________________________________________________________________________________
________________________________________________________________________________
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
                                   FORM 10-K
 
               [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                  For the fiscal year ended December 31, 1997
                                       OR
 
             [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                   For the transition period from     to
 
                         Commission file number 1-8974
 
                               ALLIEDSIGNAL INC.
 
             (Exact name of registrant as specified in its charter)

                                       
                DELAWARE                                   22-2640650
- ----------------------------------------  ---------------------------------------------
    (State or other jurisdiction of                     (I.R.S. Employer
     incorporation or organization)                    Identification No.)
 
           101 Columbia Road
             P.O. Box 4000
         Morristown, New Jersey                            07962-2497
- ----------------------------------------  ---------------------------------------------
(Address of principal executive offices)                   (Zip Code)

Registrant's telephone number, including area code (973)455-2000
 
Securities registered pursuant to Section 12(b) of the Act:

                                       
                                                      Name of Each Exchange
          Title of Each Class                          on Which Registered
- ----------------------------------------  ---------------------------------------------
Common Stock, par value $1 per share*                New York Stock Exchange
                                                     Chicago  Stock Exchange
                                                     Pacific  Stock Exchange
Money Multiplier Notes due 1998-2000                 New York Stock Exchange
9 7/8% Debentures due June 1, 2002                   New York Stock Exchange
9.20% Debentures due February 15, 2003               New York Stock Exchange
Zero Coupon Serial Bonds due 1999-2009               New York Stock Exchange
9 1/2% Debentures due June 1, 2016                   New York Stock Exchange

- ------------
 
*  The common stock is also listed for trading on the London stock exchange.
 
Securities registered pursuant to Section 12(g) of the Act:  None
 
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes  X   No
                                        ---    -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
 
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $22.0 billion at January 31, 1998.
 
There were 566,016,991 shares of Common Stock outstanding at January 31, 1998.
 
                      Documents Incorporated by Reference
                      -----------------------------------
        Part I and II: Annual Report to Shareowners for the Year Ended December
31, 1997.
        Part III: Proxy Statement for Annual Meeting of Shareowners to be held
April 27, 1998.
 
________________________________________________________________________________
________________________________________________________________________________

                               ALLIEDSIGNAL INC.
 
                             CROSS REFERENCE SHEET

                                                                                                     Page(s) in
Form 10-K                                  Heading(s) in Annual Report to Shareowners for              Annual
Item No.                                            Year Ended December 31, 1997                       Report
- ----------------------------------  ------------------------------------------------------------    ------------
                                                                                              
 1. Business                        Note 25. Segment Financial Data ............................         38
                                    Note 26. Geographic Areas -- Financial Data.................         39
                                    Management's Discussion and Analysis........................         19
 3. Legal Proceedings               Note 21. Commitments and Contingencies......................         36
 5. Market for the Regis-           Note 27. Unaudited Quarterly Financial
    trant's Common Equity           Information.................................................         39
    and Related Stock-              Selected Financial Data.....................................         18
    holder Matters
 6. Selected Financial Data         Selected Financial Data.....................................         18
 7. Management's Discussion and     Management's Discussion and Analysis........................         19
    Analysis of Financial
    Condition and Results of
    Operations
 8. Financial Statements and        Report of Independent Accountants...........................         40
    Supplementary Data              Consolidated Statement of Income............................         26
                                    Consolidated Statement of Retained Earnings.................         26
                                    Consolidated Balance Sheet..................................         27
                                    Consolidated Statement of Cash Flows........................         28
                                    Notes to Financial Statements...............................         29

                                                 Heading(s) in Proxy Statement for                   Page(s) in
                                                   Annual Meeting of Shareowners                       Proxy
                                                     to be held April 27, 1998                       Statement
                                    ------------------------------------------------------------    ------------
                                                                                              
10. Directors and Executive         Election of Directors; Voting Securities....................         *
    Officers of the Registrant
11. Executive Compensation          Election of Directors -- Compensation of Directors;
                                    Executive Compensation......................................         *
12. Security Ownership of Certain   Voting Securities...........................................         *
    Beneficial Owners and
    Management

- ------------
*  To be included in a definitive Proxy Statement to be filed with the
   Securities and Exchange Commission not later than 120 days after December 31,
   1997.
 
                                       2

NOTE:  AlliedSignal Inc. is sometimes referred to in this Report as the
Registrant and as the Company, and AlliedSignal Inc. and its consolidated
subsidiaries are sometimes referred to as the Company, as the context may
require.
 
                               TABLE OF CONTENTS

           ITEM                                                                                                  PAGE
           ---------------------------------------------------------------------------------------------------   ----
                                                                                                           
Part I.    1  Business........................................................................................     4
           2  Properties......................................................................................    15
           3  Legal Proceedings...............................................................................    16
           4  Submission of Matters to a Vote of Security Holders.............................................    16
           Executive Officers of the Registrant...............................................................    16
 
Part II.   5  Market for the Registrant's Common Equity and Related Stockholder Matters.......................    17
           6  Selected Financial Data.........................................................................    17
           7  Management's Discussion and Analysis of Financial Condition and Results of Operations...........    17
           7A  Quantitative and Qualitative Disclosure About Market Risk......................................    18
           8  Financial Statements and Supplementary Data.....................................................    19
           9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............    19
 
Part III.  10  Directors and Executive Officers of the Registrant.............................................    19(a)
           11  Executive Compensation.........................................................................    19(a)
           12  Security Ownership of Certain Beneficial Owners and Management.................................    20(a)
           13  Certain Relationships and Related Transactions.................................................    20
 
Part IV.   14  Exhibits, Financial Statement Schedules and Reports on Form 8-K................................    20
 
Signatures....................................................................................................    21

- ------------
 
 (a) These items are omitted since the Registrant will file with the Securities
     and Exchange Commission a definitive Proxy Statement pursuant to Regulation
     14A involving the election of directors not later than 120 days after
     December 31, 1997. Certain other information relating to the Executive
     Officers of the Registrant appears at pages 16 and 17 of this Report.
 
                                       3

                                    PART I.
 
ITEM 1. BUSINESS
 
     AlliedSignal Inc. (with its consolidated subsidiaries referred to in this
Report as the Company) was organized in the State of Delaware in 1985. The
Company is the successor to Allied Corporation, which was organized in the State
of New York in 1920.
 
MAJOR BUSINESSES
 
     AlliedSignal Inc. is an advanced technology and manufacturing company
serving customers worldwide with aerospace and automotive products and
engineered materials, including chemicals, fibers, plastics and advanced
materials. The Company's operations are conducted by ten major businesses, which
are grouped under three major product areas, as follows:

 MAJOR PRODUCT AREAS             MAJOR BUSINESSES
- ---------------------    ---------------------------------
                      
Aerospace products       Engines
                         Aerospace Equipment Systems
                         Electronic & Avionics Systems
                         Government Services
 
Automotive products      Turbocharging Systems
                         Automotive Products Group
                         Truck Brake Systems
 
Engineered materials     Polymers
                         Specialty Chemicals
                         Electronic Materials

     Following is a description of the Company's major businesses:

  MAJOR BUSINESSES         PRODUCT CLASSES         MAJOR PRODUCTS/SERVICES         MAJOR MARKETS            COMPETITORS
- -------------------- ---------------------------  -------------------------  --------------------------  ------------------
                                                                                             
Engines              Turbine propulsion           TFE731 turbofan            Business, regional          Pratt & Whitney
                     engines                      TPE331 turboprop             and military trainer        Canada
                                                  TFE1042 turbofan             aircraft                  Rolls-Royce/
                                                  F124 turbofan              Commercial and military       Allison Engine
                                                  LF507 turbofan               helicopters                 Company
                                                  CFE738 turbofan            Military vehicles           Turbomeca
                                                  T53, T55                   Commercial and military
                                                  LT101 turboshaft             marine craft
                                                  T800 turboshaft
                                                  TF40 turboshaft
                                                  AGT1500 turboshaft
                                                  Repair, overhaul and
                                                    spare parts
                     ------------------------------------------------------------------------------------------------------
                     Auxiliary power units        Airborne auxiliary         Commercial and              Pratt & Whitney
                     (APUs)                         power units                military aircraft           Canada
                                                  Jet fuel starters          Ground power                Sundstrand
                                                  Secondary power
                                                    systems
                                                  Ground power units
                                                  Repair, overhaul and
                                                    spare parts
                     ------------------------------------------------------------------------------------------------------
                     Industrial power             ASE 8 turboshaft           Ground based                Solar
                                                  ASE 40/50                    utilities, industrial     Rolls-Royce/
                                                    turboshaft                 or mechanical               Allison Engine
                                                  ASE 120 turboshaft           drives                      Company
                                                                                                         European Gas
                                                                                                           Turbines
- ---------------------------------------------------------------------------------------------------------------------------

                                       4

 

  MAJOR BUSINESSES         PRODUCT CLASSES         MAJOR PRODUCTS/SERVICES         MAJOR MARKETS            COMPETITORS
- -------------------- ---------------------------  -------------------------  --------------------------  ------------------
                                                                                             
Aerospace            Environmental control        Air conditioning           Commercial, regional        Hamilton Standard
Equipment            systems                        systems                    and general               Intertechnique
Systems                                           Bleed air control            aviation aircraft         Liebherr
                                                    systems                  Military aircraft           Nord Micro
                                                  Cabin pressure systems     Spacecraft                  Parker Hannifin
                                                  Environmental and                                      Sundstrand
                                                    thermal control for
                                                    spacecraft
                                                  Smoke detection
                                                    systems
                                                  Repair, overhaul and
                                                    spare parts
                     ------------------------------------------------------------------------------------------------------
                     Engine systems and           Electronic,                Commercial, military,       Chandler-Evans
                     accessories                    hydromechanical and        regional and general      Hamilton Standard
                                                    pneumatic gas turbine      aviation aircraft         Liebherr
                                                    engine controls            engines                   Lockheed Martin
                                                  Digital electronic         Spacecraft                  Lucas
                                                    engine controls for      Military battle tanks
                                                    military battle tanks
                                                  Fuel flow metering
                                                    components
                                                  Pressure transducers
                                                  Repair, overhaul and
                                                    spare parts
                     ------------------------------------------------------------------------------------------------------
                     Power management and         Electric, hydraulic and    Commercial, military,       Auxilec
                     generation systems             pneumatic power            regional and general      B.F. Goodrich
                                                    generation systems         aviation aircraft         Hella
                                                  Exterior and               Ground vehicles             Lucas
                                                    interior lighting                                    Parker Bertea
                                                    systems                                              Smiths
                                                  Power distribution and                                 Sundstrand
                                                    power management                                     Teleflex
                                                    systems
                                                  Pumps, starters,
                                                    converters, controls,
                                                    electrical actuation
                                                    for flight surfaces
                                                  Repair, overhaul and
                                                    spare parts
                     ------------------------------------------------------------------------------------------------------
                     Aircraft landing systems     Wheels and brakes          Commercial and              Aircraft Braking
                                                  Friction products            military aircraft           Systems
                                                  Brake control systems                                  Dunlop
                                                  Wheel and brake                                        B.F. Goodrich
                                                    overhaul services                                    Messier-Bugatti
- ---------------------------------------------------------------------------------------------------------------------------
Electronic &         Avionics systems             Flight safety systems:     Commercial, business        Century
Avionics Systems                                    Enhanced Ground            and general aviation      Garmin
                                                      Proximity Warning        aircraft                  B.F. Goodrich
                                                      Systems (EGPWS)        Government aviation         Honeywell
                                                    Traffic Alert and                                    II Marrow
                                                      Collision Avoidance                                Litton
                                                      Systems (TCAS)                                     Lockheed Martin
                                                    Windshear detection                                  Narco
                                                      systems and weather                                Rockwell/Collins
                                                      radar                                              Sextant
                                                    Flight data and cockpit                              Smiths
                                                      voice recorders                                    S-tec
                                                  Communication and                                      Trimble/Terra
                                                    navigation systems:                                  Universal
                                                    Flight management
                                                      systems
                                                    Data management and
                                                      aircraft performance
                                                      monitoring systems
                                                    Air-to-ground
                                                      telephones
                                                    Global positioning
                                                      systems
                                                    Automatic flight
                                                      control systems
                                                    Navigation systems
                                                    Identification systems
                                                    Integrated systems
                                                    Vehicle management
                                                      systems
                                                    Cockpit display systems
                     ------------------------------------------------------------------------------------------------------

                                       5

 

  MAJOR BUSINESSES         PRODUCT CLASSES         MAJOR PRODUCTS/SERVICES         MAJOR MARKETS            COMPETITORS
- -------------------- ---------------------------  -------------------------  --------------------------  ------------------
                                                                                             
                     Automatic test systems       Computer-controlled        U.S. Government and         GDE Systems
                                                    automatic test systems     international logistics   Honeywell
                                                  Functional testers and       centers                   Litton
                                                    ancillaries              Military aviation           Lockheed Martin
                                                  Portable test and                                      Northrop Grumman
                                                    diagnostic systems
                                                  Advanced battery
                                                    analyzer/charger
                     ------------------------------------------------------------------------------------------------------
                     Guidance systems             Inertial sensors/systems   Military and                Astronautics-
                                                    and star sensors/          commercial vehicles         Kearfott
                                                    systems for guidance,    Commercial spacecraft       Ball
                                                    stabilization,             and launch vehicles       BEI
                                                    navigation and control   Energy                      GEC
                                                                             Transportation              Honeywell
                                                                             Missiles                    Litton
                                                                             Munitions                   Rockwell/Collins
                     ------------------------------------------------------------------------------------------------------
                     Tactical command,            Combat identification      Military aviation           Harris
                     control, communications,       systems (Identification  Military communications     Hughes/
                     computers and                  Friend or Foe (IFF))     Civil communications          Magnavox
                     intelligence                 Commercial information     Commercial information      Litton
                                                    security equipment         security                  Lockheed Martin
                                                  Satellite communication                                Motorola
                                                    terminals (SATCOM)                                   Raytheon/
                                                  Secured communication                                    E-Systems
                                                    equipment (INFOSEC)                                  Rockwell/Collins
                                                  Mortar fire control                                    Thomson-CSF/
                                                    system (MFCS)                                          Hazeltine
                     ------------------------------------------------------------------------------------------------------
                     Radar systems                Aircraft precision         Global and U.S. airspace    Hughes
                                                    landing                    agencies                  Motorola
                                                  Ground surveillance        Military aviation           Raytheon
                                                  Target detection devices   Military missiles           Rockwell
                                                                                                         Thomson-CSF
- ---------------------------------------------------------------------------------------------------------------------------
Government           Management and technical     Maintenance/operation of   U.S. and foreign            Computer Sciences
Services             services                       space systems and          government space and      Dyncorp
                                                    facilities                 communications            Lockheed Martin
                                                  Systems engineering,         facilities                Raytheon
                                                    integration and          Commercial space            SAIC
                                                    training                   facilities
                                                    services
                                                  Management of data
                                                    processing facilities
                     ------------------------------------------------------------------------------------------------------
                     Federal manufacturing        Non-nuclear components     U.S. Department of          Federally funded
                     and technologies               for nuclear weapons        Energy
- ---------------------------------------------------------------------------------------------------------------------------
Turbocharging        Charge-air systems           Turbochargers              Automotive and heavy        Aisin Seiki
Systems              Thermal systems              Charge-air coolers           vehicle original          Behr/McCord
                                                  Aluminum radiators           equipment manufacturers   Hitachi
                                                  Aluminum cooling             (OEMs)                    Holset
                                                    modules                  Engine manufacturers        IHI
                                                  Superchargers              Aftermarket distributors    KKK
                                                  Remanufactured components    and dealers               Mitsubishi/MHI
                                                                                                         Modine
                                                                                                         Schwitzer
                                                                                                         Valeo
                     ------------------------------------------------------------------------------------------------------
                     Electrical generators        Turbogenerators            Electrical power            Electric Utilities
                                                                                                         Capstone
- ---------------------------------------------------------------------------------------------------------------------------

                                       6

 

  MAJOR BUSINESSES         PRODUCT CLASSES         MAJOR PRODUCTS/SERVICES         MAJOR MARKETS            COMPETITORS
- -------------------- ---------------------------  -------------------------  --------------------------  ------------------
                                                                                             
Automotive Products  Aftermarket:                 Oil, air, fuel,            Automotive and heavy        Abex/Cooper
Group                filters and electronic,        transmission and           vehicle aftermarket       AC/Delphi/GM
                     brake and steering             coolant filters            channels and original     ArmorAll
                     components, car care         PCV valves                   equipment service         Belden/Cooper
                     products                     Spark plugs                  (OES)                     Bosch
                                                  Wire and cable             Mass merchandisers          Champion/Cooper
                                                  Disc pads and brake                                    EIS/Standard Motor
                                                    linings                                              Eyquem
                                                  Disc and drum brake                                    Ferodo/T&N
                                                    components                                           Girling/Lucas
                                                  Brake hydraulic                                        Havoline (Texaco)
                                                    components                                           Knecht
                                                  Brake fluid                                            Labinal
                                                  Ball-joints                                            Lockheed/AP
                                                  Rack & pinions                                         Mann & Hummel
                                                  Power-steering pumps                                   Mintex, Textar/BBA
                                                    and components                                       NGK
                                                  Antifreeze/coolant                                     Purolator/Mark IV
                                                  Driveway ice melter                                    Quinton
                                                  Windshield de-icer                                       Hazel/Echlin
                                                    washer fluid                                         Raybestos/Echlin
                                                                                                         Teves/ITT
                                                                                                         Turtle Wax
                                                                                                         Wix/Dana
                                                                                                         Zerex (Valvoline)
                                                                                                         ZF
                     ------------------------------------------------------------------------------------------------------
                     Friction materials           Disc brake pads            Automotive and heavy        Abex/Cooper
                                                  Drum brake linings           vehicle OEMs, OES and     Akebono
                                                  Brake blocks                 aftermarket channels      BBA Group
                                                  Aircraft brake linings     Railway and commercial/     Delco
                                                  Railway linings              military aircraft OEMs    Echlin
                                                                               and brake manufacturers   Ferodo/T&N
                                                                                                         JBI
                                                                                                         Nisshinbo
                                                                                                         Pagid
                                                                                                         Sumitomo
                                                                                                         Teves/ITT
                     ------------------------------------------------------------------------------------------------------
                     Filters and spark plugs      Oil, air, transmission,    Automotive and heavy        AC/Delphi/GM
                                                    fuel and cabin             vehicle OEMs, OES and     Bosch
                                                    air filters                aftermarket channels      Champion/Cooper
                                                  Spark plugs                                            Champion
                                                                                                           Labs/U.I.S.
                                                                                                         Denso
                                                                                                         NGK
                                                                                                         Purolator/Mark IV
                                                                                                         Wix/Dana
- ---------------------------------------------------------------------------------------------------------------------------
Truck Brake Systems  Air brake systems            Anti-lock braking systems  On-highway medium and       Bosch
(joint venture)                                     (ABS)                      heavy truck,              Cummins/Holset
                                                  Air disc brakes              bus and trailer OEMs      Echlin/Midland-
                                                  Air compressors            Off-highway equipment         Grau
                                                  Air valves                   OEMs                      Rockwell WABCO
                                                  Air dryers                 Aftermarket distributors
                                                  Actuators                    and dealers/OES
                                                  Truck electronics
                                                  Competitive
                                                    remanufactured
                                                    products
- ---------------------------------------------------------------------------------------------------------------------------
Polymers             Carpet fiber                 Nylon filament and staple  Commercial, residential     BASF
                                                    yarns                      and specialty carpet      Beaulieu
                                                  Bulk continuous              markets                   DuPont
                                                    filament                                             Monsanto
                                                                                                         Novalis
                     ------------------------------------------------------------------------------------------------------
                     Industrial fiber             Industrial nylon and       Passenger car and truck     Akzo
                                                    polyester yarns            tires                     DuPont
                                                                             Auto and light truck        Hoechst/Celanese
                                                                               seatbelts and airbags     Kolon
                                                                             Broad woven fabrics         Rhone-Poulenc
                                                                             Ropes and mechanical        Tong Yang
                                                                               rubber goods
                                                                             Luggage
                                                                             Sports gear
                     ------------------------------------------------------------------------------------------------------

                                       7

 

  MAJOR BUSINESSES         PRODUCT CLASSES         MAJOR PRODUCTS/SERVICES         MAJOR MARKETS            COMPETITORS
- -------------------- ---------------------------  -------------------------  --------------------------  ------------------
                                                                                             
                     Chemical intermediates       Caprolactam                Nylon for fibers,           BASF
                                                  Phenol                       engineered resins and     DSM
                                                  Acetone                      film                      DuPont
                                                  Ammonium sulfate           Phenol resins               Enichem
                                                  Hydroxylamine              Fertilizer ingredients      Monsanto
                                                  Alphamethyl styrene        Specialty chemicals         Phenol Chemie
                                                  Cyclohexanol               Vitamins                    Rhone-Poulenc
                                                  Cyclohexanone              Carbonization               Ube
                                                  Adipic acid
                     ------------------------------------------------------------------------------------------------------
                     Engineering plastics         Thermoplastic nylon        Food and pharmaceutical     BASF
                                                  Thermoplastic alloys and     packaging                 Bayer
                                                    blends                   Engine housings             DuPont
                                                  Post-consumer recycled       (e.g., electric hand      General Electric
                                                    PET resins                 tools, chain saws)        Hoechst/Celanese
                                                  Recycled nylon resins      Automotive body components  Monsanto
                                                                             Office furniture
                                                                             Electrical and electronics
                     ------------------------------------------------------------------------------------------------------
                     Textile nylon                Fine denier nylon yarns    Hosiery                     BASF
                                                                             Lingerie                    DuPont/ICI
                                                                             Active wear                 FCFC
                                                                             Recreational equipment      Fibra
                                                                             Luggage                     Nylstar
                     ------------------------------------------------------------------------------------------------------
                     Spectra performance          Extended-chain             Cordage for commercial,     Akzo
                     materials                      polyethylene               fishing and recreational  DSM
                                                    composites                 use                       DuPont
                                                                             Sports equipment
                                                                               composites
                                                                             Bullet resistant vests,
                                                                               helmets and heavy
                                                                               armor
                                                                             Cut-resistant industrial
                                                                               gloves
                                                                             Sailcloth
                     ------------------------------------------------------------------------------------------------------
                     Specialty film               Cast nylon                 Food                        DuPont
                                                  Biaxially oriented nylon   Pharmaceuticals             Kolan
                                                    film                     Packaging and industrial    Reynolds
                                                  Fluoropolymer film           applications              Toyobo
- ---------------------------------------------------------------------------------------------------------------------------
Specialty Chemicals  Pharmaceutical and           Oxime-based fine           Agrichemicals               DSM
                     agricultural chemicals         chemicals                Pharmaceuticals             Zeneca
                                                  Fluoroaromatics
                                                  Bromoaromatics
                     ------------------------------------------------------------------------------------------------------
                     Polymer additives and        Processing aids (wax)      Plastics                    Atochem
                     catalysts                    UV absorbers               Coatings                    BASF
                                                  Flame retardants           Cosmetics                   Eastman
                                                  Catalysts                                              Hoechst
                     ------------------------------------------------------------------------------------------------------
                     Coatings and sealants        Polyethylene waxes         Sealants, adhesives,        BASF
                                                  Curing agents                coatings and lubricants   Eastman
                                                  Technical preservatives                                Exxon
                                                                                                         Hoechst
                                                                                                         Mobil
                                                                                                         Rohm & Haas
                                                                                                         Thor
                                                                                                         Zeneca
                     ------------------------------------------------------------------------------------------------------
                     Electronic chemicals         HF/derivatives             Semiconductors              LaPorte
                                                  Solvents                                               Merck
                                                  Inorganic acids                                        Olin
                                                  High purity solvents
                     ------------------------------------------------------------------------------------------------------
                     Industrial specialties       Lab chemicals              Diverse by product type     Varies by
                                                  Electroplating chemicals                                 product line
                                                  Luminescent pigments
                                                  Photo dyes
                                                  Hydroxylamine sulfate
                     ------------------------------------------------------------------------------------------------------
                     Hydrofluoric acid (HF)       Anhydrous and aqueous      Fluorocarbons               Ashland
                                                    hydrofluoric acid        Steel                       Atochem
                                                  Ultra-high purity          Oil refining                DuPont
                                                    hydrofluoric acid        Chemical intermediates      Hashimoto
                                                                             Electronics                 Merck
                                                                                                         Norfluor
                                                                                                         Quimaco Fluor
                     ------------------------------------------------------------------------------------------------------

                                       8

 

  MAJOR BUSINESSES         PRODUCT CLASSES         MAJOR PRODUCTS/SERVICES         MAJOR MARKETS            COMPETITORS
- -------------------- ---------------------------  -------------------------  --------------------------  ------------------
                                                                                             
                     Fluorocarbons                Genetron'r' refrigerants,  Refrigeration               Atochem
                                                    aerosol and              Air conditioning            DuPont
                                                    insulation foam blowing  Polyurethane foam           ICI
                                                    agents                   Rigid-board insulation
                                                  Genesolv'r' solvents       Electronics
                                                  Oxyfume sterilant gases    Optical
                                                                             Metalworking
                                                                             Hospitals
                                                                             Medical equipment
                                                                               manufacturers
                     ------------------------------------------------------------------------------------------------------
                     Fluorine specialties         Sulfur hexafluoride (SF6)  Resins                      Air Products
                                                  Iodine pentafluoride       Catalysts                   Asahi Glass
                                                    (IF5)                                                Atochem
                                                  Antimony pentafluoride                                 Ausimont
                                                    (SbF5)                                               Kanto Denka Kogyo
                                                                                                         Solvay Fluor
                     ------------------------------------------------------------------------------------------------------
                     Nuclear services             UF6 conversion services    Nuclear fuel                British Nuclear
                                                                             Electric utilities            Fuels
                                                                                                         Cameco (Canada)
                                                                                                         Cogema (France)
                                                                                                         Tennex (Russia)
                     ------------------------------------------------------------------------------------------------------
                     Carbon materials             Binder pitch               Aluminum and carbon         Koppers
                                                  Creosote oils                industries                Posco Chem
                                                  Refined naphthalene        Wood products               Reilly Industries
                                                  Driveway sealer tar and    Chemicals                   Rutgers
                                                    roofing pitch            Construction
                     ------------------------------------------------------------------------------------------------------
                     UOP (joint venture):         Processes                  Petroleum,                  ABB Lummus Global
                                                  Catalysts                    petrochemical, gas        Criterion
                                                  Molecular sieves             processing and            IFP (France)
                                                  Adsorbents                   chemical industries       Procatalyse
                                                  Design of process                                        (France)
                                                    plants and equipment                                 Stone & Webster
                                                  Customer catalyst                                      Zeochem
                                                    manufacturing
- ---------------------------------------------------------------------------------------------------------------------------
Electronic Materials Multilayer circuitry         Laminates                  Military                    ADI/Isola
                     materials                    Prepregs                   Telecommunications          Nanya
                                                  Copper foil                Automotive                  Nelco
                                                                             Computers                   Polyclad
                                                                             Consumer electronics
                     ------------------------------------------------------------------------------------------------------
                     Copper-clad rigid            Laminates                  Military                    ADI/Isola
                     laminates for circuitry                                 Telecommunications          General Electric
                                                                             Automotive                  Nanya
                                                                             Computers                   Nelco
                                                                             Consumer electronics        Polyclad
                     ------------------------------------------------------------------------------------------------------
                     Advanced                     Materials for computer     Semiconductors              Tokyo-Ohka
                     microelectronic                chip manufacturing       Microelectronics
                     materials
                     ------------------------------------------------------------------------------------------------------
                     Amorphous metals             Amorphous metal ribbons    Electrical distribution     Allegheny-Ludlum
                                                    and components             transformers                Steel
                                                                             High frequency electronics  Armco Steel
                                                                             Metal joining               Kawasaki Steel
                                                                             Theft deterrent             Nippon Steel
- ---------------------------------------------------------------------------------------------------------------------------

     The Aerospace-related businesses have organized their marketing, sales,
service, technical support, repair and overhaul and distribution capabilities
into a single, dedicated point of contact for its customers -- the Marketing,
Sales & Service (MS&S) unit.
 
     Additionally, the environmental catalysts business, a joint-venture with
the General Motors Corporation, is a major worldwide supplier of catalysts used
in catalytic converters for automobiles.
 
GENERAL
 
     The Aerospace-related businesses serve key commercial and military
components of the aviation, defense and space markets with a broad array of
systems, subsystems, components and services. They design, develop, manufacture,
market and service hundreds of products found on all types of aircraft, from
single-piston engine aircraft, business aircraft and wide-bodied 'jumbos' flown
by the world's commercial airlines, to trainers, transports, bombers, fighters
and helicopters used by the U.S.
 
                                       9

and other countries for national defense. The Company's global business consists
primarily of original equipment (OE) sales and an extensive aftermarket
business, including spare parts, maintenance and repair, and retrofitting.
Worldwide customers include the U.S. and foreign governments, all of the major
airframe and engine manufacturers, including Boeing, Lockheed Martin, Airbus
Industrie, Aero International (Regional), Raytheon, Israeli Aircraft Industries,
Northrop Grumman, British Aerospace, Cessna, Fairchild/Dornier, Dassault,
Gulfstream, Bombardier, Rockwell International, Pratt & Whitney, General
Electric and Rolls-Royce, as well as the world's leading airlines and business
aircraft and general aviation aircraft operators, and dealers and distributors
of general aviation products. The Company also provides field engineering
management and technical support services to Boeing, the National Aeronautics
and Space Administration (NASA), the U.S. Department of Defense (DoD), the U.S.
Department of Energy, other federal civilian agencies as well as state and local
governments and other commercial entities.
 
     The Company is affected by U.S. Government budget constraints for defense
and space programs as well as the level of production of commercial, business
and general aviation aircraft which are impacted by business cycles and world
economic conditions. Growth in the Company's commercial business for aerospace
products is expected, over the long term, to help mitigate the reductions in
U.S. defense spending. Moreover, sales of aerospace products are not dependent
on any one key defense program or commercial customer.
 
     In 1997, world defense spending stabilized after declining in prior years.
Meanwhile, substantial improvement was seen in the commercial aircraft market,
with build rates for large airlines at near record levels. This level of
commercial activity is expected to continue in 1998. Regional airlines
experienced strong traffic growth and new regional aircraft orders were also
higher in 1997. The high-end business aviation market experienced significant
growth and the commercial aftermarket spare parts and repair and overhaul
business also showed strong improvement during 1997.
 
     The Automotive businesses design, engineer, manufacture and distribute
systems and components for worldwide vehicle manufacturers and aftermarket
customers. As a result of recent acquisitions and divestitures, however, the
Company's automotive businesses are shifting their focus to the worldwide
aftermarket. The Automotive businesses market and distribute popular
customer-branded products as well as private-label brands through warehouse
distributors, mass merchandisers and parts retailers worldwide.
 
     In 1997 and 1996, excluding the impact of the divested safety restraints
and braking businesses, aftermarket sales, including OES sales, accounted for
62% and 63%, respectively, of the total sales of the Automotive businesses and
worldwide passenger car and truck OE sales accounted for the balance. In 1997
and 1996, Automotive-related operations outside the U.S. accounted for $1,384
and $1,332 million, or 46% and 49%, respectively, of total Automotive related
sales.
 
     The Engineered Materials product area has three business units: Polymers,
Specialty Chemicals and Electronic Materials. The Engineered Materials
businesses manufacture chemicals, fibers, plastics and advanced materials with
applications for numerous industries, including electronics, automotive,
carpeting, refrigeration, construction, computers and utilities.
 
     The Polymers business is comprised of fibers, chemicals and plastic resin.
It operates caprolactam, ammonium sulfate and phenol plants. Polymers' market
positions include nylon fiber for carpets and textiles, polyester fiber for
industrial applications and intermediate chemicals. Polymers also makes
Spectra'r' fiber used in armor and sporting goods.
 
     The Specialty Chemicals business manufactures fluorine, hydrofluoric acid
and polyethylene wax products. Specialty Chemicals serves the refrigeration and
air conditioning, insulating foams, sterilization, hydrofluoric acid,
pharmaceutical, agricultural, semiconductor, electronics, polymers, coatings and
sealants and nuclear markets with key specialty and fine chemicals. Included in
Specialty Chemicals is the Company's UOP joint venture with Union Carbide, a
global leader in process technology for the petroleum industry. The integration
of the German chemical company Riedel-de Haen into Specialty Chemicals in 1996
significantly increased Specialty Chemicals' role as a global supplier of
pharmaceutical intermediates.
 
                                       10

     The Electronic Materials business includes laminate systems, materials used
in the production of printed wiring boards, and advanced microelectronic
materials which serves the semiconductor fabrication industry. Also included in
this unit is the amorphous metals business which makes specialty metals for
transformers.
 
     The Company continuously assesses the relative strength of its portfolio of
businesses as to strategic fit, market position and profit contribution in order
to upgrade its combined portfolio and identify operating units that will most
benefit from increased investment. The Company considers acquisition candidates
that will further its strategic plan and strengthen its existing core
businesses. The Company also identifies operating units that do not fit into its
long-term strategic plan based on their market position, relative profitability
or growth potential. These operating units are considered for potential
divestiture, restructuring or other repositioning action.
 
U.S. GOVERNMENT CONTRACTS
 
     Aerospace-related sales to the U.S. Government, acting through its various
departments and agencies and through prime contractors, amounted to $1,851
million for 1997 and $1,833 million for 1996, which includes sales to the DoD of
$1,338 million in 1997 and $1,237 million in 1996. Approximately 59% and 55% of
sales to the U.S. Government in 1997 and 1996, respectively, were made under
fixed-price contracts in which the Company agrees to perform a contract for a
fixed price and retains for itself any benefits of cost savings or must bear the
burden of cost overruns.
 
     In addition to normal business risks, companies engaged in supplying
military and other equipment to the U.S. Government are subject to unusual
risks, including dependence on Congressional appropriations and administrative
allotment of funds, changes in governmental procurement legislation and
regulations and other policies which may reflect military and political
developments, significant changes in contract scheduling, complexity of designs
and the rapidity with which they become obsolete, constant necessity for design
improvements, intense competition for available U.S. Government business
necessitating increases in time and investment for design and development,
difficulty of forecasting costs and schedules when bidding on developmental and
highly sophisticated technical work and other factors characteristic of the
industry. Changes are customary over the life of U.S. Government contracts,
particularly development contracts, and generally result in adjustments of
contract prices.
 
     The Company, as are other government contractors, is subject to government
investigations of business practices and compliance with government procurement
regulations. Although such regulations provide that a contractor may be
suspended or debarred from government contracts under certain circumstances, and
the outcome of pending government investigations cannot be predicted with
certainty, management is not currently aware of any such investigations that it
expects will have a material adverse effect on the Company. In addition, the
Company carries out proactive compliance programs focused on areas of potential
exposure.
 
BACKLOG
 
     Orders for certain aerospace-related products sold to general and
commercial aviation customers mainly consist of relatively short-term and
frequently renewed commitments. Government procurement agencies generally issue
contracts covering relatively long periods of time. Total backlog for
aerospace-related products and services for both government and commercial
contracts was $5,087 million at December 31, 1997 and $4,514 million at December
31, 1996 of which U.S. and foreign government orders were $1,908 million and
$1,906 million for the respective years. The Company anticipates that
approximately $4,247 million of the total 1997 backlog will be filled during
1998.
 
     Backlog information may not be an accurate indicator of future sales.
Government contracts and, in general, subcontracts thereunder are terminable, in
whole or in part, for default or for convenience by the government or the higher
level contractor if deemed in their best interest. Upon termination for
convenience, the contractor is normally entitled to reimbursement for allowable
costs and to an allowance for profit. However, if the contract is terminated
because of the contractor's default, the
 
                                       11

contractor may not recover all of its costs and may be liable for any excess
costs incurred by the government in procuring undelivered items from another
source.
 
     In addition to the right of the government to terminate, government
contracts are conditioned upon the continuing availability of Congressional
appropriations. Congress usually appropriates funds on a fiscal-year basis even
though contract performance may extend over many years. Consequently, at the
outset of a program, the prime contract is usually partially funded and
additional funds are normally only appropriated to the contract by Congress in
future years. Fixed-price subcontracts are normally fully funded, but are
subject to convenience termination if the prime contract is not funded.
 
     In addition, changes in the general economic environment and the financial
condition of the airline industry may result in commercial customer requests for
rescheduling, reduction or cancellation of firm contractual orders.
 
SEGMENT FINANCIAL DATA
 
     Note 25 (Segment Financial Data) of Notes to Financial Statements in the
Company's 1997 Annual Report to shareowners is incorporated herein by reference.
 
DOMESTIC AND FOREIGN FINANCIAL DATA
 
     Note 26 (Geographic Areas -- Financial Data) of Notes to Financial
Statements in the Company's 1997 Annual Report to shareowners is incorporated
herein by reference.
 
RECENT DEVELOPMENTS
 
     In June 1997, the Company acquired Prestone Products Corporation (Prestone)
for approximately $400 million, including assumed liabilities. Prestone is a
supplier of premium car care products and has annual sales of approximately $300
million. In July 1997, the Company acquired Grimes Aerospace Company (Grimes), a
manufacturer of exterior and interior aircraft lighting systems, for
approximately $475 million, including assumed liabilities. Grimes, which has
annual sales of approximately $230 million, also manufactures aircraft engine
components such as valves and heat exchangers, as well as electronic systems,
including flight warning computers and active matrix liquid crystal displays. In
October 1997, the Company acquired Astor Holdings, Inc. (Astor) for
approximately $370 million, including assumed liabilities. Astor, a producer of
value-added, wax-based processing aids, sealants and adhesives, has annual sales
of approximately $300 million. In November 1997, the Company acquired Holt Lloyd
Group Ltd. for approximately $150 million. Holt Lloyd is a supplier of car care
products primarily in Europe and Asia and has annual sales of approximately $150
million. In January 1998, the Company also acquired the Hardware Group and
PacAero unit of Banner Aerospace, distributors of aircraft hardware, for
approximately $350 million. The acquired operations have annual sales of about
$250 million, principally to commercial air transport and general aviation
customers. The Company also made several smaller acquisitions in 1997.
 
     To speed delivery of aftermarket products, the Company formed strategic
alliances in 1997 to streamline the Company's distribution processes. UPS
Worldwide Logistics distributes the Company's automotive aftermarket products to
customer locations across North America and Caterpillar Logistics Services
directs the global distribution of spare parts used in the repair and overhaul
of the Company's aerospace products.
 
     In October 1997, the Company completed the sale of its automotive safety
restraints business to Breed Technologies for $710 million in cash, subject to
post-closing adjustments. The safety restraints business had 1996 net sales and
income from operations of $940 and $70 million, respectively, from the sale of
seat belts and air bags. In the first quarter of 1998, the Company expects to
complete the sale of its underwater detection systems business to L-3
Communications Corporation for $70 million in cash, subject to post-closing
adjustments. The ocean systems unit had annual revenues of about $70 million.
During 1997, the Company also sold certain non-strategic businesses and other
assets.
 
     In April 1996, the Company sold a major component of its worldwide braking
business to Robert Bosch GmbH, a privately held German company, for $1.5 billion
in cash, subject to certain post-closing
 
                                       12

adjustments which were finalized in October 1997. Included in the sale were the
worldwide light-vehicle and medium-heavy truck hydraulic braking and ABS
businesses. These businesses had 1995 net sales of $2.0 billion.
 
     In 1997, the Company eliminated its three sector offices, consolidated its
automotive products and avionics groups and repositioned some of its businesses.
 
     The Company has recognized the need to ensure that its computer operations
and operating systems will not be adversely affected by the upcoming calendar
year 2000 and is cognizant of the time sensitive nature of the problem. The
Company has assessed how it may be impacted by Year 2000 and has formulated and
commenced implementation of a comprehensive plan to address known issues as they
relate to its information systems. The plan, as it relates to information
systems, involves a combination of software modification, upgrades and
replacement. The Company estimates that the cost of Year 2000 compliance for its
information systems will not have a material adverse effect on the future
consolidated results of operations of the Company. The Company is not yet able
to estimate the cost for Year 2000 compliance with respect to production
systems, products, customers and suppliers; however, based on a preliminary
review, management does not expect that such costs will have a material adverse
effect on the future consolidated results of operations of the Company.
 
COMPETITION
 
     The Company encounters substantial competition, in each of its product
areas, with businesses producing the same or similar products or with businesses
producing different products designed for the same uses. Such competition is
expected to continue both in the U.S. and in global markets. Depending on the
particular market involved, the Company's businesses compete on a variety of
factors, such as price, quality, delivery, customer service, performance,
product innovation and product recognition. Other competitive factors for
certain products include breadth of product line, research and development
efforts and technical and managerial capability. While the Company's competitive
position varies among its products, the Company believes it is a significant
factor in each of its major product classes.
 
     Aerospace-related products and services are sold in competition with those
of a large number of other companies, some of which have substantial financial
resources and significant technological capabilities. The Automotive-related
products are sold in competition with other independent suppliers or with the
captive component divisions of the vehicle manufacturers. Engineered
materials-related businesses are aligned around markets, customers and common
technologies. Brand identity, service to customers and quality are important
competitive factors in the market and there is considerable price competition.
 
INTERNATIONAL OPERATIONS
 
     The Company and affiliated companies are engaged in manufacturing, sales
and/or research and development mainly in the U.S., Europe, Canada, Asia and
Latin America. U.S. exports and foreign manufactured products are significant to
the Company's operations. U.S. exports comprised 17% of total Company sales in
both 1997 and 1996 and foreign manufactured products and services were 22% and
23% of total Company sales in 1997 and 1996, respectively.
 
     The Company's international operations, including U.S. exports, are
potentially subject to a number of unique risks and limitations, including:
fluctuations in currency value; exchange control regulations; wage and price
controls; employment regulations; effects of foreign investment laws; import and
trade restrictions, including embargoes; and governmental instability.
 
     The Aerospace-related international operations consist primarily of
exporting U.S. manufactured products and systems, performance of services that
include operating aircraft repair and overhaul facilities, and licensing
activities. The principal manufacturing facility outside of the U.S. is in
Canada.
 
     Automotive-related foreign operations are located in Australia, Brazil,
Canada, China, France, Germany, India, Ireland, Italy, Japan, Malaysia, Mexico,
South Korea, Spain and the United Kingdom. Distribution and marketing are
conducted in these and numerous other countries as well. Automotive
 
                                       13

related operations outside the U.S. are conducted through various foreign
companies in which it has interests ranging from minor to complete control.
International operations also include the exporting of U.S. manufactured
products and licensing activities. Internationally, products are marketed under
the Bendix, Fram, Autolite and Garrett trademarks.
 
     Regarding Engineered Materials, Polymer's foreign operations are located in
Germany, France and China; Specialty Chemicals' manufacturing facilities are
located in Germany, Belgium, Canada and the Netherlands and Electronic Materials
maintains facilities in Germany and Southeast Asia, including Taiwan, Singapore
and China.
 
RAW MATERIALS
 
     The principal raw materials used by the Company's businesses include:
Aerospace businesses -- carbon fiber; electronic, optical and mechanical
component parts and assemblies; electronic and electromechanical devices and
metallic products; Automotive businesses -- castings, forgings, steel and bar
stock, copper, aluminum, platinum and titanium and Engineered Materials
businesses -- cumene, natural gas, sulfur, terephthalic acid, ethylene and
ethylene glycol, fluorspar, HF, carbon tetrachloride, chloroform, nylon resins,
fiberglass, copper foil, platinum, rhodium, polyester chips, lubricating oil
by-products, butylrubber and coal tar pitch. The Company is producing virtually
all of its HF and nylon resin requirements. The principal raw materials used in
the Company's operations are generally readily available. Major requirements for
key raw materials and fuels are typically purchased pursuant to multi-year
contracts. The Company is not dependent on any one supplier for a material
amount of its raw material or fuel requirements, however, the Company is highly
dependent on its suppliers and subcontractors in order to meet commitments to
its customers, and many major components and product equipment items are
procured or subcontracted on a sole-source basis with a number of domestic and
foreign companies. The Company maintains a qualification and performance
surveillance process to control risk associated with such reliance on third
parties. The Company believes that sources of supply for raw materials and
components are generally adequate, however, temporary shortages may occur from
time to time.
 
PATENTS AND TRADEMARKS
 
     The Company owns approximately 9,060 patents or patent applications and is
licensed under other patents covering certain of its products and processes. It
believes that, in the aggregate, the rights under such patents and licenses are
generally important to its operations, but does not consider that any patent or
patent license agreement or group of them related to a specific process or
product is of material importance in relation to the Company's total business.
 
     The Company also has registered trademarks for a number of its products.
Some of the more significant trademarks include: AiResearch, Anso, Autolite,
Bendix, Bendix/King, Capron, Fram, Garrett, Genetron, King, Prestone and Norplex
Oak.
 
RESEARCH AND DEVELOPMENT
 
     The Company's research activities are directed toward the discovery and
development of new products and processes, improvements in existing products and
processes, and the development of new uses of existing products.
 
     Research and development expense totaled $349, $345 and $353 million in
1997, 1996 and 1995, respectively. Customer-sponsored (principally the U.S.
Government) research and development activities amounted to an additional $597,
$536 and $536 million in 1997, 1996 and 1995, respectively.
 
ENVIRONMENT
 
     The Company is subject to various federal, state and local requirements
regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment. It is the Company's policy to comply with
these requirements and the Company believes that, as a general matter, its
policies, practices and procedures are properly designed to prevent unreasonable
risk of
 
                                       14

environmental damage, and of resulting financial liability, in connection with
its business. Some risk of environmental damage is, however, inherent in certain
operations and products of the Company, as it is with other companies engaged in
similar businesses.
 
     The Company is and has been engaged in the handling, manufacture, use or
disposal of many substances which are classified as hazardous or toxic by one or
more regulatory agencies. The Company believes that, as a general matter, its
handling, manufacture, use and disposal of such substances are in accord with
environmental laws and regulations. It is possible, however, that future
knowledge or other developments, such as improved capability to detect
substances in the environment, increasingly strict environmental laws and
standards and enforcement policies thereunder, could bring into question the
Company's handling, manufacture, use or disposal of such substances.
 
     Among other environmental requirements, the Company is subject to the
federal superfund law, and similar state laws, under which the Company has been
designated as a potentially responsible party which may be liable for cleanup
costs associated with various hazardous waste sites, some of which are on the
U.S. Environmental Protection Agency's superfund priority list. Although, under
some court interpretations of these laws, there is a possibility that a
responsible party might have to bear more than its proportional share of the
cleanup costs if it is unable to obtain appropriate contribution from other
responsible parties, the Company has not had to bear significantly more than its
proportional share in multi-party situations taken as a whole.
 
     Capital expenditures for environmental control facilities at existing
operations were $69 million in 1997. The Company estimates that during each of
the years 1998 and 1999 such capital expenditures will be in the $70 to $75
million range. In addition to capital expenditures, the Company has incurred and
will continue to incur operating costs in connection with such facilities.
 
     Reference is made to Management's Discussion and Analysis at page 21 of the
Company's 1997 Annual Report to shareowners, incorporated herein by reference,
for further information regarding environmental matters.
 
EMPLOYEES
 
     The Company had an aggregate of 70,500 salaried and hourly employees at
December 31, 1997. Approximately 51,900 were located in the United States, and,
of these employees, about 25% were unionized employees represented by various
local or national unions.
 
ITEM 2.   PROPERTIES
 
     The Company has 356 locations consisting of plants, research laboratories,
sales offices and other facilities. The plants are generally located to serve
large marketing areas and to provide accessibility to raw materials and labor
pools. The properties are generally maintained in good operating condition.
Utilization of these plants may vary with government spending and other business
conditions; however, no major operating facility is significantly idle. The
facilities, together with planned expansions, are expected to meet the Company's
needs for the foreseeable future. The Company owns or leases warehouses,
railroad cars, barges, automobiles, trucks, airplanes and materials handling and
data processing equipment. It also leases space for administrative and sales
staffs. The Company's headquarters and administrative complex are located at
Morris Township, New Jersey.
 
                                       15

     The principal plants, which are owned in fee unless otherwise indicated,
are as follows:
 
                                   AEROSPACE

                                                                                    
Anniston AL                                                              South Bend, IN   Teterboro, NJ
Phoenix, AZ (4 plants, 3 fully leased, 1 partially leased)               Lawrence, KS     Rocky Mount, NC
Tempe, AZ                                                                Olathe, KS       Urbana, OH
Tucson, AZ (partially leased)                                            Columbia, MD     Rexdale, Ont., Canada (partially leased)
Torrance, CA (partially leased)                                          Towson, MD       Raunheim, Germany
Stratford, CT (owned by the U.S. Government and managed by the Company)                   Singapore

 
                                   AUTOMOTIVE

                                                     
Torrance, CA                Greenville, OH                 Glinde, Germany
Huntington, IN              Conde, France                  Skelmersdale, United Kingdom
Fostoria, OH                Thaon-Les-Vosges, France

 
                              ENGINEERED MATERIALS

                                                     
Metropolis, IL              Philadelphia, PA               Hopewell, VA
Baton Rouge, LA             Pottsville, PA                 Longlaville, France
Geismar, LA                 Columbia, SC                   Seelze, Germany
Moncure, NC                 Chesterfield, VA

ITEM 3.   LEGAL PROCEEDINGS
 
     The first and second paragraphs of Note 21 (Commitments and Contingencies)
of Notes to Financial Statements at page 36 of the Company's 1997 Annual Report
to shareowners are incorporated herein by reference.
 
     On September 27, 1997 the Company asked the United States District Court
for the Northern District of New York to resolve a dispute over whether the
Company was late in delivering a mercury modeling report to the State of New
York. The report was delivered pursuant to a consent decree between the Company
and the State addressing a remedial investigation of the Onondaga Lake system
where the Company had operations prior to 1987. On December 19, 1997, the Court
ruled that the State had properly established a deadline for the report of April
15, 1997, and that a $191,000 stipulated penalty was payable under the consent
decree because the report had been delivered 58 days after the deadline.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
                                 Not Applicable
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The executive officers of the Registrant, listed as follows, are elected
annually in April. There are no family relationships among them.

          NAME, AGE,
          DATE FIRST
      ELECTED AN OFFICER                                     BUSINESS EXPERIENCE
- -------------------------------  ----------------------------------------------------------------------------
                              
Lawrence A. Bossidy (a), 62      Chairman of the Board since January 1992. Chief Executive Officer of the
              1991                 Company since July 1991.
Daniel P. Burnham (a), 51        Vice Chairman since October 1997. Executive Vice President and President,
                                   AlliedSignal Aerospace from January 1992 to September 1997.
              1991
Frederic M. Poses (a), 55        Vice Chairman since October 1997. Executive Vice President and President,
                                   AlliedSignal Engineered Materials from April 1988 to September 1997.
              1988
- ------------
(a) Also a director.

                                                   (list continued on next page)
 
                                       16

(list continued from previous page)

          NAME, AGE,
          DATE FIRST
      ELECTED AN OFFICER                                     BUSINESS EXPERIENCE
- -------------------------------  ----------------------------------------------------------------------------
                              
Peter M. Kreindler, 52           Senior Vice President, General Counsel and Secretary since December 1994.
              1992                 Senior Vice President and General Counsel from March 1992 to November
                                   1994.
Donald J. Redlinger, 53          Senior Vice President -- Human Resources and Communications since February
              1991                 1995. Senior Vice President -- Human Resources from January 1991 to
                                   January 1995.
Richard F. Wallman, 46           Senior Vice President and Chief Financial Officer since March 1995. Vice
              1995                 President and Controller of International Business Machines Corp. (IBM)
                                   (manufacturer of information-handling systems) from April 1994 to February
                                   1995. General Assistant Controller of IBM from October 1993 to March 1994.
                                   Assistant Controller -- Sales & Marketing of Chrysler Corporation
                                   (automobile manufacturer) from April 1989 to September 1993.
Nancy A. Garvey, 48              Vice President and Controller since September 1996. Vice President and
              1994                 Treasurer from February 1994 to August 1996. Staff Vice
                                   President -- Investor Relations from November 1989 to January 1994.
Larry E. Kittelberger, 49        Vice President and Chief Information Officer since August 1995 (Executive
              1996                 Officer since February 1996). Corporate Chairman -- Information Officer
                                   Leadership Committee of Tenneco Inc. (diversified industrial concern) from
                                   June 1989 to July 1995.

                                    PART II.
 
ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS
 
     Market and dividend information for the Registrant's common stock is
contained in Note 27 (Unaudited Quarterly Financial Information) of Notes to
Financial Statements at page 39 of the Company's 1997 Annual Report to
shareowners, and such information is incorporated herein by reference.
 
     The number of record holders of the Registrant's common stock is contained
in the statement 'Selected Financial Data' at page 18 of the Company's 1997
Annual Report to shareowners, and such information is incorporated herein by
reference.
 
ITEM 6.   SELECTED FINANCIAL DATA
 
     The information included under the captions 'For the Year' and 'At
Year-End' in the statement 'Selected Financial Data' at page 18 of the Company's
1997 Annual Report to shareowners is incorporated herein by reference.
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS
 
     'Management's Discussion and Analysis' on pages 19 through 25 of the
Company's 1997 Annual Report to shareowners is incorporated herein by reference.
 
     This Report contains, or incorporates by reference, certain statements that
may be deemed 'forward-looking statements' within the meaning of Section 21E of
the Securities Exchange Act of 1934. All statements, other than statements of
historical fact, that address activities, events or developments that the
Company or management intends, expects, projects, believes or anticipates will
or may occur in the future are forward-looking statements. Such statements are
based upon certain
 
                                       17

assumptions and assessments made by management of the Company in light of its
experience and its perception of historical trends, current conditions, expected
future developments and other factors it believes to be appropriate. The
forward-looking statements included in this Report are also subject to a number
of material risks and uncertainties, including but not limited to economic,
competitive, governmental and technological factors affecting the Company's
operations, markets, products, services and prices. Such forward-looking
statements are not guarantees of future performance and actual results,
developments and business decisions may differ from those envisaged by such
forward-looking statements.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
     The Company is exposed to market risk from changes in interest rates and
foreign currency exchange rates which may adversely affect its results of
operations and financial condition. The Company seeks to minimize the risks from
these interest rates and foreign currency exchange rate fluctuations through its
regular operating and financing activities and, when deemed appropriate, through
the use of derivative financial instruments. The Company does not use financial
instruments for trading or other speculative purposes and is not a party to any
leveraged financial instruments.
 
     A discussion of the Company's accounting policies for financial instruments
is included in Note 1 (Summary of Significant Accounting Policies) of Notes to
Financial Statements at page 29 of the Company's 1997 Annual Report to
shareowners, and such information is incorporated herein by reference.
Additional disclosure relating to financial instruments is included in Note 17
(Financial Instruments) of Notes to Financial Statements at pages 34 and 35 of
the Company's 1997 Annual Report to shareowners, and such information is
incorporated herein by reference.
 
     The Company uses foreign currency forward and option contracts to hedge the
exposure to adverse changes in foreign currency exchange rates. The Company's
principal currency exposures relate to the French franc, the German deutsche
mark and the British pound against the U.S. dollar. The Company's exposure to
changes in foreign currency exchange rates arises from intercompany loans
utilized to finance foreign subsidiaries, receivables, payables and firm
commitments arising from international transactions. The Company attempts to
have all such transaction exposures hedged with internal natural offsets to the
fullest extent possible and, once these opportunities have been exhausted,
through derivative financial instruments with third parties using forward or
option agreements. The Company also uses derivative financial instruments to
hedge the Company's exposure to changes in foreign currency exchange rates for
the translated U.S. dollar value of net income of a number of foreign
subsidiaries. Forward and option agreements used to hedge net income are marked
to market and recognized immediately in income.
 
     The Company utilizes both fixed-rate and variable-rate debt as described in
Note 15 (Long-term Debt and Credit Agreement) of Notes to Financial Statements
at page 33 of the Company's 1997 Annual Report to shareowners, and such
information is incorporated herein by reference. The Company uses interest rate
swaps to manage the Company's exposure to interest rate movements and reduce
borrowing costs.
 
     The Company also maintains debt investments classified as
available-for-sale and carried at their quoted market value. These short-term
investments result from excess cash on hand.
 
     The Company manages market risk by restricting the use of derivative
financial instruments to hedging activities and by limiting potential interest
and currency rate exposures to amounts that are not material to the Company's
consolidated results of operations and cash flows. The Company also has
procedures to monitor the impact of market risk on the fair value of its
long-term debt, short-term debt investments and other financial instruments,
considering reasonably possible changes in interest and currency rates. These
procedures include the use of sensitivity analysis to estimate the impact of
interest rate and currency rate changes on future cash flows and fair values.
The following table illustrates the potential change in fair value for interest
rate sensitive instruments based on a hypothetical immediate 1% point increase
in interest rates across all maturities and the potential change in fair value
for foreign exchange sensitive instruments based on a 10% increase in U.S.
dollar per local currency exchange rates across all maturities at December 31,
1997 (dollars in millions):
 
                                       18

 

                                                                                                     ESTIMATED
                                                        FACE OR        CARRYING       FAIR      INCREASE/(DECREASE)
                                                    NOTIONAL AMOUNT    VALUE(1)     VALUE(1)       IN FAIR VALUE
                                                    ---------------    ---------    --------    -------------------
                                                                                    
Interest Rate Sensitive Instruments
- -----------------------------------
Short-term debt investments.......................          143             152         152              (6)
Long-term debt (including current
  maturities)(2)..................................        1,429          (1,396)     (1,584)            (51)
Interest rate swaps...............................          358              --           3              (3)
 
Foreign Exchange Rate Sensitive Instruments
- -------------------------------------------
Foreign currency forward agreements written(3)....          649              22          23              51
Foreign currency forward agreements held(3).......          708               1           1             (64)
Foreign currency options held.....................          150               4           4               9

- ------------
(1) Asset or (liability)
 
(2) Excludes capitalized leases.
 
(3) Increases and decreases in the fair value of foreign currency forward
    agreements are completely offset by changes in the fair value of net
    underlying foreign currency transaction exposures.
 
     The above discussion of the Company's procedures to monitor market risk and
the estimated changes in fair value resulting from the Company's sensitivity
analyses are forward-looking statements of market risk assuming certain adverse
market conditions occur. Actual results in the future may differ materially from
these estimated results due to actual developments in the global financial
markets. The analysis methods used by the Company to assess and mitigate risk
discussed above should not be considered projections of future events or losses.
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The Company's consolidated financial statements, together with the report
thereon of Price Waterhouse LLP dated January 28, 1998 appearing on pages 26
through 40 of the Company's 1997 Annual Report to shareowners, are incorporated
herein by reference. With the exception of the aforementioned information and
the information incorporated by reference in Items 1, 3, 5, 6, 7 and 7A, the
1997 Annual Report to shareowners is not to be deemed filed as part of this Form
10-K Annual Report.
 
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE
 
                                 Not Applicable
 
                                   PART III.
 
ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Information relating to directors of the Registrant, as well as information
relating to compliance with Section 16(a) of the Securities Exchange Act of
1934, will be contained in a definitive Proxy Statement involving the election
of directors which the Registrant will file with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after December 31,
1997, and such information is incorporated herein by reference. Certain other
information relating to Executive Officers of the Registrant appears at pages 16
and 17 of this Form 10-K Annual Report.
 
ITEM 11.   EXECUTIVE COMPENSATION
 
     Information relating to executive compensation is contained in the Proxy
Statement referred to above in 'Item 10. Directors and Executive Officers of the
Registrant,' and such information is incorporated herein by reference.
 
                                       19

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Information relating to security ownership of certain beneficial owners and
management is contained in the Proxy Statement referred to above in 'Item 10.
Directors and Executive Officers of the Registrant,' and such information is
incorporated herein by reference.
 
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
                                 Not Applicable
 
                                    PART IV.
 
ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

                                                                                                      PAGE IN
                                                                                                  ANNUAL REPORT TO
                                                                                                    SHAREOWNERS
                                                                                                  ----------------
                                                                                               
(a)(1.) Index to Consolidated Financial Statements:
          Incorporated by reference to the 1997 Annual Report to shareowners:
          Report of Independent Accountants....................................................          40
          Consolidated Statement of Income for the years ended December 31, 1997, 1996 and
           1995................................................................................          26
          Consolidated Statement of Retained Earnings for the years ended December 31, 1997,
           1996 and 1995.......................................................................          26
          Consolidated Balance Sheet at December 31, 1997 and 1996.............................          27
          Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996 and
           1995................................................................................          28
          Notes to Financial Statements........................................................          29

(a)(2.) Consolidated Financial Statement Schedules
 
     The two financial statement schedules applicable to the Company have been
omitted because of the absence of the conditions under which they are required.
 
(a)(3.) Exhibits
 
     See the Exhibit Index to this Form 10-K Annual Report. The following
exhibits listed on the Exhibit Index are filed with this Form 10-K Annual
Report:

EXHIBIT NO.                                          DESCRIPTION
- -----------   -----------------------------------------------------------------------------------------
           
   10.13*     AlliedSignal Inc. Supplemental Pension Plan, as amended
   13         Pages 18 through 40 (except for the data included under the captions 'Financial
                Statistics' on page 18) of the Company's 1997 Annual Report to shareowners
   21         Subsidiaries of the Registrant
   23         Consent of Independent Accountants
   24         Powers of Attorney
   27         Financial Data Schedule

     The exhibits identified in the Exhibit Index with an asterisk(*) are
management contracts or compensatory plans or arrangements.
 
(b) Reports on Form 8-K
 
     During the three months ended December 31, 1997, reports on Form 8-K were
filed on October 22, November 17 and December 18, in each case reporting, under
Item 9, unregistered sales of the Company's Common Stock in reliance on
Regulation S under the Act.
 
                                       20

                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized.
 
                                          AlliedSignal Inc.
 
February 26, 1998                         By:       /s/ NANCY A. GARVEY
                                               ---------------------------------
                                                       Nancy A. Garvey
                                                Vice President and Controller
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
annual report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:

                         NAME                                                    NAME
                         ----                                                    ----

                          *                                                       *
- ------------------------------------------------------  ------------------------------------------------------
                 Lawrence A. Bossidy                                       Robert B. Palmer
      Chairman of the Board and Chief Executive                                Director
                 Officer and Director
 
                          *                                                       *
- ------------------------------------------------------  ------------------------------------------------------
                  Daniel P. Burnham                                       Russell E. Palmer
                       Director                                                Director
 
                          *                                                       *
- ------------------------------------------------------  ------------------------------------------------------
                  Frederic M. Poses                                       Ivan G. Seidenberg
                       Director                                                Director
 
                          *                                                       *
- ------------------------------------------------------  ------------------------------------------------------
                   Hans W. Becherer                                        Andrew C. Sigler
                       Director                                                Director
 
                          *                                                       *
- ------------------------------------------------------  ------------------------------------------------------
                     Ann M. Fudge                                          John R. Stafford
                       Director                                                Director
 
                          *                                                       *
- ------------------------------------------------------  ------------------------------------------------------
                    Paul X. Kelley                                        Thomas P. Stafford
                       Director                                                Director
 
                          *                                                       *
- ------------------------------------------------------  ------------------------------------------------------
                  Robert P. Luciano                                       Robert C. Winters
                       Director                                                Director
 
                                                                                  *
                                                        ------------------------------------------------------
                                                                            Henry T. Yang
                                                                               Director
 
                /s/ RICHARD F. WALLMAN                                   /s/ NANCY A. GARVEY
- ------------------------------------------------------  ------------------------------------------------------
                  Richard F. Wallman                                       Nancy A. Garvey
              Senior Vice President and                             Vice President and Controller
               Chief Financial Officer                                (Chief Accounting Officer)

*By:            /s/ RICHARD F. WALLMAN
     ----------------------------------------------
                  (Richard F. Wallman
                    Attorney-in-fact)

February 26, 1998
 
                                       21

                                 EXHIBIT INDEX

EXHIBIT NO.                                       DESCRIPTION
- -----------   ---------------------------------------------------------------------------------------------
           
   3(i)       Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit
                3(i) to the Company's Form 10-Q for the quarter ended March 31, 1997)
   3(ii)      By-laws of the Company, as amended (incorporated by reference to Exhibit 3(ii) to the
                Company's Form 10-Q for the quarter ended March 31, 1996)
   4          The Company is a party to several long-term debt instruments under which, in each case, the
                total amount of securities authorized does not exceed 10% of the total assets of the
                Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of
                Item 601(b) of Regulation S-K, the Company agrees to furnish a copy of such instruments to
                the Securities and Exchange Commission upon request.
   9          Omitted (Inapplicable)
  10.1        Master Support Agreement, dated as of February 26, 1986 as amended and restated as of January
                27, 1987, as further amended as of July 1, 1987 and as again amended and restated as of
                December 7, 1988, by and among the Company, Wheelabrator Technologies Inc., certain
                subsidiaries of Wheelabrator Technologies Inc., The Henley Group, Inc. and Henley Newco
                Inc. (incorporated by reference to Exhibit 10.1 to the Company's Form 10-K for the year
                ended December 31, 1988)
  10.2*       Deferred Compensation Plan for Non-Employee Directors of AlliedSignal Inc., as amended
                (incorporated by reference to Exhibit 10.2 to the Company's Form 10-K for the year ended
                December 31, 1996)
  10.3*       Stock Plan for Non-Employee Directors of AlliedSignal Inc., as amended (incorporated by
                reference to Exhibit C to the Company's Proxy Statement, dated March 10, 1994, filed
                pursuant to Rule 14a-6 of the Securities Exchange Act of 1934)
  10.4*       1985 Stock Plan for Employees of Allied-Signal Inc. and its Subsidiaries, as amended
                (incorporated by reference to Exhibit 19.3 to the Company's Form 10-Q for the quarter ended
                September 30, 1991)
  10.5*       AlliedSignal Inc. Incentive Compensation Plan for Executive Employees, as amended
                (incorporated by reference to Exhibit B to the Company's Proxy Statement, dated March 10,
                1994, filed pursuant to Rule 14a-6 of the Securities Exchange Act of 1934)
  10.6*       Supplemental Non-Qualified Savings Plan for Highly Compensated Employees of AlliedSignal Inc.
                and its Subsidiaries, as amended (incorporated by reference to Exhibit 10.1 to the
                Company's Form 10-Q for the quarter ended March 31, 1995)
  10.7*       1982 Stock Option Plan for Executive Employees of Allied Corporation and its Subsidiaries, as
                amended (incorporated by reference to Exhibit 19.4 to the Company's Form 10-Q for the
                quarter ended September 30, 1991)
  10.8*       AlliedSignal Inc. Severance Plan for Senior Executives, as amended (incorporated by reference
                to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 1994)
  10.9*       Salary Deferral Plan for Selected Employees of AlliedSignal Inc. and its Affiliates, as
                amended (incorporated by reference to Exhibit 10.2 to the Company's Form 10-Q for the
                quarter ended March 31, 1995)
  10.10*      1993 Stock Plan for Employees of AlliedSignal Inc. and its Affiliates (incorporated by
                reference to Exhibit A to the Company's Proxy Statement, dated March 10, 1994, filed
                pursuant to Rule 14a-6 of the Securities Exchange Act of 1934)

EXHIBIT NO.                                       DESCRIPTION
- -----------   ---------------------------------------------------------------------------------------------
           
  10.11*      Amended and restated Agreement, as amended dated May 6, 1994 between the Company and Lawrence
                A. Bossidy (incorporated by reference to Exhibit 10.3 to the Company's Form 10-Q for the
                quarter ended June 30, 1994 and to Exhibit 10.15 to the Company's Form 10-Q for the quarter
                ended June 30, 1997)
  10.12       Five-Year Credit Agreement dated as of June 30, 1995 as amended by and between AlliedSignal
                Inc., a Delaware corporation, the banks, financial institutions and other institutional
                lenders listed on the signature pages thereof (the 'Lenders'), Citibank, N.A., as agent,
                and ABN Amro Bank N.V. and Morgan Guaranty Trust Company of New York, as co-agents, for the
                Lenders (incorporated by reference to Exhibit 10.1 to the Company's Forms 10-Q for the
                quarters ended June 30, 1995 and June 30, 1996 and to Exhibit 10.13 to the Company's Form
                10-Q for the quarter ended June 30, 1997)
  10.13*      AlliedSignal Inc. Supplemental Pension Plan, as amended (filed herewith)
  11          Omitted (Inapplicable)
  12          Omitted (Inapplicable)
  13          Pages 18 through 40 (except for the data included under the captions 'Financial Statistics'
                on page 18) of the Company's 1997 Annual Report to shareowners (filed herewith)
  16          Omitted (Inapplicable)
  18          Omitted (Inapplicable)
  21          Subsidiaries of the Registrant (filed herewith)
  22          Omitted (Inapplicable)
  23          Consent of Independent Accountants (filed herewith)
  24          Powers of Attorney (filed herewith)
  27          Financial Data Schedule (filed herewith)
  28          Omitted (Inapplicable)
  99          Omitted (Inapplicable)

- ------------
     The Exhibits identified above with an asterisk(*) are management contracts
or compensatory plans or arrangements.

                           STATEMENT OF DIFFERENCES

The registered trademark symbol shall be expressed as......................'r'

 

                                AlliedSignal Inc.
                            Supplemental Pension Plan

                                                           Amended and Restated
                                                           as of January 1, 1994

                                      - 2 -

Article I - Purpose

                Effective November 20, 1975, Allied Corporation adopted the
Allied Corporation Supplemental Retirement Plan for Executives and Key
Employees. Such plan is amended and restated effective January 1, 1994 as the
AlliedSignal Supplemental Pension Plan (the "Plan").

                The purpose of the Plan is to provide retired participants and
their joint annuitants and beneficiaries under the Pension Plan with the amount
of retirement income that is not provided under the Pension Plan because the
participant deferred compensation under one or more nonqualified deferred
compensation plans of AlliedSignal, including the Incentive Plan, the
Supplemental Savings Plans and the Salary Deferral Plan or, by reason of the
limits imposed by Section 415 and 401(a)(17) of the Code. The Plan is also
intended to cover any contractual obligation Allied has to pay pension benefits
which cannot be provided under the provisions of the Pension Plan.

                Except to the extent otherwise indicated, and to the extent
otherwise inappropriate, the Pension Plan and the provisions thereof are hereby
incorporated by reference.

Article II - Definitions

1.1             AlliedSignal - means AlliedSignal Inc., a Delaware corporation
                and its subsidiaries.

1.2             Accrued Pension Benefit - means the amount of retirement income
                payable under the Pension Plan to or with respect to a
                participant at or after termination of employment, or such
                earlier date requiring payment under this Plan.

1.3             Board of Directors - means the Board of Directors of
                AlliedSignal.

1.4             Code - means the Internal Revenue Code of 1986, as amended from
                time to time.

1.5             Committee - means the Management Development and Compensation
                Committee of AlliedSignal.

1.6             Incentive Plan - means the Incentive Compensation Plan for
                Executive Employees of AlliedSignal Inc. and its Subsidiaries,
                and all predecessor and successor plans.

1.7             Pension Plan - means the AlliedSignal Inc. Retirement Program
                and/or such other pension plans covering salaried employees of
                AlliedSignal.

1.8             Plan - means the AlliedSignal Supplemental Pension Plan.

                                     - 3 -

1.9             Salary Deferral Plan - means the Salary Deferral Plan for
                Selected Employees of AlliedSignal Inc. and its Affiliates
                (Career Band 6 and above or employees who occupy positions
                equivalent thereto), as the same may be amended from time to
                time.

1.10            Supplemental Benefit - means the excess, if any, of (i) the
                retirement income payable to or with respect to a participant
                under the Pension Plan which would have been accrued by the
                participant (1) had the amount of deferred compensation awards
                under the Incentive Plan been compensation included for
                calculating benefits under the Pension Plan in the year the
                award would otherwise have been earned or payable as recognized
                by the Pension Plan, (2) had Participant Deferred Contributions,
                as that term is defined in the Supplemental Savings Plans, been
                compensation included for calculating benefits under the Pension
                Plan in the year the compensation would otherwise have been
                earned or payable as recognized by the Pension Plan, (3) had the
                portion of Base Annual Salary and Incentive Awards deferred by a
                participant under the terms of the Salary Deferral Plan, been
                compensation included for calculating benefits under the Pension
                Plan in the year the compensation would otherwise have been
                earned or payable as recognized by the Pension Plan, (4) had the
                limits of Code Section 415 and 401(a)(17) not been incorporated
                in the Pension Plan, and (5) had the participant met all the
                requirements for a benefit from the Pension Plan with respect to
                all other pension benefits which AlliedSignal has become
                contractually obligated to pay to the participant, over (ii) the
                participant's Accrued Pension Benefit.

1.11            Supplemental Savings Plans - means the Supplemental
                Non-Qualified Savings Plans for Highly Compensated Employees of
                AlliedSignal Inc. and its Subsidiaries, as the same may be
                amended from time to time.

Article III - Participation

Participation in the Plan shall be limited to:

                (a)   those participants in the Pension Plan (and their joint
                      annuitants and beneficiaries) who as a result of having
                      deferred an award under the Incentive Plan or having
                      deferred compensation under the Supplemental Savings Plans
                      or the Salary Deferral Plan, receive or shall receive a
                      lesser amount under the Pension Plan than would otherwise
                      be paid or payable in the absence of such deferral;

                                     - 4 -

                (b)   those participants in the Pension Plan (and their joint
                      annuitants and beneficiaries) who as a result of the
                      limitations contained in Code Sections 415 or 401(a)(17)
                      receive or will receive a lesser amount under the Pension
                      Plan than would otherwise be paid or payable in the
                      absence of such limitations, and

                (c)   any employee who has entered into a contractual agreement
                      with AlliedSignal under which AlliedSignal shall, after
                      the termination of employment of the employee, provide a
                      benefit in the form of a life annuity for the employee
                      (and the employee's joint annuitant or beneficiary) as
                      provided under the terms of the contractual agreement.

Article IV - Supplemental Benefit

4.01            Payment of Supplemental Benefit

                (a)   Supplemental Benefits shall be payable directly to such
                      participant, or such participant's joint annuitant or
                      beneficiary, as applicable, from the general assets of
                      AlliedSignal and AlliedSignal shall not be under any
                      obligation to set aside any funds or other assets for the
                      payment of the Supplemental Benefits under this Plan.
                      AlliedSignal may, in its sole discretion, establish funds
                      for payment of these Supplemental Benefits. However, any
                      and all such funds shall remain assets of AlliedSignal and
                      subject to the claims of creditors of such corporation.
                      Such funds, if any, shall not be deemed to be assets of
                      this Plan.

                (b)   Any person entitled to a Supplemental Benefit shall be
                      entitled to payment of such benefit only from the date on
                      which such Supplemental Benefit becomes due and payable
                      and only in such installments or other manner of payment
                      as is provided under the relevant Pension Plan or
                      agreement, provided, however, that if a Participant so
                      elects, by giving written notice to the Plan
                      Administrator, and if the Committee approves such
                      election, payment of such Supplemental Benefit shall be in
                      a lump sum equal to the present value of such
                      Participant's Supplemental Benefit accrued to the date of
                      such Participant's retirement under the relevant Pension
                      Plan or agreement. For the purpose of determining the
                      present value of a Participant's accrued Supplemental
                      Benefit, the PBGC immediate annuity rate and the UP 1984
                      mortality table shall be used. Except as may be permitted
                      pursuant to the proviso to the first sentence of this
                      Paragraph (b), no person shall have a right to
                      acceleration of any such payment. No person shall be
                      entitled to anticipate such benefit by assignment, pledge
                      or

                                     - 5 -

                      transfer in any form or manner prior to actual or
                      constructive receipt of payment.

                (c)   In the event that a Supplemental Benefit becomes payable
                      in accordance with this Article IV, Section 4.01,
                      Paragraph (b) and in the event the relevant Pension Plan
                      or agreement is terminated in accordance with its terms,
                      then the Participant shall have a right to only the
                      Supplemental Benefit accrued to the date of termination of
                      the relevant Pension Plan or agreement. In such event,
                      AlliedSignal shall remain liable for the payment of the
                      Supplemental Benefit and payment shall be made at such
                      times and in such manner as the Plan Administrator shall
                      determine, unless the Participant shall have made the
                      election referred to in Paragraph (b) of this Section
                      4.01, in which event payment shall be made pursuant to
                      such election, if approved by the Committee as therein
                      required. Such accrued Supplemental Benefit shall remain
                      subject to Paragraphs (a) and (b) of this Section 4.01.

                (d)   The rights and interest of any participant, joint
                      annuitant or beneficiary to a Supplemental Benefit under
                      this Plan are the same as any other unsecured creditor of
                      Allied. In the event of any bankruptcy proceeding by or
                      against Allied, a participant, joint annuitant or
                      beneficiary shall be entitled to prove a claim for any
                      unpaid portion of the benefit provided by the Plan.

Article V - Administration

5.01            Plan Administrator - The Board of Directors shall name a Plan
                Administrator. Such Plan Administrator shall serve at the
                convenience of the Board of Directors and shall serve without
                compensation. The Plan Administrator shall keep such records as
                necessary for the proper administration of the Plan and shall
                report to the Board of Directors at such time or times as the
                Board of Directors shall designate.

5.02            Benefit Determination - The Plan Administrator shall determine
                the amount and timing of any benefit paid under the Plan. The
                Plan Administrator shall rely on the records of AlliedSignal in
                determining any participant's eligibility for and amount of
                benefit under the Plan. In the event that the Plan
                Administrator's reliance on the records of AlliedSignal causes a
                benefit to be over or under paid, the Plan Administrator shall
                adjust future payments to be increased or decreased as required.
                If such future payments are insufficient to recover any
                overpayment to a participant, the Plan Administrator shall
                withhold any payments then due a participant and take any action
                deemed appropriate to recover the balance of the overpayment.

                                     - 6 -

5.03            Benefit Appeals - The Plan Administrator shall establish an
                appeals procedure as defined by U.S. Department of Labor
                regulations. Such procedures will provide that the participant
                has sixty (60) days upon receipt of any benefits or denial of
                benefits to file an appeal with the Plan Administrator. The Plan
                Administrator must respond within sixty (60) days of receiving
                the appeal, in writing, specifically identifying those Plan
                provisions on which the benefit denial was based and indicating
                what information the participant must supply in order to perfect
                a claim for benefits.

Article VI - Amendment and Termination

6.01            Plan Amendments - AlliedSignal reserves the right to amend the
                Plan from time to time. The Plan may be amended by the
                Committee, however, no amendment shall reduce any benefit being
                paid or then payable to a participant. Further, no amendment
                shall reduce the benefits provided by the Plan to participants
                or alter in any manner the rights of the participants to
                benefits provided under this Plan.

6.02            Plan Termination - AlliedSignal reserves the right to terminate
                the Plan. However, such termination shall not adversely affect
                the rights of participants.

Selected Financial Data
AlliedSignal Inc. (dollars in millions except per share amounts)

Years ended December 31           1997     1996     1995     1994     1993     1992     1991     1990     1989     1988     1987
                                                                                            
For the Year
- --------------------------------------------------------------------------------------------------------------------------------
Net sales                      $14,472  $13,971  $14,346  $12,817  $11,827  $12,042  $11,831  $12,343  $11,942  $11,909  $11,116
Income (loss) from continuing
 operations (1)                  1,170    1,020      875      759      656      535     (273)     462      528      463      515
Net income (loss) (2)            1,170    1,020      875      759      411     (712)    (273)     462      528      463      656
Per share of common stock:
Earnings (loss) from continuing
 operations -- basic              2.07     1.80     1.54     1.34     1.16      .95     (.50)     .84     .89       .78      .77
Net earnings (loss) -- basic      2.07     1.80     1.54     1.34      .73    (1.26)    (.50)     .84     .89       .78      .98
Earnings (loss) from continuing                                                                                           
 operations -- assuming dilution  2.02     1.76     1.52     1.32     1.14      .93     (.50)     .84     .89       .78      .77
Net earnings (loss) -- assuming                                                                                            
 dilution                         2.02     1.76     1.52     1.32      .71    (1.24)    (.50)     .84     .89       .78      .98
Dividends                          .52      .45      .39    .3238      .29      .25      .40      .45     .45       .45      .45
- --------------------------------------------------------------------------------------------------------------------------------
At Year-End 
Net working capital            $ 1,137  $ 2,143  $ 1,086  $ 1,194  $ 1,078  $ 1,414  $   526  $   892 $ 1,065   $ 1,040 $   722
Property, plant and
 equipment -- net                4,251    4,219    4,742    4,260    4,094    3,897    3,638    3,584   3,321     3,214   3,330
Total assets                    13,707   12,829   12,465   11,321   10,829   10,756   10,382   10,456  10,342    10,069  10,321
Long-term debt                   1,215    1,317    1,366    1,424    1,602    1,777    1,914    2,051   1,903     2,044   2,017
Shareowners' equity              4,386    4,180    3,592    2,982    2,390    2,251    2,983    3,380   3,412     3,268   3,129
Book value per share of
 common stock                     7.86     7.39     6.35     5.27     4.21     3.97     5.40     6.28    5.89      5.53    5.22
Average investment (3)           6,935    6,468    5,598    4,848    4,506    4,939    6,771    6,723   6,520     6,629   6,859
Common shares outstanding
 (in millions)                   558.3    565.6    565.6    566.2    567.6    567.6    552.6    538.8   580.0     591.8   599.8
Common shareowners of record    78,793   77,856   79,046   82,095   84,248   84,254   91,492   97,210 102,042   111,402 109,322
Employees (4)                   70,500   76,600   88,500   87,500   86,400   89,300   98,300  105,800 107,100   109,550 115,300
- --------------------------------------------------------------------------------------------------------------------------------
Financial Statistics (5)
Return on net sales (income
 from operations)                 11.3     10.8      8.8      9.0      8.1      3.4     (2.5)     5.9     8.0       5.7     6.8
Return on net sales (after-tax)    8.1      7.3      6.1      5.9      5.5      4.4     (2.3)     3.7     4.4       3.9     4.6
Return on average investment                                                                                             
 (after-tax)                      18.4     17.5     17.4     17.5     16.6     13.8     (1.3)     9.6    11.0      10.3    10.1
Return on average shareowners'                                                                                           
 equity (after-tax)               27.5     26.6     26.7     28.9     30.6     26.4     (8.4)    13.9    15.6      14.5    14.5
Interest coverage ratio            8.7      7.6      6.5      6.8      5.1      3.3      (.9)     2.6     3.0       2.8     3.6
Long-term debt as a percent                                                                                              
 of total capital                 19.7     22.2     25.6     30.4     37.9     40.5     34.9     33.6    30.8      33.2    33.9
Total debt as a percent of                                                                                               
 total capital                    31.7     29.5     33.7     34.1     42.7     44.7     43.9     40.4    35.7      35.9    39.0
- --------------------------------------------------------------------------------------------------------------------------------
Financial Statistics (5)(6)                                                                                              
Return on net sales (income                                                                                              
 from operations)                 11.4     10.7      9.1      9.0      7.9      6.5      4.7      5.9     8.0       7.4     6.8
Return on net sales (after-tax)    8.1      7.2      6.1      5.9      5.5      4.5      2.9      3.7     4.4       4.3     3.9
Return on average investment                                                                                             
 (after-tax)                      18.3     17.4     17.4     17.5     16.6     13.9      7.8      9.6    11.0      10.9     8.9
Return on average shareowners'                                                                                           
 equity (after-tax)               27.4     26.3     26.7     28.9     30.5     26.7     10.5     13.9    15.6      15.9    12.2
Interest coverage ratio            8.8      7.5      6.8      6.8      5.0      3.3      2.1      2.6     3.0       2.9     3.2
Long-term debt as a percent                                                                                              
 of total capital                 19.7     22.2     25.6     30.4     37.9     40.5     34.9     33.6    30.8      33.2    33.9
Total debt as a percent                                                                                                  
 of total capital                 31.7     29.5     33.7     34.1     42.7     44.7     43.9     40.4    35.7      35.9    39.0
===============================================================================================================================

(1)  In 1997, includes a provision for repositioning and other charges, a gain
     on the sale of the safety restraints business as well as a charge related
     to the 1996 sale of the braking business, resulting in a net charge of $24
     million (after-tax gain of $4 million, or $0.01 per share). In 1996,
     includes a provision for repositioning and other charges as well as a gain
     on the sale of the braking business resulting in a net gain of $33 million
     (after-tax $9 million, or $0.02 per share). In 1992, includes a provision
     for repositioning charges as well as a gain on the sale of common stock of
     Union Texas Petroleum Holdings, Inc. (Union Texas) resulting in a net
     charge of $11 million (after-tax $6 million, or $0.01 per share). In 1991,
     includes a provision for repositioning charges as well as gains on asset
     sales by Union Texas resulting in a net charge of $838 million (after-tax
     $615 million, or $1.13 per share). In 1988, includes an after-tax charge of
     $125 million, or $0.21 per share, for repositioning charges, an after-tax
     gain of $36 million, or $0.06 per share, from the sale of the Company's
     investment in Akebono Brake Industry Company Ltd. and an after-tax gain of
     $81 million, or $0.14 per share, from nonrecurring items. In 1987, includes
     a gain from the sale of common stock by Union Texas of $108 million
     (after-tax $82 million, or $0.12 per share).
(2)  Includes in 1993 the cumulative after-tax provision for the adoption of
     FASB No. 112 of $245 million, or $0.43 per share. Includes in 1992 the
     cumulative after-tax provision for the adoption of FASB Nos. 106 and 109 of
     $1,247 million, or $2.21 per share.
(3)  Investment is defined as shareowners' equity and non-current deferred
     taxes-net plus total debt.
(4)  Includes employees at facilities operated for the U.S. Department of
     Energy.
(5)  The returns and interest coverage ratio exclude the impact on income of the
     cumulative effect of changes in accounting principles.
(6)  The returns and interest coverage ratio exclude the impact of provisions
     for repositioning charges in 1997, 1996, 1995, 1992, 1991 and 1988, gain on
     the sale of the safety restraints business as well as a charge related to
     the 1996 sale of the braking business in 1997, gain on the sale of the
     braking business in 1996, gain on the transfer of the HDPE business to
     Exxon in 1995, nonrecurring items in 1993, gain on the sale of common stock
     of Union Texas in 1992, gains on asset sales by Union Texas in 1991,
     nonrecurring income in 1988 and Union Texas' equity transaction in 1987.

18

 

MANAGEMENT'S DISCUSSION AND ANALYSIS
AlliedSignal Inc.

1997 COMPARED WITH 1996

DURING 1997, THE COMPANY MADE SIGNIFICANT PROGRESS IN THE SHIFT OF ITS BUSINESS
PORTFOLIO TOWARD HIGHER GROWTH AND MARGINS. Acquisitions with aggregate annual
sales of $1.5 billion were announced. In June 1997, the Company acquired
Prestone Products Corporation (Prestone) for approximately $400 million,
including assumed liabilities. Prestone is a supplier of premium car care
products and has annual sales of approximately $300 million. In July 1997, the
Company acquired Grimes Aerospace Company (Grimes), a manufacturer of exterior
and interior aircraft lighting systems, for approximately $475 million,
including assumed liabilities. Grimes, which has annual sales of approximately
$230 million, also manufactures aircraft engine components such as valves and
heat exchangers, as well as electronic systems, including flight warning
computers and active matrix liquid crystal displays. In October 1997, the
Company acquired Astor Holdings, Inc. (Astor) for approximately $370 million,
including assumed liabilities. Astor, a producer of value-added, wax-based
processing aids, sealants and adhesives, has annual sales of approximately $300
million. In November 1997, the Company acquired Holt Lloyd Group Ltd. for
approximately $150 million. Holt Lloyd is a supplier of car care products
primarily in Europe and Asia and has annual sales of approximately $150 million.
In January 1998, the Company also acquired the Hardware Group and PacAero unit
of Banner Aerospace, distributors of aircraft hardware, for approximately $350
million. The acquired operations have annual sales of about $250 million,
principally to commercial air transport and general aviation customers. The
Company also made several smaller acquisitions in 1997, primarily in the
Engineered Materials segment.

THE COMPANY ALSO DIVESTED SOME BUSINESSES WHICH WERE PRIMARILY CYCLICAL IN
NATURE. In October 1997, the Company completed the sale of its automotive safety
restraints business to Breed Technologies for $710 million in cash, subject to
post-closing adjustments, and the Company recorded an after-tax gain of $196
million, or $0.35 per share, in the fourth quarter of 1997 (all earnings per
share data in Management's Discussion and Analysis reflect basic earnings per
share). The safety restraints business had 1996 net sales and income from
operations of $940 and $70 million, respectively, from the sale of seat belts
and air bags. It is expected that the proceeds will be used to continue to grow
the Company's higher-margin businesses and pursue acquisitions that will expand
or complement the Company's business portfolio. In April 1996, the Company sold
its worldwide hydraulic and anti-lock braking systems (ABS) business (braking
business) for $1.5 billion in cash, subject to certain post-closing adjustments
which were finalized in October 1997. See Note 4 of Notes to Financial
Statements for additional information. In the first quarter of 1998, the Company
expects to complete the sale of its underwater detection systems business to L-3
Communications Corporation for $70 million in cash, subject to post-closing
adjustments. The ocean systems unit had annual revenues of about $70 million.
During 1997, the Company also sold certain non-strategic businesses and other
assets.

The Company continuously assesses the relative strength of its portfolio
of businesses as to strategic fit, market position and profit contribution in
order to upgrade its combined portfolio and identify operating units that will
most benefit from increased investment. The Company considers acquisition
candidates that will further its strategic plan and strengthen its existing core
businesses. The Company also identifies operating units that do not fit into its
long-term strategic plan based on their market position, relative profitability
or growth potential. These operating units are considered for potential
divestiture, restructuring or other repositioning action.

IN 1997, THE COMPANY ELIMINATED ITS THREE SECTOR OFFICES, CONSOLIDATED ITS
AUTOMOTIVE PRODUCTS GROUP AND REPOSITIONED SOME OF ITS BUSINESSES. A provision
of $250 million for repositioning and other charges (after-tax $159 million, or
$0.28 per share) was established in the fourth quarter. The components of this
charge include severance costs of $59 million, asset writedowns of $34 million
and other exit costs of $31 million, as well as $40 million relating to the
write-off of capitalized business process reengineering costs associated with
information technology projects as required by Emerging Issues Task Force Issue
No. 97-13, $13 million relating to the writedown of an investment and other
items consisting of asset impairments, customer claims and legal settlements.

THE BOARD OF DIRECTORS APPROVED AN INCREASE OF 15% IN THE QUARTERLY COMMON STOCK
DIVIDEND, FROM $0.13 TO $0.15 PER SHARE. The dividend increase will be effective
with the first quarter of 1998. The Company had previously increased its regular
quarterly dividend by 16% in the first quarter of 1997.

NET SALES in 1997 were $14,472 million, an increase of $501 million, or 4%,
compared with 1996. Of this increase, $1,178 million, or 8%, was due to volume
gains and $482 million from the consolidation of recent acquisitions, offset in
part by a $744 million reduction for disposed businesses, mainly in the
Automotive segment. Lower selling prices and the impact of foreign exchange
reduced sales for the Engineered Materials and Automotive segments by $415
million. Aerospace net sales increased $698 million, or 12%, and Engineered
Materials improved by $241 million, or 6%. Automotive net sales decreased $438
million, or 10%. Excluding the disposed braking and safety restraints
businesses, Automotive net sales increased $297 million, or 11%.

COST OF GOODS SOLD as a percent of net sales was 79.3% in 1997 compared with
83.1% in 1996. Included in 1997 and 1996 are repositioning and other charges
(special charges) totaling $237 and $637 million, respectively. See Note 3 of
Notes to Financial Statements for further information. Excluding these special
charges, 1997 cost of goods sold as a percent of net sales was 77.7%, a decrease
compared with 78.5% in 1996 due in part to Six Sigma programs to lower
manufacturing and material costs and the improved mix of higher-margin
businesses.

                                                                              19

 

GAIN ON SALE OF BUSINESS reflects the 1997 pretax gain of $226 million,
comprised of a $277 million gain on the sale of the safety restraints business,
partially offset by a charge of $51 million related to the settlement of the
sale of the braking business in 1996. The 1996 pretax gain of $655 million
resulted from the sale of the braking business. See Note 4 of Notes to
Financial Statements for further information.

INCOME FROM OPERATIONS of $1,636 million in 1997 improved by $127 million, or
8%, compared with 1996. Both 1997 and 1996 include pretax gains on the sales of
businesses as well as special charges (special items). Excluding the impact of
these special items, income from operations improved by $156 million, or 10%.
Aerospace income from operations increased 37%, but Engineered Materials and
Automotive income from operations decreased 4% and 15%, respectively. The
Company's operating margin was 11.4% in 1997, compared with 10.7% in 1996.
Productivity (the constant dollar relationship of sales to costs) improved by
5.9% over 1996, reflecting in part initiatives in manufacturing, materials,
product development and sales and marketing. See the detailed discussion of net
income below for information by industry segment.

EQUITY IN INCOME OF AFFILIATED COMPANIES of $178 million increased by $35
million, or 24%, compared with 1996, mainly due to higher earnings from the UOP
process technology joint venture (UOP), partially offset by the writedown of an
equity investment as part of the 1997 repositioning and other charges.

OTHER INCOME (EXPENSE), $77 million income in 1997, decreased by $10 million, or
11%, compared with 1996 mainly due to increased minority interest offset in part
by higher foreign exchange gains.

INTEREST AND OTHER FINANCIAL CHARGES of $175 million in 1997 decreased by $11
million, or 6%, compared with 1996. This decrease results from lower tax
interest expense due to an acceleration of worldwide tax audits resulting in
favorable developments to the Company's position, offset in part by higher
debt-related interest expense reflecting higher levels of debt.

THE EFFECTIVE TAX rate in 1997 was 31.8% compared with 34.3% in 1996. Adjusted
for special items in both years, the effective tax rate in 1997 was 33.0%
compared with 33.5% in 1996.

NET INCOME in 1997 of $1,170 million, or $2.07 per share, was 15% higher than
1996 net income of $1,020 million, or $1.80 per share. Adjusted for special
items in both years, net income for 1997 was $1,166 million, or $2.06 per share,
an increase of 15% over 1996. The higher adjusted net income in 1997 was the
result of a substantial improvement in operating performance by the Aerospace
segment and moderately higher earnings by the Engineered Materials segment. The
Automotive segment had significantly lower earnings.

A DISCUSSION OF THE OPERATIONS OF THE BUSINESS SEGMENTS follows. Adjusted net
income (see tables below) for the segments excludes the impact of the 1997 and
1996 special items. (Dollars in millions)

                                               Adjusted
Aerospace   Net Sales       Net Income       Net Income
- -------------------------------------------------------
1997           $6,412             $515             $529
1996            5,714              206              385
- -------------------------------------------------------
Increase       $  698             $309             $144
=======================================================

Aerospace sales of $6,412 million in 1997 increased by $698 million, or 12%,
compared with 1996. Aerospace Equipment Systems sales were substantially higher,
driven by continued aftermarket strength and substantially higher
original-equipment shipments of engine fuel systems, environmental control
systems and aircraft landing systems. The acquisition of Grimes also contributed
$119 million of sales. Engines had significantly higher shipments of auxiliary
power units (APUs) and commercial propulsion end units and spares. Sales of
Electronic & Avionics Systems were moderately higher reflecting strong demand
for flight management and safety avionics systems, including strong shipments of
enhanced ground proximity warning systems. Sales of electronic systems to the
U.S. and foreign governments, however, were lower, mainly at communications and
ocean systems. Sales of management and technical services to the U.S. Government
were moderately higher.

The Company's 1997 sales to the Department of Defense (DoD), as a prime
contractor and subcontractor, increased 8% compared with 1996. Sales to the DoD
accounted for 21% of Aerospace's total sales, a decrease of one percentage point
compared with 1996. Sales to the commercial and foreign government markets
increased 18%, while sales to the National Aeronautics and Space Administration
(NASA) and other U.S. Government agencies declined 14% in 1997.

Aerospace adjusted net income of $529 million in 1997 improved by $144 million,
or 37%, from the 1996 adjusted net income. Income from Aerospace Equipment
Systems and Engines was substantially higher due principally to increased sales
and productivity improvements. Earnings for Electronic & Avionics Systems were
moderately higher reflecting increased demand, improved manufacturing operations
and material cost savings for flight safety avionics. However, electronic
systems had lower net income on reduced sales at communications and ocean
systems to the U.S. and foreign governments. Net income from management and
technical services for the U.S. Government improved slightly.

The Company is affected by U.S. Government budget constraints for defense and
space programs as well as the level of production of commercial, business and
general aviation aircraft which are impacted by business cycles and world
economic conditions. Growth in the Company's commercial business for aerospace
products is expected, over the long term, to help mitigate the reductions in
U.S. defense spending. Moreover, aerospace sales are not dependent on any one
key defense program or commercial customer.

In 1997, world defense spending stabilized after declining in prior years.
Meanwhile, substantial improvement was seen in the commercial aircraft market,
with build rates for large airlines at near record levels. This level of
commercial activity is expected to continue in 1998. Regional airlines
experienced strong traffic growth and new regional aircraft orders were also
higher in 1997. The high-end business aviation market experienced significant
growth and the commercial aftermarket spare parts and repair and overhaul
business also showed strong improvement during 1997, reflecting a 7% increase in
world airline passenger traffic.

The Company continues to receive significant contracts from the commercial
aviation industry, DoD and NASA and Aerospace earnings are expected to remain
strong.

At December 31, 1997 and 1996, the Company had firm orders for its aerospace
products from the U.S. and foreign

20

[GRAPHIC REPRESENTATION of Net Sales (dollars in billions), expressed
numerically below.]
 
                    1995          1996            1997
                    ----          ----            ----
                    14.3          14.0            14.5

[GRAPHIC REPRESENTATION of Net Income (dollars in millions), expressed
numerically below.]

                  1995            1996            1997
                  ----            ----            ----
                  875            1,020           1,170

[GRAPHIC REPRESENTATION of Earnings per Share (dollars), expressed
numerically below.]
 
                   1995          1996          1997
                   ----          ----          ----
                   1.54          1.80          2.07

governments of $1,908 and $1,906 million, respectively. Total backlog, including
commercial contracts, at year-end 1997 and 1996 was $5,087 and $4,514 million,
respectively. The Company anticipates that approximately $4,247 million of the
total 1997 backlog will be filled during 1998.

                                                    Adjusted
Automotive       Net Sales       Net Income       Net Income
- ------------------------------------------------------------
1997                $3,802            $ 285             $170
1996                 4,240              521              202
- ------------------------------------------------------------
(Decrease)          $ (438)           $(236)            $(32)
============================================================

Automotive sales of $3,802 million in 1997 were $438 million, or 10%, lower
compared with 1996 reflecting the disposition of the braking and safety
restraints businesses. Excluding these businesses, Automotive sales increased by
$297 million, or 11%. Continued strength of the U.S. dollar negatively impacted
sales growth by 3%. Turbocharging Systems sales were significantly higher,
primarily reflecting the flow of new products and the popularity of turbocharged
vehicles in Europe. Truck Brake Systems sales in North America also improved
significantly, benefiting from an upturn in truck builds and increased
installation rates of ABS. The Automotive Products Group sales were moderately
higher reflecting $223 million of sales from the acquisitions of Prestone and
Holt Lloyd. Sales of other aftermarket products and friction materials were
lower reflecting in part unfavorable market conditions.

Automotive adjusted net income of $170 million in 1997 declined by $32 million,
or 16%, from the 1996 adjusted net income. The decrease primarily reflects the
absence of net income from the disposed braking and safety restraints
businesses. Excluding these businesses, Automotive net income increased by $11
million, or 9%. Turbocharging Systems had substantially higher net income due to
increased sales and productivity improvements. Net income for Truck Brake
Systems was also substantially higher due principally to strong sales volume.
Earnings for the Automotive Products Group decreased substantially, primarily in
the North American aftermarket business; however, improvement for friction
materials was a partial offset.

                                                               Adjusted
Engineered Materials    Net Sales         Net Income         Net Income
- -----------------------------------------------------------------------
1997                       $4,254               $389               $462
1996                        4,013                361                432
- -----------------------------------------------------------------------
Increase                   $  241               $ 28               $ 30
=======================================================================

Engineered Materials sales of $4,254 million in 1997 were $241 million, or 6%,
higher compared with 1996. Volume gains of 9% were partially offset by lower
selling prices and the impact of the strong U.S. dollar. Polymer sales were
higher due mainly to significant growth for engineering plastics, chemical
intermediates and specialty films. Lower sales of carpet fibers and industrial
polyester, mainly as a result of reduced selling prices and the strong U.S.
dollar, were partial offsets. Specialty Chemicals sales increased moderately due
to acquisitions and volume gains for chlorofluorocarbon (CFC) replacement
products, hydrofluoric acid, pharmaceuticals and industrial specialties
products. Pricing pressures and the strong U.S. dollar were partial offsets.
Sales for Electronic Materials improved slightly reflecting increased demand for
advanced microelectronic materials and improvement in the printed circuit board
industry. Sales of amorphous metals, however, were lower.

Engineered Materials adjusted net income of $462 million in 1997 increased by
$30 million, or 7%, from the 1996 adjusted net income. Specialty Chemicals had
significantly higher earnings, driven by UOP and improvements for
pharmaceuticals and industrial specialties products. Polymers had moderately
lower income reflecting both higher raw material costs and lower selling prices
which reduced earnings for carpet fibers, industrial polyester and industrial
nylon. Partial offsets for Polymers resulted from higher income from chemical
intermediates, engineering plastics and specialty films due to sales increases.
Electronic Materials also had improved performance led by a substantial increase
in earnings for advanced microelectronic materials and the absence of losses
from the micro-optic devices business. Laminates was a partial offset as income
declined due to pricing pressures and poor results in Europe.

REGARDING ENVIRONMENTAL MATTERS, the Company is subject to various federal,
state and local government requirements relating to the protection of the
environment. The Company believes that as a general matter, its policies,
practices and procedures are properly designed to prevent unreasonable risk of
environmental damage and that its handling, manufacture, use and disposal of
hazardous or toxic substances

                                                                              21

[GRAPHIC REPRESENTATION of Capital Expenditures/R&D (dollars in millions),
expressed numerically below.]

                                             1995     1996     1997
                                            -----    -----    -----
                                                     
Capital Expenditures.......................   746      755      717
Company-funded R&D.........................   353      345      349
Total Capital Expenditures/R&D............. 1,099    1,100    1,066

[GRAPHIC REPRESENTATION of Long-Term Debt as a Percent of Total Capital
(percent), expressed numerically below.]

                                         1995      1996     1997
                                         ----      ----     ----
                                                   
                                         25.6      22.2     19.7

[GRAPHIC REPRESENTATION of Return on Average Shareowners' Equity
(After-tax percent), expressed numerically below.]

                                         1995     1996    1997
                                         ----     ----    ----
                                                 
                                         26.7     26.6    27.5

are in accord with environmental laws and regulations. However, mainly because
of past operations and operations of predecessor companies, the Company, like
other companies engaged in similar businesses, is a party to lawsuits and claims
and has incurred remedial response and voluntary cleanup costs associated with
environmental matters. Additional lawsuits, claims and costs involving
environmental matters are likely to continue to arise in the future. The Company
continually conducts studies, individually at Company-owned sites, and jointly
as a member of industry groups at non-owned sites, to determine the feasibility
of various remedial techniques to address environmental matters. It is the
Company's policy to record appropriate liabilities for such matters when
environmental assessments are made or remedial efforts are probable and the
costs can be reasonably estimated. The timing of these accruals is generally no
later than the completion of feasibility studies.

Remedial response and voluntary cleanup expenditures were $90 and $87 million in
1997 and 1996, respectively, and are currently estimated to be approximately $85
million in 1998. While annual expenditures may increase over time, the Company
expects it will be able to fund such expenditures from operating cash flow. The
timing of expenditures depends on a number of factors, including regulatory
approval of cleanup projects, remedial techniques to be utilized and agreements
with other parties.

At December 31, 1997, the recorded liability for environmental matters was $414
million. In addition, in 1997 the Company incurred operating costs for ongoing
businesses of approximately $70 million and capital expenditures of $69 million
relating to compliance with environmental regulations.

Although the Company does not currently possess sufficient information to
reasonably estimate the amounts of liabilities to be recorded upon future
completion of studies or settlements, and neither the timing nor the amount of
the ultimate costs associated with environmental matters can be determined, they
may be significant to the Company's consolidated results of operations.
Management does not expect that environmental matters will have a material
adverse effect on the consolidated financial position of the Company.

See Note 21 of Notes to Financial Statements for a discussion of the Company's
commitments and contingencies, including those related to environmental matters.

REGARDING THE YEAR 2000 compliance issue for information systems, the Company
has recognized the need to ensure that its computer operations and operating
systems will not be adversely affected by the upcoming calendar year 2000 and is
cognizant of the time sensitive nature of the problem. The Company has assessed
how it may be impacted by Year 2000 and has formulated and commenced
implementation of a comprehensive plan to address known issues as they relate to
its information systems. The plan, as it relates to information systems,
involves a combination of software modification, upgrades and replacement. The
Company estimates that the cost of Year 2000 compliance for its information
systems will not have a material adverse effect on the future consolidated
results of operations of the Company. The Company is not yet able to estimate
the cost for Year 2000 compliance with respect to production systems, products,
customers and suppliers; however, based on a preliminary review, management does
not expect that such costs will have a material adverse effect on the future
consolidated results of operations of the Company.

REGARDING FINANCIAL INSTRUMENTS, the Company, with operating and financing
activities in numerous countries and sales throughout the world, is exposed to
fluctuations in interest rates and foreign currency exchange rates. The Company
manages exposure to changes in interest rates through its regular borrowing and
investing decisions and, when deemed appropriate, through the use of interest
rate swap agreements. The objective of such risk management activity is to
minimize the cost of the Company's debt financing over an extended period of
time. The Company manages exposure to foreign currency exchange rates for
transactional items by matching and offsetting assets and liabilities and
thereafter through financial hedge contracts with third parties. The Company
does not use financial instruments for trading or other speculative purposes.
See Note 17 of Notes to Financial Statements for further information on
financial instruments.

INFLATION has not been a significant factor for the Company in a number of
years. Cost increases for labor and material have generally been low, and any
impact has been offset by productivity enhancement programs, including Six Sigma
initiatives.

22

 

TOTAL ASSETS at December 31, 1997 were $13,707 million, an increase of $878
million, or 7%, from December 31, 1996. Cash and cash equivalents and short-term
investments at December 31, 1997 were $1,041 million, a decrease of $725 million
compared with December 31, 1996. The decrease mainly results from acquisitions
and common stock repurchases, partially offset by the proceeds received from the
sale of the automotive safety restraints business. Cash flow from operating
activities of $1,306 million increased by $110 million, or 9%, compared with
1996, principally due to the increase in net income. The Company's working
capital turnover was up slightly to 5.1x at December 31, 1997 from 5.0x at
December 31, 1996.

THE MAXIMUM AMOUNT OF BORROWING available under the Company's revolving credit
agreement (Credit Agreement) was $750 million. The Credit Agreement supports the
issuance of commercial paper. There was $821 and $470 million of commercial
paper outstanding at year-end 1997 and 1996, respectively. Commercial paper
borrowing reached a high of $1,546 million during 1997.

TOTAL DEBT at year-end 1997 of $2,307 million increased $376 million. The
increase principally resulted from debt assumed in the Astor, Grimes and
Prestone acquisitions and to fund common stock repurchases during the year.
Long-term debt was reduced by $102 million during 1997. The Company's total debt
as a percent of capital was 31.7% at December 31, 1997, up from 29.5% at
year-end 1996. Long-term debt as a percent of capital was 19.7% at year-end
1997, down from 22.2% at year-end 1996. Subsequent to year-end 1997, the Company
issued $400 million of long-term debt. The proceeds from the issuance were used
to repay certain outstanding commercial paper of the Company. See Note 15 of
Notes to Financial Statements for details of long-term debt and a discussion of
the Credit Agreement.

THE COMPANY REPURCHASED 21.0 MILLION SHARES OF COMMON STOCK for $814 million in
1997. Common stock was repurchased to meet expected requirements for shares
issued under employee benefit plans, acquisitions and a shareowner dividend
reinvestment plan. At year-end 1997, the Company had 158.1 million shares of
common stock held in treasury carried at $2,665 million. As of year-end 1997,
the Company was authorized to repurchase 81.4 million shares of common stock.

At the 1997 Annual Meeting, shareowners approved an amendment to the Company's
certificate of incorporation which increased the number of authorized common
shares from 500 million to one billion. The additional shares are available for
stock splits, acquisitions and other purposes. The Company's common stock was
split 2-for-1 for owners of record as of August 21, 1997.

CAPITAL EXPENDITURES during 1997 were $717 million, a decrease of $38 million
from the $755 million spent in 1996. Spending by the segments and Corporate
since 1995 is shown in Note 25 of Notes to Financial Statements. The Company's
total capital expenditures in 1998 are currently projected at approximately $700
million. These expenditures are expected to be principally financed by
internally generated funds. Approximately 62% of the projected 1998 expenditures
are planned for expansion and cost reduction, 28% for replacement and
maintenance and 10% for environmental projects.

1996 COMPARED WITH 1995

IN APRIL 1996, THE COMPANY SOLD ITS BRAKING BUSINESS WHICH HAD 1995 NET SALES
AND INCOME FROM OPERATIONS OF $2.0 BILLION AND $154 MILLION, RESPECTIVELY. The
sale of the braking business resulted in a gain of $655 million (after-tax $368
million, or $0.65 per share). The Company received consideration of $1.5
billion, subject to certain post-closing adjustments which were finalized in
October 1997. See Note 4 of Notes to Financial Statements for additional
information. Excluded from the sale were brake friction materials, brake-related
sales to the independent aftermarket and the medium- and heavy-duty truck brake
systems business which is part of a joint venture with Knorr-Bremse AG.

IN THE SECOND QUARTER OF 1996, THE COMPANY RECORDED A PRETAX CHARGE OF $622
MILLION (AFTER-TAX $359 MILLION, OR $0.63 PER SHARE) RELATING TO THE COST OF
ACTIONS TO REPOSITION SOME OF ITS BUSINESS UNITS AND TO RECOGNIZE ADDITIONAL
ENVIRONMENTAL REMEDIATION LIABILITIES AS WELL AS OTHER CHARGES. Actions are
being undertaken to consolidate production facilities, rationalize manufacturing
capacity and optimize operational capabilities. The components of the
repositioning charge include asset writedowns of $136 million, severance costs
of $127 million and other exit costs of $14 million. The repositioning actions
are expected to be completed in 1998 and will not materially impact the
Company's liquidity. Upon completion, the repositioning actions are expected to
generate additional annual income from operations of approximately $140 million.
The charge to recognize additional environmental liabilities amounted to $175
million. See Note 3 of Notes to Financial Statements for additional information.

NET SALES in 1996 were $13,971 million, a decrease of $375 million, or 3%,
compared with 1995. Net sales were lower reflecting the sale of the braking
business. Excluding the braking business, net sales increased $1,019 million, or
8%. Of this increase, $794 million was due to volume gains, mainly by the
Aerospace segment, and $366 million from the consolidation of recent
acquisitions, offset in part by an $88 million reduction for disposed
businesses, mainly by the Engineered Materials segment. Selling prices and the
impact of foreign exchange were slightly unfavorable. Aerospace net sales
increased $630 million, or 12%, and Engineered Materials improved by $300
million, or 8%. Automotive net sales increased $85 million, or 2%.

COST OF GOODS SOLD as a percent of net sales was 83.1% in 1996 compared with
81.2% in 1995. Included in 1996 are repositioning and other charges totaling
$637 million, and 1995 reflects a provision of $115 million relating to the
revaluation of the ABS assets to their fair market value (special charges). See
Note 3 of Notes to Financial Statements for further information. Excluding these
special charges, 1996 cost of goods sold as a percent of net sales was 78.5%, a
decrease compared with 80.4% in 1995 mainly due to productivity initiatives to
lower manufacturing and material costs.

GAIN ON SALE OF BUSINESS represents the 1996 pretax gain of $655 million on the
sale of the braking business and the 1995 pretax gain of $71 million on the
transfer of the high-density polyethylene (HDPE) joint venture, Paxon Polymer
Company, L.P., to Exxon Chemical Company. See Note 4 of Notes to Financial
Statements for further information.

                                                                              23

 

INCOME FROM OPERATIONS of $1,509 million in 1996 improved by $249 million, or
20%, compared with 1995. Both 1996 and 1995 include pretax gains on the sales of
businesses as well as special charges (special items). Excluding the impact of
these special items, income from operations improved by $187 million, or 14%.
Aerospace income from operations increased 18% and Engineered Materials improved
15%, but Automotive income from operations decreased 11%. The Company's
operating margin was 10.7% in 1996, significantly higher than the 9.1% in 1995.
Productivity improved by 6.0% over 1995, reflecting in part initiatives in
manufacturing (Operational Excellence), product development (Technical
Excellence) and sales and marketing (Customer Excellence) and the sale of the
high-cost braking business. See the detailed discussion of net income below for
information by industry segment.

EQUITY IN INCOME OF AFFILIATED COMPANIES of $143 million decreased by $48
million, or 25%, compared with 1995 mainly because the Company exited its HDPE
joint venture in December 1995 and because of lower earnings from Knorr-Bremse
AG's truck brake systems joint venture. A partial offset was significantly
higher earnings from UOP.

OTHER INCOME (EXPENSE), $87 million income in 1996, improved by $109 million
compared with 1995 mainly due to increased interest income (included in the
Corporate and Unallocated segment), primarily reflecting the investment of cash
received from the sale of the braking business, higher foreign exchange costs in
1995 and the minority interest share of the 1996 repositioning and other
charges.

INTEREST AND OTHER FINANCIAL CHARGES of $186 million in 1996 increased by $18
million, or 11%, compared with 1995 due to higher levels of short-term debt.

THE EFFECTIVE TAX RATE in 1996 was 34.3% compared with 30.6% in 1995. Adjusted
for special items in both years, the effective tax rate in 1996 was 33.5%
compared with 33.0% in 1995.

NET INCOME in 1996 of $1,020 million, or $1.80 per share, was 17% higher than
net income of $875 million in 1995, or $1.54 per share. Adjusted for special
items in both years, net income for 1996 was $1,011 million, or $1.78 per share,
an increase of 16% over 1995 net income. The higher adjusted net income in 1996
was the result of a substantial improvement in the operating performance by the
Aerospace segment and higher earnings by the Engineered Materials segment. The
Automotive segment had moderately lower earnings.

A DISCUSSION OF THE OPERATIONS OF THE BUSINESS SEGMENTS follows. Adjusted net
income (see tables below) for the segments excludes the impact of the 1996 and
1995 special items. (Dollars in millions)

                                                        Adjusted
Aerospace               Net Sales     Net Income      Net Income
- ----------------------------------------------------------------
1996                       $5,714           $206            $385
1995                        5,084            303             303
- ----------------------------------------------------------------
Increase (Decrease)        $  630           $(97)           $ 82
================================================================

Aerospace sales of $5,714 million in 1996 increased $630 million, or 12%,
compared with 1995. Military aftermarket sales and sales to commercial original
equipment manufacturers (OEMs) were substantially higher. Commercial aftermarket
sales also improved. Military OEM sales were lower. Engines had significantly
higher sales of commercial and military propulsion engines and APUs, including
significantly higher aftermarket parts and repair and overhaul sales. Aerospace
Equipment Systems also showed strong sales growth with gains across most product
lines, including engine fuel systems, environmental control systems and aircraft
landing systems to both the aftermarket and OEMs. Electronic & Avionics Systems
sales improved slightly. Sales of communication and navigation systems increased
significantly reflecting the acquisition of a precision products business in
January 1996 and gains in guidance and control systems, but flight safety
systems sales were moderately lower, reflecting the completion in 1995 of the
program to install mandated traffic alert and collision avoidance systems (TCAS)
on commuter aircraft. Production problems at flight safety systems, resolved in
the latter part of the year, delayed the introduction of new products. Sales of
management and technical services to the U.S. Government were significantly
higher.

The Company's 1996 sales to the DoD, as a prime contractor and subcontractor,
increased 3% compared with 1995 despite reductions in U.S. defense spending.
Sales to the DoD accounted for 22% of Aerospace's total sales, a decrease of two
percentage points compared with 1995. Sales to the commercial and foreign
government markets increased 18%, while sales to NASA and other U.S. Government
agencies declined 1% in 1996.

Aerospace adjusted net income improved to $385 million from $303 million, an
increase of $82 million, or 27%, compared with 1995. Strong sales growth and
productivity resulted in substantially higher earnings for Engines and Aerospace
Equipment Systems. Increased management and technical services to the U.S.
Government also resulted in significant gains, but Electronic & Avionics Systems
had moderately lower income. Flight safety systems had substantially reduced
earnings due to lower sales, manufacturing difficulties and certain
repositioning expenses excluded from the 1996 provision. Higher net income for
communication and navigation systems was a partial offset.

At December 31, 1996 and 1995, the Company had firm orders for its aerospace
products from the U.S. and foreign governments of $1,906 and $1,871 million,
respectively. Total backlog, including commercial contracts, at year-end 1996
and 1995 was $4,514 and $4,523 million, respectively.

                                                     Adjusted
Automotive                  Net Sales  Net Income  Net Income
- -------------------------------------------------------------
1996                          $ 4,240        $521        $202
1995                            5,549         146         217
- -------------------------------------------------------------
Increase (Decrease)           $(1,309)       $375        $(15)
=============================================================

Automotive sales of $4,240 million in 1996 were $1,309 million, or 24%, lower
than in 1995. However, excluding the divested braking business, Automotive sales
increased $85 million, or 2%. Safety Restraint Systems, primarily air bags, and
Turbocharging Systems had significantly higher sales volumes in Europe,
reflecting strong demand. Growth by Turbocharging Systems reflected the
continued preference by

24

 

European customers for turbocharged, diesel-powered cars, although turbocharger
sales were lower in Japan and North America. The Automotive Products Group had
slightly lower sales due to the impact of weak economic conditions on the
European aftermarket business, partially offset by significantly higher sales
for filters & spark plugs due to new product introductions and higher original
equipment sales. Sales of friction materials increased slightly, mainly in North
America, and North American aftermarket sales were also slightly higher. Sales
of Truck Brake Systems in North America were lower primarily because of
decreasing medium- and heavy-duty truck production.

Automotive adjusted net income decreased to $202 million from $217 million in
1995, a $15 million, or 7%, decrease. The decrease reflects the absence of net
income from the divested braking business. Excluding the braking business,
Automotive net income increased substantially. The Automotive Products Group had
substantially higher income due to reductions in distribution costs for the
North American aftermarket business as well as significant sales gains and
manufacturing improvements for filters & spark plugs. Higher sales resulting
from additional production capacity for Turbocharging Systems and Safety
Restraint Systems also resulted in significant net income gains.

                                                            Adjusted
Engineered Materials        Net Sales     Net Income      Net Income
- --------------------------------------------------------------------
1996                           $4,013          $ 361            $432
1995                           $3,713            473             402
- --------------------------------------------------------------------
Increase (Decrease)            $  300          $(112)           $ 30
====================================================================

Engineered Materials sales of $4,013 million in 1996 were $300 million, or 8%,
higher compared with 1995 principally due to acquisitions. Specialty Chemicals
sales increased substantially mainly reflecting the acquisition of Riedel-de
Haen in October 1995. The fluorine products business showed slight improvement
as the transition away from CFCs to substitute products was completed and the
business diversifies to include more fluorine specialty products. The Polymers
business had significantly higher sales of industrial fibers and engineering
plastics products, primarily due to acquisitions in the fourth quarter of 1995.
Carpet fiber plants operated near capacity as stronger demand was driven by
sustained economic growth. Sales also increased for environmental catalysts,
carbon materials and amorphous metals. Sales for Electronic Materials were
moderately lower due to softness in the printed circuit board industry, however,
improved sales of advanced microelectronic materials were a partial offset.

Engineered Materials adjusted net income increased to $432 million from $402
million, a $30 million, or 7%, increase. Substantially higher earnings for
Specialty Chemicals was driven by UOP as the petrochemical and refining
industries continued to be strong worldwide. The acquisition of Riedel-de Haen
also contributed to higher earnings. Fluorine products net income also increased
due to sales growth and significant operational improvements. Net income was
significantly higher for the Polymers business, mainly reflecting improved
market conditions for carpet fiber and earnings from the Bridgestone/Firestone
acquisition in late 1995. Electronic Materials net income improved on higher
sales for advanced microelectronic materials. A partial offset to higher segment
income was the absence of earnings from the HDPE joint venture.

REGARDING ENVIRONMENTAL MATTERS, remedial response and voluntary cleanup
expenditures were $87 and $72 million in 1996 and 1995, respectively. In the
second quarter of 1996 the Company charged $175 million against pretax income
for remedial response and voluntary cleanup costs. At December 31, 1996, the
recorded liability for environmental matters was $530 million. In addition, in
1996 the Company incurred operating costs for ongoing businesses of
approximately $60 million and capital expenditures of $43 million relating to
compliance with environmental regulations.

TOTAL ASSETS at December 31, 1996 were $12,829 million, an increase of $364
million, or 3%, from December 31, 1995. Cash and cash equivalents and short-term
investments at year-end 1996 were $1,766 million, an increase of $1,226 million
compared with December 31, 1995, primarily reflecting the proceeds received from
the sale of the braking business. Cash flows from operating activities of $1,196
million decreased by $20 million, or 2%, compared with 1995. The Company's
working capital turnover was down slightly to 5.0x at December 31, 1996 from
5.2x a year earlier.

THE MAXIMUM AMOUNT OF BORROWING available under the Company's revolving Credit
Agreement was $750 million. The Credit Agreement supports the issuance of
commercial paper. There was $470 and $58 million of commercial paper outstanding
at December 31, 1996 and 1995, respectively. Commercial paper borrowing reached
a high of $1,271 million during 1996.

TOTAL DEBT at year-end 1996 of $1,931 million decreased $79 million. Long-term
debt was reduced by $49 million during 1996. The Company's total debt as a
percent of capital was 29.5% at December 31, 1996, down from 33.7% at year-end
1995. Long-term debt as a percent of capital was 22.2% at year-end 1996, down
from 25.6% at year-end 1995. See Note 15 of Notes to Financial Statements for
details of long-term debt and a discussion of the Credit Agreement.

THE COMPANY REPURCHASED 14.0 MILLION SHARES OF COMMON STOCK for $409 million in
1996. Common stock was repurchased to meet expected requirements for shares
issued under employee benefit plans and a shareowner dividend reinvestment plan.
At year-end 1996, the Company had 150.8 million shares of common stock held in
treasury carried at $1,953 million. In December 1996, the Board of Directors
voted to increase the Company's common share repurchase authority by 100 million
shares.

CAPITAL EXPENDITURES during 1996 were $755 million, an increase of $9 million
from the $746 million spent in 1995. Spending by the segments and Corporate
since 1995 is shown in Note 25 of Notes to Financial Statements.

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

SAFE HARBOR STATEMENT under the Private Securities Litigation Reform Act of
1995: Except for the historical information contained herein, the matters
discussed in this annual report are forward-looking statements which involve
risks and uncertainties, including but not limited to economic, competitive,
governmental and technological factors affecting the Company's operations,
markets, products, services and prices, and other factors discussed in the
Company's filings with the Securities and Exchange Commission.

                                                                              25

 

CONSOLIDATED STATEMENT OF INCOME
AlliedSignal Inc.

YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)         1997        1996        1995
                                                                                               
Net sales                                                                   $14,472     $13,971     $14,346
- -----------------------------------------------------------------------------------------------------------
Cost of goods sold                                                           11,481      11,606      11,654
Selling, general and administrative expenses                                  1,581       1,511       1,503
Gain on sale of business                                                       (226)       (655)        (71)
- -----------------------------------------------------------------------------------------------------------
Total costs and expenses                                                     12,836      12,462      13,086
- -----------------------------------------------------------------------------------------------------------
Income from operations                                                        1,636       1,509       1,260
Equity in income of affiliated companies                                        178         143         191
Other income (expense)                                                           77          87         (22)
Interest and other financial charges                                           (175)       (186)       (168)
- -----------------------------------------------------------------------------------------------------------
Income before taxes on income                                                 1,716       1,553       1,261
Taxes on income                                                                 546         533         386
- -----------------------------------------------------------------------------------------------------------
Net income                                                                  $ 1,170     $ 1,020     $   875
===========================================================================================================
Earnings per share of common stock -- basic                                 $  2.07     $  1.80     $  1.54
Earnings per share of common stock -- assuming dilution                     $  2.02     $  1.76     $  1.52
===========================================================================================================

CONSOLIDATED STATEMENT OF RETAINED EARNINGS

YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)         1997        1996        1995
                                                                                               
Balance at beginning of year                                                $ 3,214     $ 2,315     $ 1,613
Net income                                                                    1,170       1,020         875
Common stock dividends (1997 -- $.52 per share;                                                   
  1996 -- $.45 per share; 1995 -- $.39 per share)                              (295)       (262)       (217)
Other                                                                          --           141          44
- -----------------------------------------------------------------------------------------------------------
Balance at end of year                                                      $ 4,089     $ 3,214     $ 2,315
===========================================================================================================

The Notes to Financial Statements are an integral part of these statements.

26

 

CONSOLIDATED BALANCE SHEET
AlliedSignal Inc.

DECEMBER 31 (DOLLARS IN MILLIONS)                                                          1997        1996

ASSETS
- -----------------------------------------------------------------------------------------------------------
Current assets:
   Cash and cash equivalents                                                           $    611    $  1,465
   Short-term investments                                                                   430         301
   Accounts and notes receivable                                                          1,886       1,661
   Inventories                                                                            2,093       1,946
   Other current assets                                                                     553         466
- -----------------------------------------------------------------------------------------------------------
Total current assets                                                                      5,573       5,839
Investments and long-term receivables                                                       480         473
Property, plant and equipment -- net                                                      4,251       4,219
Cost in excess of net assets of acquired companies -- net                                 2,426       1,418
Other assets                                                                                977         880
- -----------------------------------------------------------------------------------------------------------
Total assets                                                                           $ 13,707    $ 12,829
===========================================================================================================
LIABILITIES
- -----------------------------------------------------------------------------------------------------------
Current liabilities:
   Accounts payable                                                                    $  1,345    $  1,187
   Short-term borrowings                                                                     47          32
   Commercial paper                                                                         821         470
   Current maturities of long-term debt                                                     224         112
   Accrued liabilities                                                                    1,999       1,895
- -----------------------------------------------------------------------------------------------------------
Total current liabilities                                                                 4,436       3,696
Long-term debt                                                                            1,215       1,317
Deferred income taxes                                                                       694         610
Postretirement benefit obligations other than pensions                                    1,775       1,787
Other liabilities                                                                         1,201       1,239
- -----------------------------------------------------------------------------------------------------------
SHAREOWNERS' EQUITY
- -----------------------------------------------------------------------------------------------------------
Capital -- common stock -- Authorized 1,000,000,000 shares (par value $1 per share):
           -- issued 716,457,484 shares                                                     716         716
           -- additional paid-in capital                                                  2,425       2,189
Common stock held in treasury, at cost:
        1997 -- 158,114,964 shares
        1996 -- 150,828,234 shares                                                       (2,665)     (1,953)
Cumulative foreign exchange translation adjustment                                         (181)          2
Unrealized holding gain on marketable securities                                              2          12
Retained earnings                                                                         4,089       3,214
- -----------------------------------------------------------------------------------------------------------
Total shareowners' equity                                                                 4,386       4,180
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareowners' equity                                              $ 13,707    $ 12,829
===========================================================================================================

The Notes to Financial Statements are an integral part of this statement.

                                                                              27

 

CONSOLIDATED STATEMENT OF CASH FLOWS
AlliedSignal Inc.

YEARS ENDED DECEMBER 31 (DOLLARS IN MILLIONS)                    1997            1996        1995

CASH FLOWS FROM OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------------------
Net income                                                    $ 1,170         $ 1,020    $   875
Adjustments to reconcile net income to net cash provided by
operating activities:
   Gain on sale of business                                      (226)           (655)       (71)
   Repositioning and other charges                                250             622        115
   Depreciation and amortization (includes goodwill)              609             602        612
   Undistributed earnings of equity affiliates                    (55)            (33)       (59)
   Deferred income taxes                                          138             213        199
   (Increase) decrease in accounts and notes receivable          (104)           (163)       134
   (Increase) in inventories                                      (92)            (87)      (141)
   (Increase) decrease in other current assets                    (88)            134         35
   Increase in accounts payable                                   226             117         16
   (Decrease) in accrued liabilities                             (188)            (77)      (245)
   Net taxes paid on sale of business                             (21)            (49)      --
   Other                                                         (313)           (448)      (254)
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities                       1,306           1,196      1,216
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------------------------------------------------------------------
Expenditures for property, plant and equipment                   (717)           (755)      (746)
Proceeds from disposals of property, plant and equipment           67              77         46
Decrease in investments and long-term receivables                  25              20         27
(Increase) in other investments                                    (6)            (12)        (4)
Cash paid for acquisitions                                     (1,218)           (114)      (499)
Proceeds from sales of businesses                                 695           1,358         72
(Increase) in short-term investments                             (129)           (301)      --
- ------------------------------------------------------------------------------------------------
Net cash (used for) provided by investing activities           (1,283)            273     (1,104)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------------------------------------------------------------------
Net increase in commercial paper                                  351             412         58
Net increase (decrease) in short-term borrowings                   18            (356)       253
Proceeds from issuance of preferred stock of subsidiary           112            --         --
Proceeds from issuance of common stock                            151             147        104
Proceeds from issuance of long-term debt                           33              48        108
Payments of long-term debt                                       (307)           (124)      (147)
Repurchase of preferred stock of subsidiary                      (112)           --         --
Repurchases of common stock                                      (786)           (409)      (239)
Cash dividends on common stock                                   (295)           (262)      (217)
Other                                                             (42)           --         --
- ------------------------------------------------------------------------------------------------
Net cash (used for) financing activities                         (877)           (544)       (80)
- ------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents             (854)            925         32
Cash and cash equivalents at beginning of year                  1,465             540        508
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                      $   611         $ 1,465    $   540
================================================================================================

The Notes to Financial Statements are an integral part of this statement.

28

 

NOTES TO FINANCIAL STATEMENTS
AlliedSignal Inc. (dollars in millions except per share amounts)

NOTE 1
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

CONSOLIDATED FINANCIAL STATEMENTS include the accounts of AlliedSignal Inc. and
its majority-owned subsidiaries. The preparation of consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Certain reclassifications were made to prior year amounts to conform
with the 1997 presentation.

INVENTORIES are valued at the lower of cost or market using the last-in,
first-out (LIFO) method for certain qualifying domestic inventories and the
first-in, first-out (FIFO) or the average cost method for all other inventories.

INVESTMENTS are carried at market value, if readily determinable, or cost.
Investments in affiliates over which significant influence is exercised are
accounted for using the equity method of accounting.

PROPERTY, PLANT AND EQUIPMENT are carried at cost and are generally depreciated
using estimated service lives, which range from 3 to 40 years. For the financial
statements, depreciation is computed principally on the straight-line method.

COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES is being amortized on a
straight-line basis over appropriate periods ranging from 20 to 40 years. The
cumulative amount of goodwill amortized at December 31, 1997 and 1996 is $476
and $423 million, respectively.

RECOGNITION OF CONTRACT REVENUES primarily relates to Aerospace operations.
Under fixed-price contracts, sales and related costs are recorded as deliveries
are made. Sales and related costs under cost-reimbursable contracts are recorded
as costs are incurred. Anticipated future losses on contracts are charged to
income when identified. Contracts which are part of a program are evaluated on
an overall program basis.

ENVIRONMENTAL expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments are made or remedial efforts are probable and the costs can be
reasonably estimated. The timing of these accruals is generally no later than
the completion of feasibility studies. The liabilities for environmental costs
recorded in Accrued Liabilities and Other Liabilities at December 31, 1997 and
1996 were $110 and $304 million and $120 and $410 million, respectively.

INTEREST RATE SWAP, FOREIGN CURRENCY FORWARD AND OPTION AGREEMENTS are accounted
for as a hedge of the related asset, liability, firm commitment or anticipated
transaction when designated and effective as a hedge of such items. Agreements
qualifying for hedge accounting are accounted for as follows:

  Changes in the amount to be received or paid under interest rate swap
  agreements are recognized in Interest and Other Financial Charges.

  Gains and losses on foreign currency forward agreements and combination
  options (options purchased and written as a unit) used to hedge assets and
  liabilities, or net investments in foreign subsidiaries, are recognized in
  Other Income (Expense) and Cumulative Foreign Exchange Translation Adjustment,
  respectively.

  Gains and losses on foreign currency forward agreements used to hedge firm
  foreign currency commitments, and purchased foreign currency options used to
  hedge anticipated foreign currency transactions, are recognized in the
  measurement of the hedged transaction when the transaction occurs.

Changes in the fair value of agreements not qualifying for hedge accounting are
recognized in Other Income (Expense).

The carrying value of each agreement is reported in Accounts and Notes
Receivable, Other Current Assets, Accounts Payable or Accrued Liabilities, as
appropriate.

INCOME TAXES are based on the asset and liability approach. Deferred tax
liabilities or assets reflect the impact of temporary differences between
amounts of assets and liabilities for financial and tax reporting. Such amounts
are subsequently adjusted, as appropriate, to reflect changes in tax rates
expected to be in effect when the temporary differences reverse. A valuation
allowance is established for any deferred tax asset for which realization is not
likely.

EARNINGS PER SHARE are calculated in accordance with the provisions of Statement
of Financial Accounting Standards No. 128 -- "Earnings per Share" (SFAS No.
128), effective for 1997. SFAS No. 128 requires the Company to report both basic
earnings per share which is based on the weighted-average number of common
shares outstanding and diluted earnings per share which is based on the
weighted-average number of common shares outstanding and all dilutive potential
common shares outstanding. All prior years earnings per share data in this
report have been recalculated to reflect the provisions of SFAS No. 128. All
earnings per share data in this report reflect basic earnings per share, unless
otherwise indicated. The details of the earnings per share calculations for the
years 1997, 1996 and 1995 follow:

                                                                              29

 

                                                                          Per Share
                                             Income          Shares          Amount
- -----------------------------------------------------------------------------------
                                                                       
1997
Earnings per share of
 common stock -- basic                       $1,170     564,807,801           $2.07
Dilutive securities:
  Stock options                                          14,372,032
  Restricted stock units                                    688,917
- -----------------------------------------------------------------------------------
Earnings per share of common
stock -- assuming dilution                   $1,170     579,868,750           $2.02
===================================================================================
1996
Earnings per share of
 common stock -- basic                       $1,020     565,660,128           $1.80
Dilutive securities:
  Stock options                                          13,529,590
  Restricted stock units                                  1,273,198
- -----------------------------------------------------------------------------------
Earnings per share of common
  stock -- assuming dilution                 $1,020     580,462,916           $1.76
===================================================================================
1995
Earnings per share of
 common stock -- basic                       $  875     566,875,546           $1.54
Dilutive securities:
  Stock options                                           9,022,214
  Restricted stock units                                  1,171,998
- -----------------------------------------------------------------------------------
Earnings per share of common
 stock -- assuming dilution                  $  875     577,069,758           $1.52
===================================================================================

For each of the years 1997, 1996 and 1995, there were outstanding stock options
not included in the computation of diluted earnings per share of common stock
because the options exercise price was greater than the average market price of
the common shares. In 1997, 1996 and 1995, the number of stock options not
included in the computation were 1,201,900, 35,000 and 1,241,350, respectively.
These options were outstanding at the end of each of the respective years.

A TWO-FOR-ONE STOCK SPLIT was announced by the Company on July 23, 1997. The
stock split was effected on September 15, 1997 for shareowners of record on
August 21, 1997. All share and per share data in this report reflects the stock
split for all periods presented.

NOTE 2

ACQUISITIONS

In 1997, the Company acquired Prestone Products Corporation (Prestone) for
approximately $400 million, including assumed liabilities. Prestone is a
supplier of premium car care products and has annual sales of approximately $300
million. The Company also acquired Grimes Aerospace Company (Grimes), a
manufacturer of exterior and interior aircraft lighting systems, for
approximately $475 million, including assumed liabilities. Grimes, which has
annual sales of approximately $230 million, also manufactures aircraft engine
components such as valves and heat exchangers, as well as electronic systems,
including flight warning computers and active matrix liquid crystal displays. In
addition, the Company acquired Astor Holdings, Inc. (Astor) for approximately
$370 million, including assumed liabilities. Astor, a producer of value-added,
wax-based processing aids, sealants and adhesives, has annual sales of
approximately $300 million. The Company also acquired Holt Lloyd Group Ltd. for
approximately $150 million. Holt Lloyd is a supplier of car care products
primarily in Europe and Asia and has annual sales of approximately $150 million.

In 1995, the Company acquired a 95.8% interest in Riedel-de Haen AG from Hoechst
AG for approximately $245 million. Riedel-de Haen AG is a specialty chemicals
manufacturer located in Germany. The business had 1994 sales of approximately
$250 million. In addition, the Company acquired The Budd Company's Wheel & Brake
Division (Budd Wheel & Brake) for approximately $160 million. Budd Wheel & Brake
was sold in 1996 as part of the sale of the Company's worldwide hydraulic and
anti-lock braking systems (ABS) business (braking business).

The Company also made other smaller acquisitions in 1997, 1996 and 1995.

NOTE 3

REPOSITIONING AND OTHER CHARGES

In the fourth quarter of 1997, the Company recorded a pretax charge of $124
million relating to the costs to eliminate its three sector offices, consolidate
its Automotive Products Group and reposition some of its businesses. These
actions are intended to enhance the Company's competitiveness and productivity.
The components of this charge include severance costs of $59 million, asset
writedowns of $34 million and other exit costs of $31 million. All of the
actions are expected to be completed in 1998. The Company also recorded other
charges in the fourth quarter of 1997, including $40 million relating to the
write-off of capitalized business process reengineering costs associated with
information technology projects as required by Emerging Issues Task Force Issue
No. 97-13 and other items consisting of asset impairments, customer claims and
legal settlements.

Repositioning and other charges totaling $237 million are included as part of
Cost of Goods Sold for 1997. Equity in Income of Affiliated Companies includes a
charge of $13 million relating to the writedown of an equity investment. The
total pretax impact of the repositioning and other charges for 1997 is $250
million (after-tax $159 million, or $0.28 per share).

In the second quarter of 1996, the Company recorded a pretax charge of $277
million relating to the costs of actions to reposition some of its businesses.
The repositioning actions are intended to enhance the Company's competitiveness
and productivity and include consolidating production facilities, rationalizing
manufacturing capacity and optimizing operational capabilities. The components
of the repositioning charge include asset writedowns of $136 million, severance
costs of $127 million and other exit costs of $14 million. The repositioning
actions are expected to be completed in 1998.

In the second quarter of 1996, the Company adopted the provisions of the
American Institute of Certified Public Accountants' Statement of Position 96-1,
"Environmental Remediation Liabilities" (SOP 96-1). SOP 96-1 provides additional
guidance regarding the manner in which existing authoritative accounting
literature is to be applied to the specific circumstances of recognizing,
measuring and disclosing environmental remediation liabilities. The adoption of
SOP 96-1 resulted in a pretax charge of $175 million, and is accounted for as a
change in estimate. The Company also recorded other charges primarily related to
changes made in employee benefit programs and in connection with customer and
former employee claims.

30

 

Repositioning and other charges totaling $637 million are included as part of
Cost of Goods Sold for 1996. Other Income (Expense) for 1996 includes a $15
million credit for repositioning and other charges representing the minority
interest share of such charges. The total pretax impact of the repositioning and
other charges for 1996 is $622 million (after-tax $359 million, or $0.63 per
share).

Cost of Goods Sold in 1995 includes a provision of $115 million (after-tax $71
million, or $0.13 per share) relating to management's decision to exit the ABS
business. The provision consists of the revaluation of the Company's ABS assets
to their fair market value and certain other closure costs.

Note 4

GAIN ON SALE OF BUSINESS

In October 1997, the Company sold its automotive safety restraints business to
Breed Technologies for $710 million in cash, subject to post-closing
adjustments. The safety restraints business had 1996 net sales and income from
operations of $940 and $70 million, respectively. The sale of the safety
restraints business resulted in a pretax gain of $277 million (after-tax $196
million, including the benefit of capital losses, or $0.35 per share). In
addition, in 1997 the Company recorded a charge of $51 million (after-tax $33
million, or $0.06 per share) related to the settlement of the 1996 sale of the
braking business.

In April 1996, the Company sold its braking business to Robert Bosch GmbH, a
privately-held German company. The braking business had 1995 net sales and
income from operations of $2.0 billion and $154 million, respectively. The sale
of the braking business resulted in a pretax gain of $655 million (after-tax
$368 million, or $0.65 per share). The Company received consideration of $1.5
billion, subject to certain post-closing adjustments which were finalized in
October 1997.

In December 1995, the Company transferred the assets of its high-density
polyethylene (HDPE) business joint venture, Paxon Polymer Company, L.P., to
Exxon Chemical Company (Exxon). The transfer of the HDPE business to Exxon
resulted in a pretax gain of $71 million (after-tax $71 million, or $0.13 per
share).

NOTE 5

OTHER INCOME (EXPENSE)

Years ended December 31                 1997         1996         1995
- ----------------------------------------------------------------------
Interest income and other               $ 95         $ 94         $ 35
Minority interests                       (45)         (18)         (36)
Foreign exchange gain (loss)              27           11          (21)
- ----------------------------------------------------------------------
                                        $ 77         $ 87         $(22)
======================================================================

NOTE 6

INTEREST AND OTHER FINANCIAL CHARGES

Years ended December 31                 1997         1996         1995
- -----------------------------------------------------------------------
Total interest and other
 financial charges                      $196        $ 209        $ 189
Less -- Capitalized interest             (21)         (23)         (21)
- -----------------------------------------------------------------------
                                        $175        $ 186        $ 168
=======================================================================

NOTE 7

TAXES ON INCOME

Income before taxes on income

Years ended December 31                 1997         1996         1995
- -----------------------------------------------------------------------
United States                        $ 1,526      $ 1,099      $ 1,101
Foreign                                  190          454          160
- -----------------------------------------------------------------------
                                     $ 1,716      $ 1,553      $ 1,261
=======================================================================
Taxes on income
Years ended December 31                 1997         1996         1995
- -----------------------------------------------------------------------
United States                        $   466      $   359      $   347
Foreign                                   80          174           39
- -----------------------------------------------------------------------
                                     $   546      $   533      $   386
=======================================================================
Years ended December 31                 1997         1996         1995
- -----------------------------------------------------------------------
Taxes on income consist of:
Current:
  United States                       $  292      $   190      $   118
  State                                   54           41           25
  Foreign                                 62           89           44
- -----------------------------------------------------------------------
                                         408          320          187
- -----------------------------------------------------------------------
Deferred:
  United States                           98          133          192
  State                                   22           (5)          12
  Foreign                                 18           85           (5)
- -----------------------------------------------------------------------
                                         138          213          199
- -----------------------------------------------------------------------
                                      $  546      $   533      $   386
=======================================================================

Years ended December 31                 1997         1996         1995
- -----------------------------------------------------------------------
The principal items accounting
 for the difference in taxes on
 income computed at the U.S. 
 statutory rate and as recorded
 on an overall basis are
 as follows:
Statutory U.S. federal income tax
 rate                                   35.0%        35.0%        35.0%
Taxes on foreign earnings over
 (under) U.S. tax rate                    .2           .4         (1.7)
Asset basis differences                 (2.4)         (.1)        (2.0)
Nondeductible amortization               1.4          2.1          1.1
State income taxes                       2.6          1.3          1.6
Tax benefits of Foreign Sales
  Corporation                           (3.0)        (1.9)        (1.5)
Dividends received deduction             (.3)         (.2)         (.1)
ESOP dividend tax benefit                (.7)         (.7)         (.8)
All other items-- net                   (1.0)        (1.6)        (1.0)
- -------------------------------------------------------------------------
                                        31.8%        34.3%        30.6%
=========================================================================

Deferred income taxes

December 31                                          1997         1996
- -----------------------------------------------------------------------
Included in the following balance
  sheet accounts:
Other current assets                               $  394       $  309
Other assets                                          117          178
Accrued liabilities                                   --           (18)
Deferred income taxes                                (694)        (610)
- -----------------------------------------------------------------------
                                                   $ (183)      $ (141)
=======================================================================

                                                                              31

 

Deferred tax assets (liabilities)

December 31                                         1997         1996
- -----------------------------------------------------------------------
The temporary differences and carryforwards
 which give rise to deferred tax assets and
 liabilities are as follows:
Property, plant and equipment basis
 differences                                       $(690)       $(644)
Postretirement benefits other than pensions          728          732
Postemployment benefits                               67           65
Investment and other asset basis differences        (567)        (502)
Nonrecurring items                                   235          151
Other accrued items                                  326          420
Net operating losses                                 218          188
Deferred foreign gain                                (48)         (50)
Undistributed earnings of subsidiaries               (45)         (66)
All other items -- net                              (381)        (398)
- -----------------------------------------------------------------------
                                                    (157)        (104)
Valuation allowance                                  (26)         (37)
- -----------------------------------------------------------------------
                                                   $(183)       $(141)
=======================================================================

The amount of federal tax net operating loss carryforwards generated by certain
subsidiaries prior to their acquisition in 1997 is $195 million with expiration
dates through the year 2011. The use of pre-acquisition operating losses is
subject to limitations imposed by the Internal Revenue Code. The Company does
not anticipate that these limitations will affect utilization of the
carryforwards prior to their expiration. The Company also has foreign net
operating losses of $375 million which are available to reduce future income tax
payments in several countries, subject to varying expiration rules.

Deferred income taxes have not been provided on approximately $355 million of
undistributed earnings of foreign affiliated companies, which are considered to
be permanently reinvested. Any U.S. taxes payable on foreign earnings which may
be remitted, however, will be substantially offset by foreign tax credits.

NOTE 8

SHORT-TERM INVESTMENTS

Short-term Investments consist of marketable debt and equity securities
classified as available-for-sale and carried at their quoted market value. The
fair values of marketable debt and equity securities at December 31, 1997 and
1996 were $152 million ($152 million, at cost) and $214 million ($206 million,
at cost) and $155 million ($155 million, at cost) and $128 million ($130
million, at cost), respectively. The Company also had other short-term
investments held for sale of $64 and $18 million at December 31, 1997 and 1996,
respectively, carried at cost, which approximates market value.

NOTE 9

ACCOUNTS AND NOTES RECEIVABLE

December 31                                         1997           1996
- -----------------------------------------------------------------------
Trade                                            $ 1,466        $ 1,330
Other                                                457            362
- -----------------------------------------------------------------------
                                                   1,923          1,692
Less -- Allowance for doubtful accounts
  and refunds                                        (37)           (31)
- -----------------------------------------------------------------------
                                                 $ 1,886        $ 1,661
=======================================================================

The Company is a party to agreements under which it can sell undivided interests
in designated pools of trade accounts receivable. During 1997 and 1996, the
average outstanding was $505 and $517 million, respectively. New receivables are
sold under the agreements as previously sold receivables are collected. During
1997, this represented an average collection period of 47 days or a replacement
of receivables of approximately eight times. At both December 31, 1997 and 1996,
customer accounts receivable on the Consolidated Balance Sheet have been reduced
by $500 million reflecting such sales. The Company acts as an agent for the
purchasers in the collection and administration of the receivables.

NOTE 10

INVENTORIES

December 31                                       1997             1996
- -----------------------------------------------------------------------
Raw materials                                  $   639          $   538
Work in process                                    722              762
Finished products                                  871              814
Supplies and containers                             89               88
- -----------------------------------------------------------------------
                                                 2,321            2,202
Less --
Progress payments                                  (88)            (126)
Reduction to LIFO cost basis                      (140)            (130)
- -----------------------------------------------------------------------
                                               $ 2,093          $ 1,946
=======================================================================

Inventories valued at LIFO amounted to $191 million at December 31, 1997 and
$223 million at December 31, 1996, which amounts were below estimated
replacement cost by $140 and $130 million, respectively.

NOTE 11

OTHER CURRENT ASSETS

December 31                                     1997              1996
- -----------------------------------------------------------------------
Current deferred taxes                         $394               $309 
Other                                           159                157
- -----------------------------------------------------------------------
                                               $553               $466
=======================================================================

NOTE 12

INVESTMENTS AND LONG-TERM RECEIVABLES

December 31                                    1997               1996
- -----------------------------------------------------------------------
Affiliates (1)                                $403                $379
Long-term receivables                           77                  94
- -----------------------------------------------------------------------
                                              $480                $473
=======================================================================

(1)  Includes unrealized holding gains of $3 and $23 million at December 31,
     1997 and 1996, respectively, on equity securities classified as
     available-for-sale. The cost basis of the equity securities was $7 and $21
     million at December 31, 1997 and 1996, respectively. Also includes the
     Company's 50% partnership interest in UOP, a joint venture accounted for
     under the equity method. UOP is in the process technology and catalyst
     business.

 32

 

NOTE 13

PROPERTY, PLANT AND EQUIPMENT

December 31                                      1997          1996
- -----------------------------------------------------------------------
Land and land improvements                    $   330       $   331
Machinery and equipment                         6,038         5,760
Buildings                                       1,417         1,415
Office furniture and equipment                    868           868
Transportation equipment                          126           153
Construction in progress                          410           449
- -----------------------------------------------------------------------
                                                9,189         8,976
Less -- Accumulated depreciation
  and amortization                             (4,938)       (4,757)
- -----------------------------------------------------------------------
                                              $ 4,251       $ 4,219
=======================================================================

NOTE 14

ACCRUED LIABILITIES

December 31                                      1997          1996
- -----------------------------------------------------------------------
Wages                                         $   246       $   315
Customer advance payments/deposits                126           127
Insurance                                         110           102
Postretirement benefits other than pensions       157           135
Other                                           1,360         1,216
- -----------------------------------------------------------------------
                                              $ 1,999       $ 1,895
=======================================================================

NOTE 15

LONG-TERM DEBT AND CREDIT AGREEMENT

December 31                                      1997          1996
- -----------------------------------------------------------------------
Employee stock ownership
  plan floating rate notes,
  4.29%-4.71%, due 1998-1999                  $    85       $   164
6.75% notes due August 15, 2000                   100           100
9 7/8% debentures due June 1, 2002                250           250
9.20% debentures due February 15, 2003            100           100
Medium term notes,
  8.93%-9.28%, due 1999-2001                       69           116
Zero coupon bonds and
  money multiplier notes,
  13.0%-14.26%, due 1998-2009                     157           229
9 1/2% debentures due June 1, 2016                100           100
Industrial development bond
  obligations, 3.15%-6.75%, maturing
  at various dates through 2027                   105           103
Other (including capitalized leases),
  1.54%-12.42%, maturing at various
  dates through 2016                              249           155
- -----------------------------------------------------------------------
                                              $ 1,215       $ 1,317
=======================================================================

The schedule of principal payments on long-term debt is as follows:

                         Long-term
December 31, 1997             Debt
- ------------------------------------
1998                          $224
1999                           195
2000                           177
2001                            43
2002                           275
Thereafter                     525
- ------------------------------------
                             1,439
Less -- Current portion       (224)
- ------------------------------------
                            $1,215
====================================

The Company has a Five-Year Credit Agreement (Credit Agreement) with a group of
19 banks with commitments aggregating $750 million. The funds available under
the Credit Agreement may be used for any corporate purpose. Loans under the
Credit Agreement are required to be repaid no later than June 30, 2002.
Annually, the Company may request that the maturity of the Credit Agreement be
extended by another year. The Company intends to request an extension of this
agreement in 1998. The Company has agreed to pay a facility fee of 0.065% per
annum on the aggregate commitment for the Credit Agreement, subject to increase
or decrease in the event of changes in the Company's long-term debt ratings. The
Credit Agreement does not restrict the Company's ability to pay dividends,
however, it does require the Company to maintain a minimum net worth of $3.1
billion. The Credit Agreement also contains other customary conditions and
events of default, the failure to comply with, or occurrence of, would prevent
any further borrowings and would generally require the repayment of any
outstanding borrowings under the Credit Agreement. Such events of default
include (a) non-payment of Credit Agreement debt and interest thereon, (b)
non-compliance with the terms of the Credit Agreement covenants, (c)
cross-default with other debt in certain circumstances, (d) bankruptcy and (e)
defaults upon obligations under the Employee Retirement Income Security Act.
Additionally, each of the banks has the right to terminate its commitment to
lend under the Credit Agreement if any person or group acquires beneficial
ownership of 30% or more of the Company's voting stock or, during any 12-month
period, individuals who were directors of the Company at the beginning of the
period cease to constitute a majority of the Board of Directors (the Board).

Interest on borrowings under the Credit Agreement would be determined, at the
Company's option, by (a) an auction bidding procedure; (b) the highest of the
floating base rate of the agent bank, 0.5% above the average CD rate, or 0.5%
above the Federal funds rate or (c) the average Eurocurrency rate of three
reference banks plus 0.135% (applicable margin). The applicable margin over the
Eurocurrency rate on the Credit Agreement is subject to increase or decrease if
the Company's long-term debt ratings change. The Company had no balance
outstanding under the Credit Agreement at December 31, 1997. The Credit
Agreement presently serves as support for the issuance of commercial paper.

                                                                              33

 

NOTE 16

LEASE COMMITMENTS

Future minimum lease payments under operating leases having initial or remaining
noncancelable lease terms in excess of one year are as follows:

                         Lease
December 31, 1997      Payments
- -------------------------------
1998                      $73
1999                       72
2000                       61
2001                       47
2002                       41
Thereafter                140
- -------------------------------
                         $434
===============================

Rent expense of $109, $98 and $121 million was included in costs and expenses
for 1997, 1996 and 1995, respectively.

NOTE 17

FINANCIAL INSTRUMENTS

The Company, as a result of its global operating and financing activities, is
exposed to changes in interest rates and foreign currency exchange rates which
may adversely affect its results of operations and financial condition. In
seeking to minimize the risks and/or costs associated with such activities, the
Company manages exposure to changes in interest rates and foreign currency
exchange rates through its regular operating and financing activities and, when
deemed appropriate, through the use of derivative financial instruments. The
instruments utilized include forward, option and swap agreements. The Company
does not use financial instruments for trading or other speculative purposes.
The Company had no leveraged financial instruments at December 31, 1997 and
1996.

At December 31, 1997 and 1996, interest rate swap agreements effectively
changed $300 million of fixed-rate debt at an average rate of 9.53% in both
years to U.S. commercial paper based floating rate debt with an effective
average rate of 8.04% and 7.94%, respectively. Based on their terms, these
agreements will be terminated by the counterparty if short-term interest rates
drop below a predetermined level. Other interest rate swaps at December 31, 1997
and 1996 effectively changed $58 and $66 million, respectively, of London
Interbank Offer Rate (LIBOR) based floating rate debt at an average rate of
4.80% and 4.76%, respectively, to fixed rate debt with an effective average rate
of 6.81% and 7.00%, respectively. The Company's interest rate swaps mature
through the year 2000.

The Company's exposure to changes in foreign currency exchange rates arises
from intercompany loans utilized to finance foreign subsidiaries, receivables,
payables and firm commitments arising from international transactions. The
Company attempts to have all such transaction exposures hedged with internal
natural offsets to the fullest extent possible and, once these opportunities
have been exhausted, through derivative financial instruments with third parties
using forward or option agreements. The Company currently also uses derivative
financial instruments to hedge the Company's exposure to changes in foreign
currency exchange rates for the translated U.S. dollar value of the net income
of a number of foreign subsidiaries. Forward and option agreements used to hedge
net income are marked to market and recognized immediately in income. The
Company's principal foreign currency exposures relate to the French franc, the
German deutsche mark, the British pound and the U.S. dollar. At December 31,
1997, the Company held or had written foreign currency forward and option
agreements, maturing through 1999. The Company only writes foreign currency
options in combination with purchased options as an integral transaction and
economic alternative to using forward agreements.

Financial instruments expose the Company to counterparty credit risk for
nonperformance and to market risk for changes in interest and currency rates.
The Company manages exposure to counterparty credit risk through specific
minimum credit standards, diversification of counterparties and procedures to
monitor the amount of credit exposure. The Company's financial instrument
counterparties are substantial investment or commercial banks with significant
experience with such instruments. The Company also has procedures to monitor
the impact of market risk on the fair value and costs of its financial
instruments considering reasonably possible changes in interest and currency
rates. The Company manages market risk by restricting the use of derivative
financial instruments to hedging activities and by limiting potential interest
and currency rate exposures to amounts that are not material to the Company's
consolidated results of operations and cash flows. Because of the above
practices and procedures, management believes that the Company's credit and
market risk exposures from financial instruments are not significant at
December 31, 1997.

The values of the Company's outstanding derivative financial instruments at
December 31, 1997 and 1996 are as follows:

                                           Notional
                                          Principal        Fair    Carrying
December 31, 1997                            Amount   Value (1)       Value
- ---------------------------------------------------------------------------
Interest rate swap
  agreements held                              $358      $    3       $  --
Foreign currency forward
  agreements held                               708           1           1
Foreign currency forward
  agreements written                            649          23          22
Foreign currency options held                   150           4           4
Foreign currency options
  written                                        --          --          --
============================================================================
December 31, 1996
- ----------------------------------------------------------------------------
Interest rate swap
  agreements held                              $366       $  (1)      $  --
Foreign currency forward
  agreements held                               425          (1)         (1)
Foreign currency forward
  agreements written                            420           2           4
Foreign currency options held                   120           1           1
Foreign currency options
  written                                        76          (1)         (1)
============================================================================

(1) Fair values for forward, option and interest rate swap contracts are based
    on market quotes.

The only other material financial instruments that are not carried on the
Consolidated Balance Sheet at amounts which approximate fair values are certain
debt instruments. The carrying values of long-term debt and related current
maturities

34

 

(excluding capitalized leases of $43 and $41 million at December 31, 1997 and
1996, respectively) are $1,396 and $1,388 million and the fair values are
$1,584 and $1,560 million at December 31, 1997 and 1996, respectively. The
fair values are estimated based on the quoted market price for the issues
(if traded) or based on current rates offered to the Company for debt of the
same remaining maturity and characteristics.

NOTE 18

CAPITAL STOCK

The Company is authorized to issue up to 20,000,000 shares of preferred stock
without par value and may establish series of preferred stock having such number
of shares and such terms as it may determine.

The Company is authorized to issue up to 1,000,000,000 shares of common stock,
with a par value of one dollar. Common shareowners are entitled to receive such
dividends as may be declared by the Board, are entitled to one vote per share,
and are entitled, in the event of liquidation, to share ratably in all the
assets of the Company which are available for distribution to the common
shareowners. Common shareowners do not have preemptive or conversion rights.
Shares of common stock issued and outstanding or held in the treasury are not
liable to further calls or assessments. There is no restriction on dividends or
the repurchase or redemption of common stock by the Company. As of December 31,
1997, the Company has remaining authority to repurchase from time to time up to
81.4 million shares of common stock.

                                                 Common
                                        Shares    Stock/
                                   Outstanding   Paid-in    Treasury
                                  (in millions)  Capital       Stock
- -----------------------------------------------------------------------
Balance December 31, 1994                566.2    $2,816    $ (1,505)
Purchased under repurchase programs      (11.0)      --         (239)
Used for Dividend Reinvestment Plan         .4       --            3
Used for employee benefit plans
  (including related tax 
  benefits)                               10.0        31          83
- -----------------------------------------------------------------------
Balance December 31, 1995                565.6     2,847      (1,658)
Purchased under repurchase programs      (14.0)       --        (409)
Used for Dividend Reinvestment Plan         .2        --           2
Used for employee benefit plans 
  (including related tax benefits)        13.4        58         109
Used for acquisitions                       .4        --           3
- -----------------------------------------------------------------------
Balance December 31, 1996                565.6     2,905      (1,953)
Purchased under repurchase programs      (21.0)       --        (814)
Used for Dividend Reinvestment Plan         .3         8           2
Used for employee benefit plans
  (including related tax
  benefits)                               12.4       232          92
Used for acquisitions                      1.0        32           8
Other                                      --        (36)         --
- ------------------------------------------------------------------------
Balance December 31, 1997                558.3    $3,141     $(2,665)
========================================================================

NOTE 19

STOCK OPTIONS AND AWARDS

The Company has a 1993 Stock Plan and a 1985 Stock Plan available to grant
incentive and non-qualified stock options, stock appreciation rights (SARs),
restricted shares and restricted units (Units) to officers and other employees.
The 1993 Stock Plan provides for the annual grant of awards in an amount not in
excess of 1.5% of the total shares issued (including shares held in treasury) as
of December 31 of the year preceding the year of the award. Any shares that are
available for awards that are not utilized in a given year will be available for
use in subsequent years. There were 10,468,811 and 8,204,312 shares available
for future grants under the terms of the Company's stock option plans at
December 31, 1997 and 1996, respectively. Incentive stock options have a term
determined by the Management Development and Compensation Committee of the Board
(Committee), but not in excess of ten years from the date of grant.
Non-qualified stock options have been granted with terms of up to ten years and
one day. An option becomes exercisable at such times and in such installments as
set by the Committee. Options generally become exercisable over a three-year
period. SARs entitle an optionee to surrender unexercised stock options for cash
or stock equal to the excess of the fair market value of the surrendered shares
over the option value of such shares. Units have been granted to certain
employees, which entitle the holder to receive shares of common stock. At
December 31, 1997, there were 1,529,346 Units outstanding, including 215,920
Units granted in 1997, the restrictions on which generally lapse over periods
not exceeding ten years from date of grant. Compensation expense is recognized
over the restricted period.

The following table summarizes information about stock option activity for the
three years ended December 31, 1997:

                                               Number           Average
                                           of Options    Exercise Price
- ------------------------------------------------------------------------
Outstanding at December 31, 1994           48,743,438           $ 14.38
Granted                                    12,799,180             18.27
Exercised                                  (8,398,830)            11.44
Lapsed or canceled                           (717,134)            17.38
- -----------------------------------------------------------------------
Outstanding at December 31, 1995           52,426,654             15.76
Granted                                     9,436,540             25.60
Exercised                                 (10,003,554)            14.08
Lapsed or canceled                           (738,014)            21.01
- ------------------------------------------------------------------------
Outstanding at December 31, 1996           51,121,626             17.83
Granted                                     8,408,454             36.92
Exercised                                  (9,299,671)            15.19
Lapsed or canceled                           (548,254)            23.67
- ------------------------------------------------------------------------
Outstanding at December 31, 1997           49,682,155             21.49
========================================================================

The following table summarizes information about stock options outstanding at
December 31, 1997:

                              Options Outstanding                    Options Exercisable 
                   ---------------------------------------   ------------------------------
Range of                                          Average                         Average
Exercise               Number       Average      Exercise          Number        Exercise
Prices            Outstanding      Life (1)         Price     Exercisable           Price
- -------------------------------------------------------------------------------------------
                                                                      
$ 7.18-$14.58       7,447,018           3.4        $11.05       7,447,018          $11.05
$16.00-$17.75       8,722,715           5.7         17.20       8,650,615           17.20
$17.79-$19.54      15,860,288           6.7         18.43      10,622,054           18.74
$21.25-$44.33      17,652,134           8.6         30.76       3,130,670           25.44
                   -----------                                 ----------
                   49,682,155           5.2         21.49      29,850,357           17.08
==========================================================================================

(1) Average remaining contractual life in years.

There were 28,365,464 and 28,105,478 options exercisable at average exercise
prices of $15.14 and $13.75 at December 31, 1996 and 1995, respectively.

                                                                              35

 

The Company accounts for stock compensation costs in accordance with the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Accordingly, no compensation
cost has been recognized for its fixed stock option plans. The following table
sets forth pro forma information as if compensation cost had been determined
based on the fair value at the grant date for awards under the Company's stock
plans consistent with the requirements of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation".

                                              1997           1996           1995
- --------------------------------------------------------------------------------
                                                                    
Weighted-average fair value per share
 of options granted during the  year (1)      $9.15          $6.22         $5.53
Reduction of:
Net income                                    $  33          $  24         $  15 
Earnings per share of common stock -- basic   $ .06          $ .04         $ .03
Earnings per share of common
  stock -- assuming dilution                  $ .06          $ .04         $ .03
Assumptions: 
  Historical dividend yield                     1.8%           1.8%          1.8%
  Historical volatility                        19.1%          21.1%         23.0%
  Risk-free rate of return                      6.4%           5.5%          7.2%
  Expected life (years)                         5.0            5.0           5.5
=================================================================================

 (1) Estimated on date of grant using Black-Scholes option-pricing model.

The Company also has a Stock Plan for Non-Employee Directors (Directors' Plan)
under which restricted shares and options are granted. New directors receive
grants of 3,000 shares of common stock, subject to certain restrictions. In
addition, each director will be granted an option to purchase 2,000 shares of
common stock each year on the date of the annual meeting of shareowners. The
Company has set aside 450,000 shares for issuance under the Directors' Plan.
Options generally become exercisable over a three-year period and have a term of
ten years from the date of grant.

All options were granted at not less than fair market value at dates of grant.

Treasury shares of common stock have been used upon exercise of stock options.
Differences between the cost of treasury stock used and the total option price
of shares exercised have been reflected in Additional Paid-in Capital during
1997 and Retained Earnings in prior years.

NOTE 20

CUMULATIVE FOREIGN EXCHANGE
TRANSLATION ADJUSTMENT 

December 31                  1997   1996     1995
- -------------------------------------------------
Balance at beginning of year   $2    $61      $18
Translation adjustment and
  impact of hedges           (183)   (59)      43
- --------------------------------------------------
                            $(181)    $2      $61
==================================================

NOTE 21

COMMITMENTS AND CONTINGENCIES

The Company is subject to a number of lawsuits, investigations and claims (some
of which involve substantial amounts) arising out of the conduct of its
business, including those relating to commercial transactions, government
contracts, product liability and environmental, health and safety matters.

In accordance with the Company's accounting policy described in Note 1 of Notes
to Financial Statements, liabilities are recorded for environmental matters
generally no later than the completion of feasibility studies. Although the
Company does not currently possess sufficient information to reasonably estimate
the amounts of the liabilities to be recorded upon future completion of studies,
they may be significant to the consolidated results of operations, but
management does not expect that they will have a material adverse effect on the
consolidated financial position of the Company. With respect to all other
matters, while the ultimate results of these lawsuits, investigations and claims
cannot be determined, management does not expect that these matters will have a
material adverse effect on the consolidated results of operations or financial
position of the Company.

The Company has issued or is a party to various direct and indirect guarantees,
bank letters of credit and customer guarantees. Management does not expect these
guarantees will have a material adverse effect on the consolidated results of
operations or financial position of the Company. 

NOTE 22

SUPPLEMENTAL CASH FLOW
AND OTHER INFORMATION

Cash and Cash Equivalents includes cash on hand and on deposit as well as highly
liquid debt instruments with maturities generally of three months or less. Cash
payments during the years 1997, 1996 and 1995 included interest of $191, $178
and $183 million and income taxes of $269, $221 and $185 million, respectively.

The weighted-average interest rate on short-term borrowings and commercial paper
outstanding at December 31, 1997 and 1996 was 6.0%.

During 1997, a subsidiary of the Company issued $112 million of preferred stock
to third-party investors and subsequently redeemed such stock prior to year-end.

NOTE 23

POSTRETIREMENT BENEFITS
OTHER THAN PENSIONS

The Company's U.S. retiree medical programs cover employees who retire with
pension eligibility for hospital, professional and other medical services. Most
of the programs require deductibles and copayments and virtually all are
integrated with Medicare. Retiree contributions are generally required based on
coverage type, plan and Medicare eligibility. The Company also sponsors retiree
life insurance programs which generally provide a flat benefit of at least two
thousand dollars or a benefit as a percent of pay.

36

 

The retiree medical and life insurance programs are not funded. Claims and
expenses are paid from the general assets of the Company.

For most non-union employees retiring after July 1, 1992, the Company has
implemented an approach which bases the Company's contribution to retiree
medical premiums on years of service and also establishes a maximum Company
contribution in the future at approximately twice the current level at the date
of implementation. Effective July 1, 1997, the Company adopted a plan amendment
that will encourage Medicare eligible non-union retirees to join Company
sponsored Medicare managed care programs. The Company uses the services of an
enrolled actuary to calculate postretirement benefit costs.

For measurement purposes, the assumed annual rates of increase in the per capita
cost of covered health care benefits for 1997 were 6.75% to 8% for indemnity
programs and 6% to 8% for managed care programs, which reduce to 6% for all
programs in the year 2000 and remain at that level thereafter (except for
Medicare managed care programs which continue at 8%). The health care cost trend
rate assumptions have a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of December 31, 1997 by $129 million and the aggregate of
the service and interest cost component of net periodic postretirement benefit
cost for the year then ended by $12 million. The weighted-average discount rate
used in determining the accumulated postretirement benefit obligation was 7.25%
and 7.75% at December 31, 1997 and 1996, respectively.

Net periodic postretirement benefit cost for 1997, 1996 and 1995 included the
following components:

Years ended December 31                        1997    1996      1995
- ---------------------------------------------------------------------
Service cost-benefits attributed to service 
  during the period                            $ 21    $ 24      $ 20
Interest cost on accumulated postretirement
  benefit obligation                            110     110       133
Net amortization                                (24)    (14)      (12)
- ----------------------------------------------------------------------
                                                107     120       141
Foreign plans                                     1       1         1
- ----------------------------------------------------------------------
Net periodic postretirement benefit cost       $108    $121      $142
======================================================================

Presented below are the plans' status and amounts recognized in the Company's
Consolidated Balance Sheet at December 31, 1997 and 1996:

December 31                                           1997        1996
- -----------------------------------------------------------------------
Accumulated postretirement benefit obligation:
 Retirees                                            $1,012      $1,054
 Fully eligible active plan participants                186         126
 Other active plan participants                         436         353
- -----------------------------------------------------------------------
                                                      1,634       1,533
Unrecognized prior service cost                         221         115
Unrecognized net gain                                    77         274
- -----------------------------------------------------------------------
Accrued postretirement benefit cost                  $1,932      $1,922
=======================================================================

NOTE 24 

PENSIONS

The Company's pension plans, most of which are defined benefit plans and almost
all of which are noncontributory, cover substantially all employees. Benefits
under the plans are generally based on years of service and employees'
compensation during the last years of employment or as a flat dollar benefit.
Benefits are generally paid from funds previously provided to trustees. In the
Company's principal U.S. plans, funds are contributed to a trustee as necessary
to provide for current service and for any unfunded projected benefit obligation
over a reasonable period. To the extent that these requirements are fully
covered by assets on hand for a plan, a contribution may not be made in a
particular year. At December 31, 1997, approximately 60% of the assets of U.S.
plans were held in equity securities, with the balance primarily in fixed
income-type securities. The Company uses the services of an enrolled actuary to
calculate the amount of pension expense and contributions to trustees of the
various pension plans.

Net periodic pension cost for 1997, 1996 and 1995 included the following
components:

Years ended December 31                            1997      1996      1995
- ----------------------------------------------------------------------------
Service cost-benefits earned during the period  $   124     $ 133   $   107
Interest cost on projected benefit obligation       412       398       395
Actual return on plan assets                     (1,041)     (841)   (1,019)
Net amortization and deferral                       527       388       616
- -----------------------------------------------------------------------------
Net periodic pension cost for defined benefit
  plans                                              22        78        99
Foreign plans and other                              13        10        16
- ----------------------------------------------------------------------------
Net periodic pension cost                       $    35     $  88   $   115
============================================================================

The assumed rate of return for the Company's U.S. defined benefit pension plans
was 10% in 1997, 9.5% in 1996 and 9% in 1995. The assumed discount rate used in
calculating the projected benefit obligations at December 31, 1997, 1996 and
1995 was 7.25%, 7.75% and 7.25%, respectively. In addition, the assumed annual
increase in compensation over employees' estimated remaining working lives was
5% in 1997, 1996 and 1995.

                                                                              37

 

Presented below are the plans' funded status and amounts recognized in the
Company's Consolidated Balance Sheet at December 31, 1997 and 1996 for its
significant defined benefit pension plans:

                                                      1997                            1996
                                          ----------------------------  ----------------------------
                                          Assets Exceed    Accumulated  Assets Exceed    Accumulated
                                            Accumulated       Benefits    Accumulated       Benefits
December 31                                    Benefits  Exceed Assets       Benefits  Exceed Assets
- ----------------------------------------------------------------------------------------------------
                                                                                    
Actuarial present value of benefit obligation:
  Vested                                         $4,731          $ 231         $3,715          $ 832
  Nonvested                                         351             15            256             65
- ----------------------------------------------------------------------------------------------------
Accumulated benefit obligation                   $5,082          $ 246         $3,971          $ 897
====================================================================================================
Projected benefit obligation                     $5,656          $ 285         $4,474          $ 933
Less-- Fair value of assets                       6,397             31          5,116            711
- ----------------------------------------------------------------------------------------------------
Over (under) funded plans                           741           (254)           642           (222)
Unrecognized transition (asset) liability           (27)             1             (6)           (24)
Unrecognized net (gain) loss                       (711)            52           (549)           (55)
Unrecognized prior service cost                      61             32            (10)            90
- ----------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost                   $   64          $(169)        $   77          $(211)
====================================================================================================

NOTE 25

SEGMENT FINANCIAL DATA

AlliedSignal Inc. is a global, advanced technology and manufacturing company.
The Company's principal lines of business are aerospace, automotive and
engineered materials. Aerospace's principal products, which include propulsion
engines, auxiliary power units, environmental control systems, cabin
pressurization and engine control systems and avionics, are sold to the U.S. and
foreign governments, aircraft manufacturers, commercial airlines and dealers and
distributors of general aviation products. Automotive supplies systems and
components to worldwide manufacturers of passenger cars; light-, medium- and
heavy-duty trucks; buses; and off-highway vehicles, as well as replacement parts
through the independent aftermarket and passenger car/truck dealers. Engineered
materials' products include chemicals, fibers, plastics and advanced materials,
which have applications for numerous industries including electronics,
automotive, carpeting, refrigeration, construction, computer and utilities,
among others.

                                                                              Corporate
                                                               Engineered           and
                                          Aerospace Automotive  Materials   Unallocated (1)   Total
- ----------------------------------------------------------------------------------------------------
                                                                              
Net sales (2)                       1997   $  6,412   $  3,802   $  4,254       $     4    $ 14,472
                                    1996      5,714      4,240      4,013             4      13,971
                                    1995      5,084      5,549      3,713          --        14,346
- ----------------------------------------------------------------------------------------------------
Research and development expense    1997        180         43        126          --           349
                                    1996        173         49        123          --           345
                                    1995        154         80        109            10         353
- ----------------------------------------------------------------------------------------------------
Depreciation and amortization       1997        180        111        226            29         546
                                    1996        186        127        207            31         551
                                    1995        186        164        185            28         563
- ----------------------------------------------------------------------------------------------------
Income from operations (3)          1997        872        469        432          (137)      1,636
                                    1996        359        900        438          (188)      1,509
                                    1995        551        292        563          (146)      1,260
- ----------------------------------------------------------------------------------------------------
Net income (3)(4)                   1997        515        285        389           (19)      1,170
                                    1996        206        521        361           (68)      1,020
                                    1995        303        146        473           (47)        875
- ----------------------------------------------------------------------------------------------------
Capital expenditures                1997        200        163        314            40         717
                                    1996        143        212        336            64         755
                                    1995        131        214        334            67         746
- ----------------------------------------------------------------------------------------------------
Identifiable assets                 1997      5,889      2,894      4,100           824      13,707
                                    1996      5,172      2,729      3,453         1,475      12,829
                                    1995      5,079      3,813      3,302           271      12,465
====================================================================================================

Intersegment sales approximate market and are not significant.
(1) The "Corporate and Unallocated" column includes amounts for businesses sold
    and Corporate items.
(2) Sales to the U.S. Government and its agencies, mainly for the Aerospace
    segment, were $1,121 , $1,172 and $1,107 million for each of the respective
    years.
(3) Includes in 1997 a pre- and after-tax provision for repositioning and other
    charges for Aerospace of $23 and $14 million, Automotive of $64 and $48
    million, Engineered Materials of $110 and $73 million and Corporate and
    Unallocated of $40 and $24 million, respectively. Also includes in 1997 a
    pre- and after-tax gain on the sale of the safety restraints business of
    $277 and $196 million for Automotive and a pre- and after-tax provision for
    the settlement of the 1996 braking business sale of $51 and $33 million for
    Automotive. Includes in 1996 a pre- and after-tax provision for
    repositioning and other charges for Aerospace of $292 and $179 million,
    Automotive of $117 and $49 million, Engineered Materials of $129 and $71
    million and Corporate and Unallocated of $99 and $60 million, respectively.
    Also includes in 1996 a pre- and after-tax gain on the sale of the braking
    business of $655 and $368 million for Automotive. Includes in 1995 a pre-
    and after-tax provision for repositioning charge of $115 and $71 million for
    Automotive and a pre- and after-tax gain on the transfer of the HDPE
    business of $71 and $71 million for Engineered Materials.
(4) An interest charge is made by Corporate Office to the segments on the basis
    of relative investment. Taxes on income are generally included in the
    segments which gave rise to the tax effects and equity in income of
    affiliated companies is included in the segments in which these companies
    operate.

38

 

NOTE 26

GEOGRAPHIC AREAS -- FINANCIAL DATA 

                                                                                            Adjustments
                                       United                                      Other           and
                                       States       Canada         Europe  International   Eliminations       Total
- --------------------------------------------------------------------------------------------------------------------
                                                                                       
Net sales (1)              1997       $11,319          $361        $2,171          $621          $--        $14,472
                           1996        10,774           252         2,397           548           --         13,971
                           1995        10,734           230         2,740           642           --         14,346
- --------------------------------------------------------------------------------------------------------------------
Net income (2)             1997         1,086            39            23            22           --          1,170
                           1996           736            28           212            44           --          1,020
                           1995           734            31            58            52           --            875
- --------------------------------------------------------------------------------------------------------------------
Assets                     1997        10,861           339         2,570           677           (740)      13,707
                           1996         9,880           302         2,501           729           (583)      12,829
                           1995         9,378           219         2,964           588           (684)      12,465
- --------------------------------------------------------------------------------------------------------------------
Liabilities                1997         8,688           115           974           284           (740)       9,321
                           1996         8,059           132           798           243           (583)       8,649
                           1995         7,623           106         1,535           293           (684)       8,873
=====================================================================================================================

Sales between geographic areas approximate market and are not significant.
(1) Included in United States net sales are export sales of $2,467, $2,399 and
    $2,119 million for each of the respective years.
(2) Includes in 1997 an after-tax provision for repositioning and other charges
    for the United States of $92 million, for Europe of $57 million and for
    Other International of $10 million. Includes in 1997 an after-tax gain on
    the sale of the safety restraints business for the United States of $173
    million, for Europe of $11 million and for Other International of $12
    million. Also includes in 1997 an after-tax provision for the settlement of
    the 1996 braking business sale for the United States of $11 million, for
    Europe of $16 million and for Other International of $6 million. Includes in
    1996 an after-tax provision for repositioning and other charges for the
    United States of $356 million and for Europe of $3 million. Also includes in
    1996 an after-tax gain on the sale of the braking business for the United
    States of $244 million and for Europe of $143 million and an after-tax loss
    for Other International of $19 million. Includes in 1995 an after-tax
    provision for a repositioning charge for the United States of $29 million
    and for Europe of $42 million. Also includes in 1995 an after-tax gain on
    the transfer of the HDPE business for the United States of $71 million.

NOTE 27

UNAUDITED QUARTERLY FINANCIAL INFORMATION

                                        1997                                                        1996
                     ----------------------------------------------------   ----------------------------------------------------
                     Mar. 31  June 30  Sept. 30   Dec. 31            Year   Mar. 31  June 30      Sept. 30   Dec. 31       Year
- --------------------------------------------------------------------------------------------------------------------------------
                                                                                         
Net sales             $3,327   $3,578    $3,657    $3,910         $14,472    $3,778   $3,347        $3,348    $3,498    $13,971
Gross profit             722      814       817       638 (1)       2,991       766      112 (3)       750       737      2,365
Net income               259      305       292       314 (1)(2)    1,170       225      272 (3)(4)    253       270      1,020
Earnings per
  share -- basic         .46      .54       .52       .56 (1)(2)     2.07       .40      .48 (3)(4)    .45       .48       1.80
Earnings per share
  -- assuming dilution   .45      .52       .50       .55            2.02       .39      .47           .44       .46       1.76
Dividends paid           .13      .13       .13       .13             .52     .1125    .1125         .1125     .1125        .45
Market price (5)
High                   38.25    42.50     47.13     43.94           47.13     29.63    30.25         33.25     37.25      37.25
Low                    33.25    33.88     41.13     31.63           31.63     23.63    27.13         26.38     31.00      23.63
===============================================================================================================================

(1) Includes a provision of $237 million, after-tax $159 million and $0.28 per
    share for repositioning and other charges. See Note 3 of Notes to Financial
    Statements for further information.
(2) Includes an after-tax gain of $196 million and $0.35 per share on the sale
    of the safety restraints business and an after-tax loss of $33 million and
    $0.06 per share related to the settlement of the 1996 braking business sale.
    See Note 4 of Notes to Financial Statements for further information.
(3) Includes a provision of $637 million, after-tax $359 million and $0.63 per
    share for repositioning and other charges. See Note 3 of Notes to Financial
    Statements for further information.
(4) Includes an after-tax gain of $368 million and $0.65 per share on the sale
    of the braking business. See Note 4 of Notes to Financial Statements for
    further information.
(5) From composite tape -- stock is primarily traded on the New York Stock
    Exchange.

                                                                              39

 

REPORT OF INDEPENDENT ACCOUNTANTS

[LOGO]

January 28, 1998

To the Shareowners and Directors of AlliedSignal Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of retained earnings and of cash flows
present fairly, in all material respects, the financial position of AlliedSignal
Inc. and its subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP

Morristown, NJ

40

                                                                      EXHIBIT 21
 
                         SUBSIDIARIES OF THE REGISTRANT

                                                                                         SECURITIES OWNED
                                                                     COUNTRY OR      -------------------------
                                                                      STATE OF                        PERCENT
                              NAME                                  INCORPORATION       CLASS        OWNERSHIP
- -----------------------------------------------------------------   -------------    ------------    ---------

AlliedSignal International Finance Corporation...................    Delaware        Common Stock      100
AlliedSignal Avionics Inc........................................    Kansas          Common Stock      100
AlliedSignal Technical Services Corporation......................    Delaware        Common Stock      100
AlliedSignal Technologies Inc....................................    Arizona         Common Stock      100
Astor Corporation................................................    Delaware        Common Stock      100
EM Sector Holdings Inc...........................................    Delaware        Common Stock      100
Grimes Holdings Inc..............................................    Delaware        Common Stock      100
Prestone Holdings Inc............................................    Delaware        Common Stock      100

                            ------------------------
 
     The names of the Registrant's other consolidated subsidiaries, which are
primarily totally-held by the Registrant, are not listed because all such
subsidiaries, considered in the aggregate as a single subsidiary, would not
constitute a significant subsidiary.

                                                                      EXHIBIT 23
 
                       CONSENT OF INDEPENDENT ACCOUNTANTS
 
     We hereby consent to the incorporation by reference in the Prospectuses
constituting part of AlliedSignal Inc.'s Registration Statements on Forms S-8
(Nos. 33-09896, 33-51455, 33-55410, 33-58347, 33-60261, 33-62963, 33-64295 and
333-14673), on Forms S-3 (Nos. 33-13211, 33-14071, 33-55425, 33-64245,
333-22355, 333-44523 and 333-45555) and on Form S-8 (filed as an amendment to
Form S-14, No. 2-99416-01) of our report dated January 28, 1998 appearing in the
1997 Annual Report to Shareowners of AlliedSignal Inc., which is incorporated by
reference in this Annual Report on Form 10-K for the year ended December 31,
1997.
 
PRICE WATERHOUSE LLP
 
Morristown, New Jersey
February 26, 1998

                               POWER OF ATTORNEY

               I, Lawrence A. Bossidy, Chairman and Chief Executive Officer and
a director of AlliedSignal Inc. (the "Company"), a Delaware corporation, hereby
appoint Peter M. Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A.
Garvey, each with power to act without the other and with power of substitution
and resubstitution, as my attorney-in-fact and agent for me and in my name,
place and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Lawrence A. Bossidy
                                                  ---------------------------
                                                  Lawrence A. Bossidy

Dated: January 23, 1998

                               POWER OF ATTORNEY

               I, Hans W. Becherer, a director of AlliedSignal Inc. (the
"Company"), a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M.
Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Hans W. Becherer
                                                  ----------------------------
                                                  Hans W. Becherer

Dated: January 23, 1998

                               POWER OF ATTORNEY

               I, Daniel P. Burnham, a director of AlliedSignal Inc. (the
"Company"), a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M.
Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Daniel P. Burnham
                                                  ---------------------------
                                                  Daniel P. Burnham

Dated: January 23, 1998

                                POWER OF ATTORNEY

               I, Ann M. Fudge, a director of AlliedSignal Inc. (the "Company"),
a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M. Kreindler,
Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with power to act
without the other and with power of substitution and resubstitution, as my
attorney-in-fact and agent for me and in my name, place and stead, in any and
all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Ann M. Fudge
                                                  ---------------------------
                                                  Ann M. Fudge

Dated: January 23, 1998

                               POWER OF ATTORNEY

               I, Paul X. Kelley, a director of AlliedSignal Inc. (the
"Company"), a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M.
Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Paul X. Kelley
                                                  ---------------------------
                                                  Paul X. Kelley

Dated: January 23, 1998

                               POWER OF ATTORNEY

               I, Robert P. Luciano, a director of AlliedSignal Inc. (the
"Company"), a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M.
Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Robert P. Luciano
                                                  ---------------------------
                                                  Robert P. Luciano

Dated: January 23, 1998

                               POWER OF ATTORNEY

               I, Robert B. Palmer, a director of AlliedSignal Inc. (the
"Company"), a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M.
Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Robert B. Palmer
                                                  ----------------------------
                                                  Robert B. Palmer

Dated: January 23, 1998

                               POWER OF ATTORNEY

               I, Russell E. Palmer, a director of AlliedSignal Inc. (the
"Company"), a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M.
Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Russell E. Palmer
                                                  ----------------------------
                                                  Russell E. Palmer

Dated: January 23, 1998

                                POWER OF ATTORNEY

               I, Frederic M. Poses, a director of AlliedSignal Inc. (the
"Company"), a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M.
Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Frederic M. Poses
                                                  ----------------------------
                                                  Frederic M. Poses

Dated: January 23, 1998

                                POWER OF ATTORNEY

               I, Ivan G. Seidenberg, a director of AlliedSignal Inc. (the
"Company"), a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M.
Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Ivan G. Seidenberg
                                                  ----------------------------
                                                  Ivan G. Seidenberg

Dated: January 23, 1998

                                POWER OF ATTORNEY

               I, Andrew C. Sigler, a director of AlliedSignal Inc. (the
"Company"), a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M.
Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Andrew C. Sigler
                                                  ---------------------------
                                                  Andrew C. Sigler

Dated: January 23, 1998

                                POWER OF ATTORNEY

               I, John R. Stafford, a director of AlliedSignal Inc. (the
"Company"), a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M.
Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ John R. Stafford
                                                  ---------------------------
                                                  John R. Stafford

Dated: January 23, 1998

                                POWER OF ATTORNEY

               I, Thomas P. Stafford, a director of AlliedSignal Inc. (the
"Company"), a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M.
Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Thomas P. Stafford
                                                  ---------------------------
                                                  Thomas P. Stafford

Dated: January 23, 1998

                               POWER OF ATTORNEY

               I, Robert C. Winters, a director of AlliedSignal Inc. (the
"Company"), a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M.
Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Robert C. Winters
                                                 ----------------------------
                                                  Robert C. Winters

Dated: January 23, 1998

                                POWER OF ATTORNEY

               I, Henry T. Yang, a director of AlliedSignal Inc. (the
"Company"), a Delaware corporation, hereby appoint Lawrence A. Bossidy, Peter M.
Kreindler, Richard F. Wallman, Robert F. Friel and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

               (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1997,

               (ii) to sign any amendment to the Annual Report referred to in
(i) above, and

               (iii) to file the documents described in (i) and (ii) above and
all exhibits thereto and any and all other documents in connection therewith,

granting unto each said attorney and agent full power and authority to do and
perform every act and thing requisite, necessary or desirable to be done in
connection therewith, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes or substitute,
may lawfully do or cause to be done by virtue hereof.

                                                  /s/ Henry T. Yang
                                                  ---------------------------
                                                  Henry T. Yang

Dated: January 23, 1998

  

                 5

This schedule contains summary financial information extracted from the
consolidated balance sheet at December 31, 1997 and the consolidated statement
of income for the year ended December 31, 1997 and is qualified in its
entirety by reference to such financial statements.

                                   1,000

                    YEAR
                DEC-31-1997
                     DEC-31-1997
                                   611
                             430
                          1,466
                              37
                            2,093
                       5,573
                                 9,189
                         4,938
                        13,707
                  4,436
                                1,215
                      0
                                0
                                 716
                             3,670
          13,707
                               14,472
                      14,472
                                 11,481
                         11,481
                           0
                           0
                       175
                        1,716
                             546
                    1,170
                             0
                            0
                                  0
                           1,170
                           2.07
                           2.02