002 Form 10-K and any and all amendments thereto to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to the Form 10-K and to any and all amendments thereto.

Dated as of February 28, 2003.

/s/ John W. Rowe, M.D.	/s/ Jack D. Kuehler, Director
John W. Rowe, M.D.	Jack D. Kuehler, Director
Chairman, Chief Executive Officer and Director (Principal Executive Officer)
/s/ Betsy Z. Cohen	/s/ Joseph P. Newhouse
Betsy Z. Cohen, Director	Joseph P. Newhouse, Director
/s/ Barbara H. Franklin	/s/ Judith Rodin
Barbara Hackman Franklin, Director	Judith Rodin, Director
/s/ Jeffrey E. Garten	/s/ Ronald A. Williams
Jeffrey E. Garten, Director	Ronald A. Williams, President and Director
	/s/ R. David Yost
Earl G. Graves, Director	R. David Yost, Director
/s/ Gerald Greenwald	/s/ Alan M. Bennett
Gerald Greenwald, Director	Alan M. Bennett
	Senior Vice President and Chief Financial Officer (Principal Financial Officer)
/s/ Ellen M. Hancock	/s/ Ronald M. Olejniczak
Ellen M. Hancock, Director	Ronald M. Olejniczak Vice President and Controller (Principal Accounting Officer)
/s/ Michael H. Jordan
Michael H. Jordan, Director

EX-24.2 12 y83806exv24w2.htm POWERS OF ATTORNEY

Exhibit 24.2

POWER OF ATTORNEY

We, the undersigned directors and officers of Aetna Inc. (the “Company”), hereby severally constitute and appoint Alan M. Bennett, William J. Casazza and Ronald M. Olejniczak, and each of them individually, our true and lawful attorneys, with full power to them and each of them to sign for us, and in our names and in the capacities indicated below, the Company’s 2002 Form 10-K and any and all amendments thereto to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, hereby ratifying and confirming our signatures as they may be signed by our said attorneys to the Form 10-K and to any and all amendments thereto.

Dated as of February 26, 2003.

John W. Rowe, M.D.	Jack D. Kuehler, Director
Chairman, Chief Executive Officer and Director (Principal Executive Officer)
Betsy Z. Cohen, Director	Joseph P. Newhouse, Director
Barbara Hackman Franklin, Director	Judith Rodin, Director
Jeffrey E. Garten, Director	Ronald A. Williams, President and Director
/s/ Earl G. Graves, Sr.
Earl G. Graves, Director	R. David Yost, Director
Gerald Greenwald, Director	Alan M. Bennett
	Senior Vice President and Chief Financial Officer (Principal Financial Officer)
Ellen M. Hancock, Director	Ronald M. Olejniczak Vice President and Controller (Principal Accounting Officer)
Michael H. Jordan, Director

EX-99.1 13 y83806exv99w1.htm AETNA INC, CODE OF CONDUCT

Exhibit  99.1

Contents

Message from the Chairman and Chief Executive Officer

Compliance reporting, administration and discipline

Statement 1: Conflict of interest
Employees, officers and directors must conduct themselves in a manner that avoids actual or apparent conflicts of interest and that protects Aetna’s business reputation.

Statement 2: Improper record keeping or use of Aetna property or resources

Illegal or improper record keeping or use of Aetna property or resources is prohibited.

Statement 3: Fraud, dishonesty or criminal conduct

Fraud, dishonesty or criminal conduct involving company operations is prohibited.

Statement 4: Safeguarding member health information and other proprietary, confidential or nonpublic information

Member health information and other proprietary, confidential or nonpublic information must be handled properly in order to protect such information from inappropriate access, use and disclosure.

Statement 5: Business and trade practices

All employees, officers and directors are expected to comply fully with all federal and state laws and regulations applicable to Aetna’s businesses and with all applicable company policies.

Statement 6: Government contracting

Employees and officers must help Aetna meet its objective to be a responsible and reputable government contractor.

Statement 7: Employment practices

Employment decisions must be based only on an employee’s or applicant’s qualifications, demonstrated skills and achievements without regard to race, color, sex, national origin, religion, age, disability, veteran status, citizenship, sexual orientation, gender identity or marital status.

Statement 8: Securities transactions

Employees, officers and directors are prohibited from trading securities while in possession of material nonpublic information.

Statement 9: Interacting with the media and other outside parties and organizations

Communications made on behalf of Aetna must be approved by senior management, and personal views must be kept separate from company views.

Statement 10: Intellectual property

Intellectual property used by Aetna, whether owned or licensed from others, is a valuable asset and must be protected from unauthorized use or disclosure.

1

Message from the Chairman and Chief Executive Officer

Excellence with Integrity is the key to Aetna’s continued success in all our dealings with our members, customers, plan sponsors, providers, shareholders, employees, regulators and others with whom we do business.

At the forefront of our core values is “Act with Integrity” — we honor our commitment to deliver excellence in all that we do. Aetna’s reputation for excellence with integrity is our most valuable asset. We have earned this reputation over the course of 150 years by delivering quality products and services, and by adhering to the highest standards of business conduct. If we are to live up to the trust placed in us, we must continue to conduct ourselves in accordance with the highest principles of fair and ethical business practices.

This Code of Conduct expresses the standards of integrity and business conduct I expect every Aetna employee, officer and director to uphold and follow. Compliance with this Code, other company policies, and the laws and regulations applicable to our businesses must be a priority for each of us. We must all exercise sound judgment, make the right choices and take the right actions. World-class compliance is critical to preserving Aetna’s priceless reputation and to our future success. Anything less is unacceptable. To demonstrate my strong support for compliance, I have positioned the Compliance organization directly under my supervision. I have done so because I firmly believe that excellence in compliance goes hand in hand with excellence in business.

I urge you to read this Code carefully and to abide by the spirit as well as the letter of the Code in all you do on Aetna’s behalf. Remember, compliance is good business practice — our behavior today will have a significant impact on Aetna’s reputation and business success tomorrow.

John W. Rowe, M.D.
Chairman and Chief Executive Officer

2

Compliance reporting, administration and discipline

All employees and officers of Aetna (including its affiliated companies) are responsible for conducting themselves in compliance with this Code of Conduct, other company policies, and applicable laws and regulations. In addition, all members of the Aetna Board of Directors, in regard to their Aetna duties, are responsible for conducting themselves in compliance with applicable provisions of this Code of Conduct and other company policies, and applicable laws and regulations.

Compliance Reporting
After reading this Code, every Aetna employee and officer must submit an electronic Code acknowledgment by use of the intranet to acknowledge that you have read, understand and, to the best of your knowledge, are complying with the various provisions of the Code. The electronic acknowledgment also provides a means of reporting any possible Code violations or conflicts of interest. For those of you who do not have access to Aetna’s intranet, contact your compliance officer for a paper copy of the Code acknowledgment form. If your circumstances should change, you must immediately discuss the matter with your manager and compliance officer, and submit an updated Code acknowledgment, if warranted. Apart from matters disclosed in the Code acknowledgment, compliance problems and violations must be promptly reported to your manager and compliance officer or internal legal counsel. The Audit Committee of the Aetna Board of Directors or the Chairman of the Audit Committee, in consultation with Aetna’s Chief or Deputy Chief Compliance Officer, will review complaints involving the company’s accounting, internal accounting controls, or auditing matters, or concerns regarding questionable accounting or auditing matters.

Confidentiality regarding those who make compliance reports and those potentially involved is maintained to the extent possible during a compliance investigation. Aetna does not tolerate retribution, retaliation or adverse personnel action of any kind against anyone for lawfully reporting a situation of potential noncompliance, or providing to the company or any law enforcement or other governmental agency any information or assistance relating to the commission or possible commission of any federal or state offense, or breach of company policy. Those wishing to anonymously report compliance problems may call Aetna’s toll-free compliance assistance service, AlertLine^® (1-888-891-8910), or write to Corporate Compliance, P.O. Box 370205, West Hartford, CT 06137-0205.

Every business and staff area has a designated compliance officer. It is the duty of these compliance officers, working with management, internal legal counsel and others, to assist the business and staff areas in achieving the highest standards of integrity and business conduct.

The compliance officers are listed on the Compliance website at http://aetnet.aetna.com/compliance. Call them or internal legal counsel whenever you have a question or a matter to report involving potential violation of this Code or applicable laws and regulations.

3

Administration and Waiver
This Code of Conduct can be found on Aetna’s Internet website at http://www.aetna.com/index.htm. Any change to this Code shall be disclosed to the public on Aetna’s website within five business days after the change is made.

Any waiver, interpretation or other administration of this Code of Conduct for directors may only be implemented by the Aetna Board of Directors or the Nominating and Corporate Governance Committee of the Board. Any waiver of this Code for executive officers may only be granted by the Aetna Board of Directors or the Audit Committee of the Board. Any waiver for other officers or employees may only be granted by the Chairman. Any waiver of this Code for directors, executive officers, the chief financial officer, the corporate controller, or persons performing similar functions shall be disclosed to the public on Aetna’s website within five business days after the waiver is granted.

Disciplinary Action
Employees and officers who fail to comply with the policies, standards and guidelines in this Code of Conduct, or with the laws and regulations applicable to Aetna’s businesses, are subject to disciplinary action, including possible termination of employment with Aetna. For example, disciplinary action may be taken against any of the following persons:

• Any employee or officer who violates this Code or applicable laws and regulations, or who directs others to do so.

• Any employee or officer who deliberately withholds relevant information, or knowingly provides false information, concerning a violation of this Code or applicable laws and regulations.

• The violator’s manager to the extent that the circumstances of a violation reflect the manager’s disregard for this Code or applicable laws and regulations.

• Any employee or officer who retaliates, directly or indirectly, against another employee for reporting a suspected violation of this Code or applicable laws and regulations, or assisting an investigation of a suspected violation.

4

Statement 1: Conflict of interest

Employees, officers and directors must conduct themselves in a manner that avoids actual or apparent conflicts of interest and that protects Aetna’s business reputation.

All business decisions must be made in Aetna’s best interest. A conflict of interest arises when an employee’s, officer’s or director’s judgment is or may be influenced by considerations of improper personal gain or benefit to the individual or another person. Situations that create the appearance of a conflict may cause public relations or other problems damaging to Aetna, and also should be avoided. Guidelines for some of the most common conflict of interest situations are listed below.

Employee and Officer Affiliations and Interests
A conflict of interest is likely to arise if an employee or officer becomes affiliated with a business entity that is a competitor, customer, provider or supplier, or otherwise does business with Aetna. If you plan to take a position (e.g., as employee, officer, director, consultant or agent) with or acquire a significant ownership interest (one-tenth of one percent or more of a publicly owned company or one percent or more of any other business, including a partnership) in such a business entity, you must report your intention to your manager and compliance officer for review before you enter into the relationship. In addition, you may not become an officer, director or advisor, or assume a similarly responsible position with any for-profit business entity without prior approval of the Chairman or the Chairman’s designee. (To make arrangements for securing approval, contact your compliance officer.) If you plan to become affiliated with a nonprofit organization that is a competitor, customer, provider or supplier of Aetna, or if there is any other reason such affiliation may give rise to a conflict of interest, you must report your intention to your manager and compliance officer for review before you enter into the relationship. Further, you may not engage in any outside activity that will prevent you from performing your Aetna duties. Since conflicts may not always be clear-cut, you must report to your manager and compliance officer all transactions or relationships that reasonably could be expected to give rise to a conflict.

Director Affiliations and Interests
A conflict of interest may arise when a director takes actions or has interests that may make it difficult to perform the director’s work for the company objectively and effectively. Conflicts of interest arise when a director, or a member of the director’s family, receives improper personal benefits because of the director’s position with the company. Except as authorized by the Aetna Board of Directors, no outside director shall have a direct economic relationship with the company. Company loans to, or guarantees of obligations of, directors and their family members are prohibited. Any proposed affiliation with a for-profit enterprise or any proposed transaction, involving the company or a subsidiary of the company, in which a director has a direct economic or beneficial interest shall be analyzed and reviewed by the Nominating and Corporate Governance Committee of the Board for potential conflicts. Since conflicts may not always be clear-cut, directors shall report any potential conflicts to, and are encouraged generally to consult with, the Corporate Secretary or General Counsel. The Corporate Secretary or General Counsel will then consult with the Chairman of the Board, or the full Board, as necessary.

Family and Personal Relationships
When a family member or close friend of an employee or officer living in the same household works for a competitor, customer, provider or supplier of Aetna, there is the

5

potential for favoritism or inappropriate sharing of confidential information. You must report any situation involving such persons to your manager and compliance officer.

Disclosure to Customers
Employees and officers must consult with internal legal counsel regarding the need for and content of any disclosure to Aetna customers if they are aware of any agent, broker, consultant or other outside party who may have a conflict of interest.

Accepting Gifts
Gifts or other benefits of value offered to you because of your Aetna employment or affiliation should be refused whenever possible and never accepted where prohibited by law. However, non-cash gifts of nominal value usually can be accepted. You should consult with your compliance officer for guidance on gifts of nominal value. In those rare circumstances where refusal would create serious negative business repercussions (e.g., because of cultural practices in other countries), gifts or benefits may be accepted (where lawful) on behalf of the company, but must be reported to your compliance officer for a determination of appropriate disposition.

Travel and Entertainment Expenses
Aetna pays legitimate expenses for business trips. In general, trips should not be financed by others. Employees and officers may accept an occasional meal or entertainment in connection with furthering Aetna’s business interest, but only if it will be appropriate to reciprocate or if refusal would be discourteous. Employees and officers may not receive compensation (e.g., an honorarium) for participation on professional committees and panel presentations related to Aetna business, but the sponsoring organization may pay reasonable travel expenses if non-Aetna participants are treated equally.

Discounts and Preferential Treatment
You may not accept any discount or other preferential treatment that you know has been offered to you personally because of your position with Aetna, except discounts extended to all employees. If you use company suppliers or contractors for personal business, you are expected to pay full market value for services rendered and materials provided.

Loans and Guarantees of Obligations
Loans to, or guarantees of obligations of, executive officers and their family members are likely to create conflicts of interest and, therefore, are prohibited. In addition, loans to, or guarantees of obligations of, other officers and employees may create conflicts of interest and, therefore, must be reviewed and approved in advance by the Chairman or the Chairman’s designee.

People to Contact. Your manager, compliance officer, internal legal counsel, or the Corporate Secretary or General Counsel (for directors only).

6

Statement 2: Improper record keeping or use of Aetna property or resources

Illegal or improper record keeping or use of Aetna property or resources is prohibited.

The company requires full, fair, accurate, timely, and understandable disclosure in reports and documents filed with, or submitted to, the Securities and Exchange Commission and other regulators, and in other public communications made by the company. Additionally, you must use company property and resources, including information systems, solely for company purposes, unless you obtain authorization in advance from your manager. Company property, resources or position may never be used for improper personal gain, and you are prohibited from taking or keeping company property or resources upon termination of your employment or affiliation with Aetna. If you detect or suspect improper record keeping or that Aetna property or resources are being illegally or improperly used or retained, immediately contact your manager, compliance officer, internal legal counsel, controller or Investigative Services.

Accounting Controls
Officers, managers and employees must keep books, records and accounts that accurately and fairly reflect in reasonable detail transactions and disposition of assets. Off-balance sheet transactions, arrangements and obligations must not be executed, and unrecorded funds or assets must not be maintained unless permitted by applicable law or regulation. If permitted, such transactions, arrangements, obligations and accounts, if material, must be disclosed in appropriate reports to the Securities and Exchange Commission. Officers and managers must establish and maintain a system of internal accounting controls designed to (i) prevent unauthorized, unrecorded or inaccurately recorded transactions; and (ii) permit the preparation of financial statements according to generally accepted accounting principles.

Corporate Opportunities
Employees, officers and directors are prohibited from (i) taking for themselves personally business opportunities that are discovered through the use of Aetna property, information or position; (ii) using company property, information or position for improper personal gain; and (iii) competing with the company.

Bribes or Other Illegal Payments
Employees, officers and directors are prohibited from making or authorizing bribes, payments for illegal acts or any other use of company property or resources in a manner that creates a conflict of interest or violates applicable law.

Foreign Payments
Employees, officers and directors must comply with the U.S. Foreign Corrupt Practices Act, which prohibits American firms, and in many cases their foreign subsidiaries, from offering, paying or authorizing payment to foreign government officials, political parties or their officials, or political candidates for the purpose of obtaining, retaining or directing business.

Payment to Outside Parties
Any payment made to an outside party shall be made only for identifiable services and shall be appropriate in relationship to the services provided.

7

Giving Gifts
Gifts or other benefits of value may never be given if doing so is prohibited by law or otherwise prohibited by this Code of Conduct. All gifts or benefits given must be approved by your manager, and disclosed in the appropriate expense report in a manner that identifies the recipient, purpose and amount.

Monitoring
Aetna may monitor or inspect information systems, including e-mail, Internet use and personal computer files, and any materials contained in furniture or elsewhere on company premises in order to prevent or detect improper record keeping or use of property or resources and to investigate possible violations of law, this Code of Conduct or other company policies.

People to Contact. Your manager, compliance officer, internal legal counsel, controller, Investigative Services, or the Corporate Secretary or General Counsel (for directors only).

8

Statement 3: Fraud, dishonesty or criminal conduct

Fraud, dishonesty or criminal conduct involving company operations is prohibited.

Our reputation for integrity and our continued success depend on each of us conducting Aetna’s business honestly and in accordance with our legal and regulatory obligations. Fraud, dishonesty or criminal conduct on the part of any employee, officer or director or anyone doing business with the company will not be tolerated. Conduct prohibited by this Statement includes theft of employee or company property; misuse of computer, telephone or mail resources; falsification of records or reports, including signing another person’s name or any unauthorized alteration of a company document; violation of the drug and alcohol policy or weapons prohibition policy; and violence or threats of violence. If you detect or suspect conduct on the part of anyone inside or outside the company that violates this Statement, report it immediately to Investigative Services, internal legal counsel or your compliance officer. The following guidelines should be observed in situations involving actual or suspected fraud, dishonesty or criminal conduct.

• Do not discuss instances of actual or suspected fraud, dishonesty or criminal conduct with anyone except those authorized to investigate such conduct.

• Do not discipline an employee or officer for conduct prohibited by this Statement until you have consulted with Investigative Services and have been authorized to do so by your compliance officer or internal legal counsel.

• Do not promise not to report conduct to law enforcement authorities for any reason.

• Do not attempt to dissuade another person from reporting actual or suspected criminal activity to any law enforcement or other governmental agency.

• Do not destroy, attempt to destroy, alter, falsify or conceal evidence of actual or suspected criminal activity or of any conduct that violates this Code of Conduct.

• Do not retaliate or take any adverse personnel action against any individual for lawfully (i) reporting to the company or any law enforcement or other governmental agency a possible violation of law, regulation or company policy; (ii) assisting the company or governmental agency in an investigation of a possible violation of law, regulation or company policy; or (iii) filing or participating in a proceeding to address a possible violation of law, regulation or company policy.

• You must cooperate with, and be truthful during, all authorized company investigations.

• If you are contacted by any law enforcement or other governmental agency about actual or suspected illegal conduct of any kind, immediately report such contact to Investigative Services, internal legal counsel or your compliance officer.

People to Contact. Investigative Services, internal legal counsel, your compliance officer, or the Corporate Secretary or General Counsel (for directors only).

9

Statement 4: Safeguarding member health information and other proprietary, confidential or nonpublic information

Member health information and other proprietary, confidential or nonpublic information must be handled properly in order to protect such information from inappropriate access, use and disclosure.

In the course of our work, each of us may have access to member health information or other information not known to the public. Employees, officers and directors must protect this nonpublic information by adhering to the following guidelines.

• We consider member health information to be confidential, and we have specific company policies in place that must be followed to protect the privacy of such information. We have established a Privacy Office to oversee our privacy policies.

• You are prohibited from accessing or using information that relates to the past, present or future physical or mental health of any individual member, or any information that relates to the provision of, or payment for, care for that member, unless there is a legitimate business need to do so, and the information is accessed and used for an authorized purpose. Except as specifically permitted by a written company policy, you are prohibited from disclosing member health information to anyone outside the company without prior authorization from management in consultation with internal legal counsel or your compliance officer. Authorization shall not be granted unless there is a legitimate business need for the disclosure, and the disclosure is permitted under specific company policies and applicable law.

• Among the most important assets of the company is its proprietary and confidential information, to which employees, officers and, in particular, senior management and directors have access and which, if used on behalf of Aetna’s competitors, could affect the company’s ability to achieve its business goals. In order to protect this information and other interests of the company, you are prohibited from accessing or using proprietary, confidential and other nonpublic information about Aetna, its business interests and its employees, customers, plan sponsors, members, providers or suppliers, or disclosing such information to anyone inside the company, unless there is a legitimate business need to do so. Furthermore, you are prohibited from disclosing such proprietary, confidential and other nonpublic information to anyone outside the company (including on Internet message boards) without prior authorization from management in consultation with internal legal counsel or your compliance officer.

• You are prohibited from taking member health information and other proprietary, confidential or nonpublic information with you upon termination of your employment or affiliation with Aetna, or from using or disclosing such information for any purpose elsewhere, including with a different employer or company. You also are required to return such information to the company upon termination of your employment or affiliation with Aetna if the information has been removed from Aetna’s premises prior to termination. Aetna reserves the right to inspect materials under the control of departing employees and officers and other persons to prevent unauthorized removal of information from Aetna premises. Employees, officers and directors subject to contractual obligations in favor of the company (e.g., continued cooperation, confidentiality, nonsolicitation of employees) must honor the terms of these agreements after termination of their employment or affiliation with Aetna.

10

• You are required to secure from unauthorized access and public view documents under your control that contain member health information and other proprietary, confidential or nonpublic information. When such information is being discarded, steps must be taken to ensure proper destruction.

People to Contact. Your manager, internal legal counsel, compliance officer, or the Corporate Secretary or General Counsel (for directors only).

11

Statement 5: Business and trade practices

All employees, officers and directors are expected to comply fully with all federal and state laws and regulations applicable to Aetna’s businesses and with all applicable company policies.

Aetna’s businesses are subject to a wide range of federal and state laws, regulations and rules. Our compliance with these laws, regulations and rules is periodically tested by market conduct examinations and other regulatory inquiries. Additionally, Aetna’s products and services are primarily contractual promises. Highlighted below are some of the key compliance guidelines that must be followed.

• You shall not knowingly violate any law or regulation, including unfair trade or insurance practices laws. You should consult with internal legal counsel on any matter relating to actual or potential noncompliance with any law or regulation or any of the company’s contractual commitments.

• You may not engage in conduct or a sales practice that is intended to mislead, manipulate or take unfair advantage of a customer, member, provider or supplier, or misrepresent the company or its products or services.

• You shall not misrepresent facts, contractual terms or company policies to a customer, member, provider, supplier or regulator. If you do so inadvertently, you must correct the misrepresentation as soon as possible after consulting with your manager and internal legal counsel or your compliance officer.

• You must establish and adhere to appropriate procedures governing the retention and destruction of records consistent with applicable laws, regulations, company policies and business needs. You may not destroy, alter or falsify any document that may be relevant to a threatened or pending lawsuit or governmental investigation. Consult with and follow the instructions of internal legal counsel in these situations.

• You may not agree with representatives of competing companies to engage in any of the following illegal practices: fix prices; allocate or divide markets or customers; boycott or refuse to deal with competitors, customers or suppliers; or engage in any other behavior that unlawfully restrains competition.

• You may not discuss or exchange competitively sensitive information (e.g., relating to price or markets) with representatives of competing companies, except with the prior approval of internal legal counsel or your compliance officer.

• You may not participate in industry or trade associations, except to the extent authorized by management in consultation with your compliance officer or internal legal counsel.

People to Contact. Your compliance officer, internal legal counsel, or the Corporate Secretary or General Counsel (for directors only).

12

Statement 6: Government contracting

Employees and officers must help Aetna meet its objective to be a responsible and reputable government contractor.

When we accept government contracts, we have an obligation to ensure that we administer those contracts and deliver our products and services in a manner that fully complies with government contracting laws and regulations, as well as our own high standards of honesty, integrity and excellence.

All Government Contracting
Employees and officers must comply fully with all federal, state and local laws regulating government contracting. Employees and officers must comply with federal and state employment laws applicable to federal or state contractors, such as federal Equal Employment Opportunity and state human rights laws, and various federal and state laws prohibiting discrimination against certain protected classes of people.

Federal Government Contracting
Some of the special rules that apply to Aetna as a federal government contractor include the following:

• Employees and officers must comply with all rules that govern contractor conduct under Medicare, Medicaid and the Federal Employees Health Benefits Program.

• Managers and officers must abide by specific rules governing the recruitment and employment of current or former federal employees. Approval by internal legal counsel must be obtained prior to discussing employment with such persons.

• Employees and officers may not offer, promise or deliver a gift of any value to an employee or elected or appointed official of the federal government for the purpose of influencing official acts or as a reward for performing such acts. This includes payment for any meal, refreshment, entertainment, travel or lodging expenses of a federal employee or elected or appointed official.

• Employees and officers are prohibited from providing or accepting any “kickback” or “rebate” (i.e., anything of value) in connection with a federal contract.

• Certain federal contracts require employees or officers to certify that during the course of a contract procurement they have not engaged in activity prohibited by any federal procurement law or regulation. No certification should be given without prior consultation with internal legal counsel.

• Employees and officers must comply with all laws that apply in the countries where Aetna does business. Employees and officers also are prohibited from making any payment in violation of the U.S. Foreign Corrupt Practices Act. (See Statement 2 for a discussion of compliance requirements under the U.S. Foreign Corrupt Practices Act.)

• Employees and officers involved in administration of federal government contracts must abide by the federal privacy laws and regulations applicable to the federal agency that maintains the contract.

13

• Employees and officers may not use federal funds under government contracts for any lobbying activity designed to influence legislation, appropriations or the award of any federal contract.

• Employees and officers must be accurate and complete in all representations and certifications in negotiating or administering federal government contracts. The submission of a proposal, quotation, reconciliation, rate submission, certification or other document or statement that is false, incomplete or misleading can result in liability for both the company and the individual. Employees and officers have an affirmative duty to disclose to the federal government current, accurate and complete cost, pricing or other required data. Questions should be directed to internal legal counsel.

State Government Contracting
State laws that govern contractor conduct under Medicaid, children’s health programs, and state or local health plans may vary from the federal rules outlined above. Contact internal legal counsel concerning how any individual state rule might apply.

People to Contact. Internal legal counsel or your compliance officer.

14

Statement 7: Employment practices

Employment decisions must be based only on an employee’s or applicant’s qualifications, demonstrated skills and achievements without regard to race, color, sex, national origin, religion, age, disability, veteran status, citizenship, sexual orientation, gender identity or marital status.

Equal Opportunity and Affirmative Action
Aetna’s Equal Employment Opportunity and Affirmative Action Programs are detailed in AccessHR (which can be accessed online at AetNet). The following are key points of these programs:

• You must administer all company programs and benefits according to their terms, without discrimination on the basis of race, color, sex, national origin, religion, age, disability, veteran status, citizenship, sexual orientation, gender identity or marital status.

• You must not engage in slurs, epithets, jokes or other harassing or intimidating actions based on race, color, sex, national origin, religion, age, disability, veteran status, citizenship, sexual orientation, gender identity or marital status. Also, internal or external communication media, including e-mail, must not be used to further such inappropriate conduct.

• If you believe an employee or applicant has been subjected to any discriminatory treatment, report the matter immediately to your human resources contact or compliance officer.

Work Environment
All employees are entitled to be treated with respect and dignity.

• Management must not tolerate harassment of, or by, any employee in situations involving another employee, customer, member, provider, client, supplier or business associate.

• You must provide and maintain a work environment that is free of harassment.

Sexual Harassment

• Employees, officers and directors must not engage in conduct that could be construed as sexual harassment. Unwelcome sexual advances, sexually suggestive statements or questions, offensive jokes, sexual innuendos, offensive touching or patting, requests for sexual favors, displaying or showing sexually suggestive material (including posters, calendars, cartoons, e-mail, or Internet websites), and other verbal or physical conduct of a sexual nature may be forms of sexual harassment. AccessHR contains detailed information on employees’ and managers’ responsibilities with respect to sexual harassment.

• Report suspected instances of sexual harassment by anyone (including persons with whom the company does business) immediately to your human resources contact.

• Company policy prohibits retaliation against any individual who complains of, or reports an instance of, sexual harassment or participates in an investigation of a sexual harassment complaint.

15

Nepotism

• No individual may report, directly or indirectly, to a person who is a relative or to a person with whom the individual has a close personal relationship that may adversely affect the manager’s ability to supervise objectively and effectively.

• All individuals involved must disclose any such relationship to their managers above the level at which the relationship exists and to their compliance officers or human resources contacts.

People to Contact. Your human resources contact, compliance officer, internal legal counsel, or the Corporate Secretary or General Counsel (for directors only).

16

Statement 8: Securities transactions

Employees, officers and directors are prohibited from trading securities while in possession of material nonpublic information.

Employees, officers and directors must comply with insider trading and other securities laws and company policies regarding securities transactions and handling of confidential information. The rules outlined below apply to transactions in Aetna common stock (including stock options), preferred stock and debt instruments. The rules also apply to transfers, which you actively control, of accumulated values to and from any Aetna common stock account in any Aetna benefit plan. The rules in certain instances also apply to purchases or sales of securities of other companies and to transactions in foreign securities markets. Insider trading is both unethical and illegal and will be firmly dealt with by the company. Additionally, individuals and the company are subject to severe civil and criminal penalties for insider trading.

For your protection and the protection of the company, you must follow these basic rules:

• You may not trade Aetna securities while you possess material nonpublic information about the company’s operations, activities, plans or financial results. However, in limited circumstances from time to time, certain employees may trade Aetna securities pursuant to a prearranged contract, instruction or plan that complies with federal and state law, provided such contract, instruction or plan, or amendment thereof, is approved by the Chairman or the Chairman’s designee in consultation with internal legal counsel.

• Information is material when it could affect someone’s decision to buy, hold or sell a company’s securities. Material information includes a company’s anticipated earnings, plans to acquire or sell significant businesses, and changes in senior executives. Limit transactions to times when it can reasonably be assumed that all material information about a company has been disclosed. Allow two business days between the time material information has been made public through news services and the time you place your buy or sell order, so the information can be absorbed by the financial markets. Consult with internal legal counsel about the safest times to buy or sell Aetna securities.

• Unless otherwise permitted by Securities and Exchange Commission rules, you may not trade securities of other companies when you possess material nonpublic information about those companies. Also, you may not trade securities of other companies when such trade is otherwise unlawful or creates a conflict of interest.

• You may not disclose material nonpublic information about Aetna or another company to anyone (i) inside the company, unless they need to know the information for business purposes; or (ii) outside the company, unless you obtain prior approval from management in consultation with internal legal counsel. The information belongs to Aetna, and you may not misappropriate it for anyone’s benefit. Giving a tip based on material nonpublic information is unethical and illegal, and is prohibited, even if you don’t profit from it.

• You may not buy or sell put or call options on Aetna stock, and you may not sell Aetna stock short.

17

• Whenever buying or selling Aetna securities, you must tell the broker about your relationship with Aetna to facilitate a determination of whether you have “insider” status under securities laws.

• Certain individuals who regularly have access to material nonpublic information or who hold certain positions with the company must obtain clearance from internal legal counsel before buying or selling any Aetna security. All affected individuals will be personally notified about this clearance requirement.

• These rules apply to members of your family and anyone else sharing your home. Therefore, you must use discretion when discussing your work with friends or family members, as well as with other employees.

People to Contact. Internal legal counsel, your compliance officer, or the Corporate Secretary or General Counsel (for directors only).

18

Statement 9: Interacting with the media and other outside parties and organizations

Communications made on behalf of Aetna must be approved by senior management, and personal views must be kept separate from company views.

Since corporations are subject to increasing public scrutiny, it is important that any public statement that might be attributed to Aetna be carefully considered, and that personal views be kept separate from company views. To protect the company and yourself, observe the following rules.

Company Communications

• Employees and officers may not speak publicly for the company, unless specifically authorized by senior management. Additionally, external communications such as speeches or presentations, and e-mail communications or mailings to more than one external party (including prospective and current members, customers, plan sponsors, physicians and other providers) must be reviewed through the appropriate national or regional quality communications center (QCC) process, in consultation with internal legal counsel, as appropriate.

• All communications media inquiries regarding the company must be referred to appropriate personnel in the communications department. Similarly, inquiries from financial analysts must be referred to appropriate personnel in the finance department.

Personal Communications

• Do not use company stationery or titles in communications involving non-Aetna business (e.g., a personal letter to the editor). An exception is allowed for an occasional use of stationery for routine correspondence in connection with appropriate outside civic, public service or charitable activities when approved by your manager and compliance officer.

• Do not associate the company with or imply a company endorsement of your personal opinions when speaking, writing or otherwise engaging in personal affairs (including when using the Internet), unless authorized to do so by the company. Further, since it may be difficult for the media when interacting with key managers to distinguish between the personal views of those managers and official company positions, key managers may not disagree in public with Aetna’s official positions on business issues.

Activities with Government

• All matters involving a state or federal governmental body or agency must be closely coordinated with internal legal counsel, State Government Relations or Federal Government Relations, as appropriate. Immediately notify internal legal counsel or appropriate government relations personnel if contacted by a governmental body or agency.

• Only senior management or persons designated by the company to serve in a government relations or legal capacity are authorized to express the company’s views on legislation, regulations or governmental action. Further, only persons designated by the company from the government relations and law areas may engage the services of lobbyists for the company.

19

Political Activity and Contributions

• Do not associate the company with or imply a company endorsement of personal political activity.

• No contributions of company funds may be made in any state in connection with any candidate, ballot initiative, referendum or other question without prior approval from appropriate government relations personnel. This prohibition applies to any direct or indirect use of company funds, including the use of core, segment and regional budget money, as well as company reimbursement for entertainment or other expenses for political purposes, such as attending a political event.

• Company funds may not be used to make political contributions in connection with a federal election. However, company funds may be used to support certain political activity not considered to be a contribution to an election under federal law. Because campaign contribution laws are complex and subject to change, refer inquiries to Federal Government Relations.

• Company funds are used to support the administration of the Aetna political action committee (PAC), but may not be used for PAC contributions. Employee contributions to the Aetna PAC are strictly voluntary.

• Any use of company funds for political election activity (whether state or federal) must be processed through Federal Government Relations, irrespective of the source of the contribution (e.g., whether core, segment or regional budget funds).

People to Contact. Your manager, communications department, compliance officer, internal legal counsel or government relations personnel.

20

Statement 10: Intellectual property

Intellectual property used by Aetna, whether owned or licensed from others, is a valuable asset and must be protected from unauthorized use or disclosure.

You are responsible for the proper handling of all intellectual property under your control. This includes all names, logos, trademarks, patents, service marks and copyrights. Refer to the Aetna Intellectual Property Guide for further guidance. Observe the following rules to properly protect intellectual property.

Aetna’s Intellectual Property

• Before using a new service mark or trademark, contact internal legal counsel for approval of the mark. Once approval is obtained, follow the usage guidelines in the Aetna Intellectual Property Guide.

• Place copyright notices on all Aetna-created audiovisuals, Internet materials, computer programs, screen displays and other documents that are intended for outside distribution or broad internal circulation. Internal legal counsel will provide you with the proper form of copyright notice.

• Do not disclose Aetna’s trade secrets or allow anyone outside the company to use an Aetna mark or copyrighted work without (i) obtaining approval from senior management, and (ii) having in place a signed confidentiality or license agreement approved by internal legal counsel.

• Notify internal legal counsel immediately if you become aware of any unauthorized or improper use or disclosure of an Aetna name, logo, service mark, trademark, trade secret, confidential document, patent or copyright.

Others’ Intellectual Property

• Do not use another party’s name, logo, trademark, service mark or copyrighted material (including music and computer programs) without prior written permission from the owner.

• Treat all computer programs, documentation and related materials owned by others as you would treat Aetna trade secrets and confidential materials. Never remove copyright notices from a software product or its documentation.

• Aetna has a photocopying agreement with the Copyright Clearance Center that allows Aetna to copy from many publications for internal purposes only, subject to certain conditions. Contact internal legal counsel to determine if photocopying is permissible.

• Do not copy entire copyrighted non-Aetna documents. Circulate the original or copy a very small excerpt, if necessary.

• Do not copy videotapes (either full-length or edited), rebroadcast all or part of a television newscast, program or movie, or incorporate cuts from a movie or TV show into an Aetna production, without appropriate written permission, as determined by internal legal counsel.

21

• Aetna has the contractual right to play certain musical recordings at company events. Contact internal legal counsel to determine if your particular use is permitted. Do not combine music with video or computer presentations without appropriate written permission, as determined by internal legal counsel.

People to Contact. Your compliance officer or internal legal counsel.

22 GRAPHIC 16 y83806y8380600.gif GRAPHIC begin 644 y83806y8380600.gif M1TE&.#EAE0`P`/<``````(````"``("`````@(``@`"`@,#`P,#/CX^KJZO'Q\?CX^/_[\*"@I("`@/\```#_ M`/__````__\`_P#______RP`````E0`P```(_@#_"1Q(4""O-@R&S"O(L*'# MAQ`C2IQ(L:)%B^P8*-BX\:+'CR!#BASYCJ-)!0L%WFL3X>1&!Q/PO8LWLJ;- MFR'GM=SX0-)`2>OP27!)E&,$G$B3*AW(CN,0F@3;%%4`82J$I5BS@N3X`%Y# M"AP=M)G9D-<[=NH8'-7*MBU$!11X/81W(!X]MWCS?H2JMZ_?CP?^"I0GN/!$ MC0K8W:R@8.*]QH8C0X3'F`)AD.L4W*,(5J[DSPWG/5`PY'+%>`HJ6-RH#K1K MANTV2FCX+G#!S)LKENSXNK=`U!M3"E0W1#7!JEXM#MWXSK=O>1RA\IHMB8+` M>1OY5C1IO:UIYQ-Y_G$4V$;>[G_B%=BV>.!DV_;@+696X.#?A-$HVR?^*-5D M[JP9Q;<:<^](H)A^0VQU4H):15"?@!0UI0`#`^D'F4?P3.B>5@H\`"%%]'"T MF86>>=2&!/BZL*)"%<#2WWWT`[*M#<0!,, MUXY/$KD4$CO#_K/L1FX2*VM#50:;XT._THB=E>8R=]M&V#)4K+34DH=/C1&E MR!$#CWU7$0/Q_C.C20Y),MY7')6HZ;D.I2LIL`S)2:O`'+764&P'_V/Q.N\\ MZQ"N$>C7*T47#C3J1@H/1'!#^DYLDJ((FQ0E0R>;UK("GC(4Z49=6O3.:!4L M.]M%[2@Y$,85,]0?:0Y].^C"/$'D<,DTFS2M?1L6M#/$%RUMDL46/<`N0=JV MFUK3)CT*-8_HFI2S0R<_[;7:!&T]=D70$74W_HPC_Y.EF&^:E"Q!WZ)4),,Q M@PM1W`/E?6A#=H.TDP+SPGRET8&;5.U`7G?'D,$F8?NRU&XO;M+3_\0C004! MUVW2WA1-CJ,"_D;$V!`1Y*Y[[F4+-/E&$4`@_/`0X+I1SJ.W;:SI'*$ND:E< M5P2Z`D=1Z7%$FMVC_?;:O_,W1U>?!,$]DI1O?OG<2V);\@V7_A#C#]%S0#OK MM$'8]C2*J`)X%0,:9<'FF9`!4PM(E4 M(%P/Z=U)!I`A4`.KR!#;709"`_M0K2'\H`I^(I"=(`CD9!['GP8*`,(=/2YM#(N<1UA1D M-RDC5@7?&V)#8%*`3_H/KB=CCRAFR+^+J*?O8TK6SUS")7&9:&S2:2( M8W1B&45XQK713HT_K(B$KF8RIAF1:@]QG)8.!R5"#2V/K-ICU9KWCSHB+5AP)(A[AF*2%"L"6 MPS#(1X[,T)NF-`DW:\>0]!PI*A3D9;-)"=2ZR1(A@*VG(G](S;`I91D M0>#G,+H-9$LT_,=0)/*8$!9$/"W\279JB$2![&9S!4G1W:!Y-8.MYR0)%0@T M[>C'9+7G*M^2RU#Z)L17"I`A[3S)-/TX%8'M1!WMN`<[BC5-[!CE@9O9E,LV MM:*3=0@_[*HG1TCJD7B\4&#S2*I2E?J0I3K5J8W#Q]\<(`%"TD8=$7C`$/#U >CZ<^E2!>7>I`#C($"$2@`F-A2#SPH8ZT%B0@```[ ` end GRAPHIC 17 y83806y8380601.gif GRAPHIC begin 644 y83806y8380601.gif M1TE&.#EAJ``Z`/<``````(````"``("`````@(``@`"`@,#`P,#/CX^KJZO'Q\?CX^/_[\*"@I("`@/\```#_ M`/__````__\`_P#______RP`````J``Z```(_@#_"1Q(L*#!@P@3*ES(L*'# MAQ`C2IQ(L:+%BQ@S:MS(L:/'CR!#BAQ)LJ3)DRA3JES)LJ7+ES`MVAM6KAPH M@?9BZMR)W9NP]!>;%YM6!34$07SOR*MS## MJ@C[&EZ,D1X]C_4:1F:<]4`9,ZYXX;280!:MAF9J44Y*M)Z\6H9"SZ/8>5:& MAO%,&1I]]X"A,J[@0:0W2U:"AY$,&=)-^RRMRZX,)E@D[U^]H[M8S8IH1GCR MXF=Y53>D.:<[0PE$_@NL-XL5MXC:A9L9&1@[VG_PJIMQ)W"][7;_,LAB]3NB M*^'"B2>2*_&X1]%WJ34'7AFFS),`*[+L,M%VPBWRCV(=E4&<@1+1`B`]J3U3 MSRZRR*++1+8!F%J!(?%"P(8<[@;@.P/U)LMT$RU"H7"1#*AAC!,%)YQ`Y94X M643UE)'`CH8;R7*\MI$J/WS'X!F'(`1AO6HUTUA&&(T MSVWPZ))E?TXZM(AH*0*87)H(S1.G0?"`29]D9*X6D3UZ/H3G1?2444MT)?8W MD3QE",HDBXG],X^'961:QB('7'5`)*Z8P20M[=02B6:UI%K+/;6XLL@7_@/5 M@YJF91CB2G,)T3,KK89$0JE`[+CBRJ>ZT:(91_2X\N"-NDA'42T6"H2:B@(B M5$NMM4P&SR*U_MFJ*Y$LHJ*PY-+WK;@`FB)0BK7P$@\O7X9VH4&8YC:9/)&8 M@EES1]7RV"(]&O(G1_IE6:*@$ADBX#RUJJC0?V8<2Y!ZU?XCI'"_%A0?@&7\ M4PL!%?\#9L7U?"DQ04+.-U`MJ[G23@*T#+R1C5GJM`[%*.L(HRQ_I.>>@E\=+6*LTVL(N?UF>ZE\`B-?EOQ*J['0ZCGF MAC=<4_D*Y['RN4-Q_C@,X@US@KL""N2$"0R@VP[0*N%<9D<2#`G-!'+!V2DD M44:<&O;$L[QU`(((,<0%SZ:I>@6!A!D]"C1#!DWIL`SHL@C(M2FQ&Q1" MY"%-TAM6V(Z"5K2E"K%GALB4[XL%D=A$5F8/="$C7"Y+4H\L&421_(%D M-`\"NK;5(G7<80@O=!9#/Q:DEGH+8)FHE:=IDJ1@.!J/0%()RS(L+WQ,_A*( MBD)ID$4\0XL$9.;X.JD>YVP1(0!LX4@Z(XOSQ(F""^G20XC9'.0)AQT1)6FD%JEF/`_2+$9:RE:W,46M%M%3 MA-B&KQO\VW#FX8K+M"L>\7!')*I#-WFD)C6N2!7&SK@(G`50))H(/"]AC5MW^LA3AU(/75BQ'@=(5L`!W#';`]CVB_*P[6S=P=O> MZE90\<"4II2ED`/\)U,*BTQN;=M;WQY`:KRH;7-C.]M!'E=?MEHMO/B:F2EY :][O@#:]XQTO>\IKWO.A-KWK7RUZ3!`0``#L_ ` end GRAPHIC 18 y83806y8380602.gif GRAPHIC begin 644 y83806y8380602.gif M1TE&.#EA@``D`/<``````(````"``("`````@(``@`"`@,#`P,#/CX^KJZO'Q\?CX^/_[\*"@I("`@/\```#_ M`/__````__\`_P#______RP`````@``D```(_@#_"1Q(L*#!@P@3*ES(L*'# MAQ`C2IQ(L:+%BQ@S:MS(D2.\>_C:M)'4L:1)C/+>X9OPH$($"OC>Q3M)L^;" M>0?838#P`(*$=@?DV1Q*="!.G0P@4&#W3FC1IS;IO6LSQ$&%=>_F0=U*4YXD M=4.&J),$C^O0G.HJJ%7;AMT!C?#P46C9YIY3LS7EM5$0H2XO>H`!PWO'[L$# M7A/IL1NB0-T!>A2UXH4([T&$MPX=O(/X3L&0S1<'3WXXA,+$"@_G48"<$?5H MAIUG2H10UNR#UPLEF)[H@*39>&UP)X1P;V([![7-WO,MO*`"V1#;00`]6<)= MA_`Z M0GAMX.>?0VI0Z%!!^0W M$%4+/M2.D9TI`.1);727D#S["22!BA$5V1`%[PGD0)():2809`H49-^0')6Y M4#M921!!<@9*,%".";5WD&?O@/F.B!64*0$##U``YS\*(+@13N]\.$\$!!W@ M4@6@S:,.`S(^-,&'`F&YD(H4QH//$(&V(Q0OEST@@0+($0JCF]`!H(GT3TH#63@0.T8^ M2)A((C$UZ$'Q'"M/H0K,V@Z<#SC@%CR#+0D!`X`"V8X"$"APC[,,1:`L1^D) M*U`[^*P$0002K$/61)+L\\X\]^SSST`' '+;1)`0$`.S\_ ` end -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.3

EXHIBIT 10.3

EX-10.4

EXHIBIT 10.4

EX-10.11

EXHIBIT 10.11

EX-10.12

EXHIBIT 10.12

EX-12

EXHIBIT 12

EX-13

EXHIBIT 13

EX-21

EXHIBIT 21

EX-23

EXHIBIT 23

EX-24.1

EXHIBIT 24.1

EX-24.2

EXHIBIT 24.2

EX-99.1

EXHIBIT 99.1