________________________________________________________________________________
________________________________________________________________________________

                                 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, 1998
                                       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 Exchange
Money Multiplier Notes due 1999-2000                 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 [x]
 
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $21.7 billion at January 31, 1999.
 
There were 557,130,797 shares of Common Stock outstanding at January 31, 1999.
 
                      Documents Incorporated by Reference
         Part I and II: Annual Report to Shareowners for the Year Ended December
31, 1998.
        Part III: Proxy Statement for Annual Meeting of Shareowners to be held
April 26, 1999.
 
________________________________________________________________________________
________________________________________________________________________________

                               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, 1998                       Report
- - -------------------------------  -----------------------------------------------------------    ------------

   1. Business                   Note 23. Segment Financial Data ...........................         41
                                 Note 24. Geographic Areas -- Financial Data................         42
                                 Management's Discussion and Analysis.......................         19
   3. Legal Proceedings          Note 20. Commitments and Contingencies.....................         39
   5. Market for the Regis-      Note 25. Unaudited Quarterly Financial
      trant's Common Equity        Information..............................................         42
      and Related Stock-         Selected Financial Data....................................         18
      holder Matters
   6. Selected Financial Data    Selected Financial Data....................................         18
   7. Management's               Management's Discussion and Analysis.......................         19
      Discussion and Analysis
      of Financial Condition
      and Results of
      Operations
  7A. Quantitative and           Management's Discussion and Analysis.......................         19
      Qualitative Disclosure
      About Market Risk
   8. Financial Statements and   Report of Independent Accountants..........................         27
      Supplementary Data         Consolidated Statement of Income...........................         28
                                 Consolidated Balance Sheet.................................         29
                                 Consolidated Statement of Cash Flows.......................         30
                                 Consolidated Statement of Shareowners' Equity..............         31
                                 Notes to Financial Statements..............................         32

                                              Heading(s) in Proxy Statement for                  Page(s) in
                                                Annual Meeting of Shareowners                      Proxy
                                                  to be held April 26, 1999                      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      Voting Securities..........................................         *
      Certain 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,
   1998.
 
                                       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......................................................................................    14
           3  Legal Proceedings...............................................................................    14
           4  Submission of Matters to a Vote of Security Holders.............................................    14
           Executive Officers of the Registrant...............................................................    15
 
Part II.   5  Market for the Registrant's Common Equity and Related Stockholder Matters.......................    16
           6  Selected Financial Data.........................................................................    16
           7  Management's Discussion and Analysis of Financial Condition and Results of Operations...........    17
          7A  Quantitative and Qualitative Disclosure About Market Risk.......................................    17
           8  Financial Statements and Supplementary Data.....................................................    17
           9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............    17
 
Part III.  10  Directors and Executive Officers of the Registrant.............................................    17(a)
           11  Executive Compensation.........................................................................    17(a)
           12  Security Ownership of Certain Beneficial Owners and Management.................................    18(a)
           13  Certain Relationships and Related Transactions.................................................    18
 
Part IV.   14  Exhibits, Financial Statement Schedules and Reports on Form 8-K................................    18
 
Signatures....................................................................................................    19

- - ------------
 
 (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, 1998. Certain other information relating to the Executive
     Officers of the Registrant appears at pages 15 and 16 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, chemicals,
fibers, plastics and advanced materials. The Company's operations are conducted
by eleven strategic business units, which have been aggregated under five
reportable segments: Aerospace Systems, Specialty Chemicals & Electronic
Solutions, Turbine Technologies, Performance Polymers and Transportation
Products.
 
     Following is a description of the Company's strategic business units:

STRATEGIC
BUSINESS UNITS       PRODUCT CLASSES              MAJOR PRODUCTS/SERVICES    MAJOR CUSTOMERS/USES        KEY COMPETITORS
- - -------------------- ---------------------------  -----------------------    --------------------------  ------------------
                                                                                             
AEROSPACE SYSTEMS
Aerospace            Environmental control        Air conditioning           Commercial, regional        Barber Colman
Equipment            systems                        systems                    and general               Hamilton Standard
Systems                                           Bleed air control            aviation aircraft         Liebherr
                                                    systems                  Military aircraft           Parker Hannifin
                                                  Cabin pressure systems     Spacecraft                  Sundstrand
                                                  Environmental and                                      TAT
                                                    thermal control for
                                                    spacecraft
                                                  Smoke detection
                                                    systems
                                                  Repair, overhaul and
                                                    spare parts
                     ------------------------------------------------------------------------------------------------------
                     Engine systems and           Electronic and             Commercial air transport,   Chandler-Evans
                     accessories                    hydromechanical            regional and general      Hamilton Standard
                                                    fuel controls              aviation                  Lockheed Martin
                                                  Engine start systems       Military aircraft           Lucas
                                                  Pressure transducers                                   Parker
                                                  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
                                                  Aircraft landing                                       Messier-Dowty
                                                    systems integration
- - ---------------------------------------------------------------------------------------------------------------------------

                                       4

 

STRATEGIC
BUSINESS UNITS       PRODUCT CLASSES              MAJOR PRODUCTS/SERVICES    MAJOR CUSTOMERS/USES        KEY COMPETITORS
- - -------------------- ---------------------------  -------------------------  --------------------------  ------------------

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                                    Litton
                                                      Collision Avoidance                                Lockheed Martin
                                                      Systems (TCAS)                                     Narco
                                                    Windshear detection                                  Rockwell/Collins
                                                      systems and weather                                Sextant
                                                      radar                                              Smiths
                                                    Flight data and cockpit                              S-tec
                                                      voice recorders                                    Trimble/Terra
                                                  Communication and                                      Universal
                                                    navigation systems:                                  
                                                    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
                     ------------------------------------------------------------------------------------------------------
                     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
                     ------------------------------------------------------------------------------------------------------
                     Inertial sensor              Inertial sensor systems    Military and                Astronautics-
                                                    for guidance,              commercial vehicles         Kearfott
                                                    stabilization,           Commercial spacecraft       Ball
                                                    navigation                 and launch vehicles       BEI
                                                    and control              Energy utility boring       GEC
                                                  Gyroscopes,                Transportation              Honeywell
                                                    accelerometers,          Missiles                    Litton
                                                    inertial measurement     Munitions                   Rockwell/Collins
                                                    units and thermal
                                                    switches
                     ------------------------------------------------------------------------------------------------------
                     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
- - ---------------------------------------------------------------------------------------------------------------------------
Aerospace            Management and technical     Maintenance/operation of   U.S. and foreign            Computer Sciences
Marketing,           services                       space systems and          government space and      Dyncorp
Sales & Service(1)                                  facilities                 communications services   Lockheed Martin
                                                  Systems engineering,       Commercial space ground     Raytheon
                                                    integration and            segment systems and       SAIC
                                                    information technology     services
                                                    services
                     ------------------------------------------------------------------------------------------------------
                     Aircraft hardware            Consumable hardware,       Commercial and military     Wesco Aircraft
                     distribution                   including fasteners,       aviation and space        Tristar Aerospace
                                                    bearings, bolts and        programs                  M&M Aerospace
                                                    o-rings                                              Aviall
                                                  Adhesives, sealants,                                   W.S. Wilson
                                                    lubricants, cleaners                                 Jamaica Bearings
                                                    and paints
                                                  Value-added services,
                                                    repair and overhaul
                                                    kitting and
                                                    point-of-use
                                                    replenishment
- - ---------------------------------------------------------------------------------------------------------------------------

(1) Aerospace-related businesses have organized their marketing, sales, service,
    technical support, repair and overhaul and distribution capabilities into
    this business unit.
 
                                       5

 

STRATEGIC
BUSINESS UNITS       PRODUCT CLASSES              MAJOR PRODUCTS/SERVICES    MAJOR CUSTOMERS/USES        KEY COMPETITORS
- - -------------------- ---------------------------  -------------------------  --------------------------  ------------------

SPECIALTY CHEMICALS & ELECTRONIC SOLUTIONS
Specialty Chemicals  Fluorocarbons                Genetron'r' refrigerants,  Refrigeration               Atochem
                                                    aerosol and              Air conditioning            DuPont
                                                    insulation foam blowing  Polyurethane foam           ICI
                                                    agents                   Precision cleaning
                                                  Genesolv'r' solvents       Optical
                                                  Oxyfume sterilant gases    Metalworking
                                                                             Hospitals
                                                                             Medical equipment
                                                                               manufacturers
                     ------------------------------------------------------------------------------------------------------
                     Hydrofluoric acid (HF)       Anhydrous and aqueous      Fluorocarbons               Ashland
                                                    hydrofluoric acid        Steel                       Atochem
                                                                             Oil refining                DuPont
                                                                             Chemical intermediates      Hashimoto
                                                                                                         Merck
                                                                                                         Norfluor
                                                                                                         Quimaco Fluor
                     ------------------------------------------------------------------------------------------------------
                     Fluorine specialties         Sulfur hexafluoride (SF6)  Electric utilities          Air Products
                                                  Iodine pentafluoride       Magnesium                   Asahi Glass
                                                    (IF5)                    Gear manufacturers          Atochem
                                                  Antimony pentafluoride                                 Ausimont
                                                    (SbF5)                                               Kanto Denko Kogyo
                                                                                                         Solvay Fluor
                     ------------------------------------------------------------------------------------------------------
                     Nuclear services             UF6 conversion services    Nuclear fuel                British Nuclear
                                                                             Electric utilities            Fuels
                                                                                                         Cameco (Canada)
                                                                                                         Cogema (France)
                                                                                                         Tennex (Russia)
                     ------------------------------------------------------------------------------------------------------
                     Pharmaceutical and           Active pharmaceutical      Agrichemicals               Cambrex
                     agricultural chemicals         ingredients              Pharmaceuticals             DSM
                                                  Oxime-based fine                                       Lonza
                                                    chemicals                                            Zeneca
                                                  Fluoroaromatics
                                                  Bromoaromatics
                     ------------------------------------------------------------------------------------------------------
                     High purity chemicals        Ultra high purity HF       Semiconductors              LaPorte
                                                  Solvents                                               Merck
                                                  Inorganic acids                                        Olin
                                                  High purity solvents
                     ------------------------------------------------------------------------------------------------------
                     Industrial specialties       Hydrofluoric acid (HF)     Diverse by product type     Varies by product
                      Imaging                     HF derivatives                                           line
                      Luminescence and            Fluoroaromatics
                       plastic additives          Photodyes
                      Chemical processing         Phosphors
                      Materials and               Catalysts
                       surface treatment          Oxime silanes
                      Sealants
                     ------------------------------------------------------------------------------------------------------
                     Specialty waxes              Polyethylene waxes         Coatings                    BASF
                                                  Petroleum waxes and        Inks                        Clariant
                                                    blends                   Candles                     Eastman
                                                                             Tire/Rubber                 Exxon
                                                                             Personal care               IGI
                                                                             Packaging                   Leuna
                                                                                                         Schumann-Sasol
                     ------------------------------------------------------------------------------------------------------
                     Specialty additives          Polyethylene waxes         PVC                         Eastman
                                                  Petroleum waxes and        Plastics                    Geon
                                                    blends                                               Henkel
                                                  PVC lubricant systems
                                                  Plastic additives
                     ------------------------------------------------------------------------------------------------------
                     UOP (joint venture)          Processes                  Petroleum,                  ABB Lummus
                                                  Catalysts                    petrochemical, gas        Criterion
                                                  Molecular sieves             processing and            IFP (France)
                                                  Adsorbents                   chemical industries       Mobil
                                                  Design of process                                      Procatalyse
                                                    plants and equipment                                   (France)
                                                  Customer catalyst                                      Stone & Webster
                                                    manufacturing                                        Zeochem
- - ---------------------------------------------------------------------------------------------------------------------------

                                       6

 

STRATEGIC
BUSINESS UNITS       PRODUCT CLASSES              MAJOR PRODUCTS/SERVICES    MAJOR CUSTOMERS/USES        KEY COMPETITORS
- - -------------------- ---------------------------  -------------------------  --------------------------  ------------------

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                     Spin-on dielectrics        Semiconductors              Dow Corning
                     microelectronic                for semiconductor        Microelectronics            Applied Materials
                     materials                      manufacturing                                        Tokyo-Ohka
                     ------------------------------------------------------------------------------------------------------
                     Equipment for semiconductor  Electron beam              Semiconductor and           Fusion Systems
                     and                            curing equipment           thin film head            Asyst
                     related electronics          Mini clean room              manufacturing
                     manufacturing                  environments             Seimconductor and
                                                                               related electronics
                                                                               manufacturing
                     ------------------------------------------------------------------------------------------------------
                     Engineering design services  Printed circuit board      Semiconductor               N/A
                                                  MultiChip fabricators        manufacturing
                     ------------------------------------------------------------------------------------------------------
                     Amorphous metals             Amorphous metal ribbons    Electrical distribution     Allegheny-Ludlum
                                                    and components             transformers                Steel
                                                                             High frequency electronics  Armco Steel
                                                                             Metal joining               Kawasaki Steel
                                                                             Theft deterrent systems     Nippon Steel
- - ---------------------------------------------------------------------------------------------------------------------------
 
TURBINE TECHNOLOGIES
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
                                                  LF502 turbofan               helicopters                 Company
                                                  LF507 turbofan             Military vehicles           Turbomeca
                                                  CFE738 turbofan            Commercial and military
                                                  T53, T55 turboshaft          marine craft
                                                  LT101 turboshaft
                                                  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 Power
                                                  Secondary power                                          Systems
                                                    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
- - ---------------------------------------------------------------------------------------------------------------------------

                                       7

 

STRATEGIC
BUSINESS UNITS       PRODUCT CLASSES              MAJOR PRODUCTS/SERVICES    MAJOR CUSTOMERS/USES        KEY COMPETITORS
- - -------------------- ---------------------------  -------------------------  --------------------------  ------------------

Turbocharging        Charge-air systems           Turbochargers              Passenger car, truck        Aisin Seiki
Systems              Thermal systems              Charge-air coolers           and off-highway           Behr/McCord
                                                  Aluminum radiators           original equipment        GE/Elliott
                                                  Aluminum cooling             manufacturers (OEMs)      General Motors
                                                    modules                  Engine manufacturers        Hitachi
                                                  Superchargers              Aftermarket distributors    Holset
                                                  Remanufactured components    and dealers               IHI
                                                                                                         KKK
                                                                                                         Mitsubishi/MHI
                                                                                                         Modine
                                                                                                         Schwitzer
                                                                                                         Valeo
                                                                                                         Williams
                                                                                                           International
                     ------------------------------------------------------------------------------------------------------
                     Power generation             Turbogenerators            Users of electricity        Capstone Turbine
                                                                                                         Electric Utilities
- - ---------------------------------------------------------------------------------------------------------------------------
 
PERFORMANCE POLYMERS
Polymers             Carpet fibers                Nylon filament and         Commercial, residential     BASF
                                                    staple yarns               and specialty carpet      DuPont
                                                  Bulk continuous              markets                   Solutia
                                                    filament                                             Rhodia
                                                  Nylon polymer
                     ------------------------------------------------------------------------------------------------------
                     Performance fibers           Industrial nylon and       Passenger car and truck     Akra
                                                    polyester yarns            tires                     Akzo
                                                  Extended-chain             Passenger car and light     BASF
                                                    polyethylene composites    truck seatbelts and       DSM
                                                  Fine denier nylon yarns      airbags                   DuPont
                                                                             Broad woven fabrics         Hoechst/Celanese
                                                                             Ropes and mechanical        Hyosung
                                                                               rubber goods              Kolon
                                                                             Luggage                     Nylstar
                                                                             Sports gear                 Rhodia
                                                                             Bullet resistant vests,
                                                                               helmets and heavy armor
                                                                             Cut-resistant industrial
                                                                               gloves
                                                                             Sailcloth
                     ------------------------------------------------------------------------------------------------------
                     Engineering plastics         Thermoplastic nylon        Food and pharmaceutical     BASF
                                                  Thermoplastic alloys and     packaging                 Bayer
                                                    blends                   Housings (e.g., electric    DuPont
                                                  Post-consumer recycled       hand tools, chain saws)   Hoechst/Celanese
                                                    PET resins               Automotive components       Monsanto
                                                  Recycled nylon resins      Office furniture
                                                                             Electrical and electronics
                     ------------------------------------------------------------------------------------------------------
                     Specialty films              Cast nylon                 Food                        DuPont of Canada
                                                  Biaxially oriented nylon   Pharmaceuticals             Kolon
                                                    film                     Packaging and industrial    Rexam Custom
                                                  Fluoropolymer film           applications              Toyobo
                     ------------------------------------------------------------------------------------------------------
                     Chemical intermediates       Caprolactam                Nylon for fibers,           BASF
                                                  Ammonium sulfate             engineered resins and     DSM
                                                  Hydroxylamine                film                      DuPont
                                                  Cyclohexanol               Fertilizer ingredients      Enichem
                                                  Cyclohexanone              Specialty chemicals         Solutia
                                                  Adipic acid                Vitamins                    Rhodia
                                                                                                         Ube
- - ---------------------------------------------------------------------------------------------------------------------------

                                       8

 

STRATEGIC
BUSINESS UNITS       PRODUCT CLASSES              MAJOR PRODUCTS/SERVICES    MAJOR CUSTOMERS/USES        KEY COMPETITORS
- - -------------------- ---------------------------  -------------------------  --------------------------  ------------------

TRANSPORTATION PRODUCTS
Consumer Products    Aftermarket                  Oil, air, fuel,            Automotive and heavy        AC Delco/Delphi/GM
Group                filters, electronic            transmission and           vehicle aftermarket       ArmorAll/STP/Clorox
                     components and car care        coolant filters            channels and original     Autoglym  
                     products                     PCV valves                   equipment service         Baldwin
                                                  Spark plugs                  (OES)                     Bosch
                                                  Wire and cable             Mass merchandisers          Champion Labs
                                                  Antifreeze/coolant                                     Champion/Cooper Ind.
                                                  Ice-fighter products                                   Cummings Diesel
                                                  Windshield washer fluids                               Donaldson
                                                  Waxes, washes and                                      Gold Eagle
                                                    specialty cleaners                                   Gonher
                                                                                                         Havoline/Texaco
                                                                                                         Labinal
                                                                                                         Mac Quair
                                                                                                         Mann & Hummel
                                                                                                         NGK
                                                                                                         Peak
                                                                                                         Pennzoil/Quaker State
                                                                                                         Purolator/Arvin Ind
                                                                                                         Pyroil/Valvoline
                                                                                                         Turtle Wax
                                                                                                         Various Prival Label
                                                                                                         Wix/Dana
                                                                                                         Zerex/Valvoline
                                                                                                         
- - ---------------------------------------------------------------------------------------------------------------------------
Friction Materials   Friction materials           Disc brake pads            Automotive and heavy        Akebono
                     Aftermarket brake hard       Drum brake linings           vehicle OEMs, OES, brake  BBA Group
                     parts                        Brake blocks                 manufacturers and         Dana
                                                  Disc and drum brake          aftermarket channels      Delphi
                                                    components               Mass merchandisers          Federal-Mogul
                                                  Brake hydraulic            Installers                  ITT/Galfer
                                                    components               Railway and commercial/     JBI
                                                  Brake fluid                  military aircraft OEMs    Nisshinbo
                                                  Aircraft brake linings       and brake manufacturers   Pagid
                                                  Railway linings                                        Sumitomo
- - ---------------------------------------------------------------------------------------------------------------------------
Truck Brake          Air brake systems            Anti-lock brake systems    On-highway medium and       Eaton
Systems                                             (ABS)                      heavy truck,              Midland-Haldex
(joint venture)                                   Air disc brakes              bus and trailer OEMs      Meritor
                                                  Air compressors            Off-highway equipment       WABCO
                                                  Air valves                   OEMs
                                                  Air dryers                 Aftermarket distributors
                                                  Actuators                    and dealers/OES
                                                  Truck electronics
                                                  Competitive
                                                    remanufactured
                                                    products
- - ---------------------------------------------------------------------------------------------------------------------------

RECENT DEVELOPMENTS
 
     Activity in Aerospace Systems included the acquisition, in January 1998, of
substantially all the assets of Banner Aerospace, distributors of FAA-certified
aircraft hardware, for common stock valued at approximately $350 million. The
acquired operations have annual sales of about $250 million, principally to
commercial air transport and general aviation customers. In June 1998, the
Company acquired a controlling interest in the Normalair-Garrett Ltd
environmental controls joint venture. The acquired operations have annual sales
of approximately $240 million. Several smaller acquisitions were also completed.
In the first quarter of 1998, the Company sold its underwater detection systems
business to L-3 Communications Corporation for approximately $70 million in cash
and, in September 1998, the Company sold its communications systems business to
Raytheon Company for approximately $60 million in cash. The divested businesses
had annual sales of about $190 million. Aerospace Systems also strengthened its
leadership in flight safety products by winning several major contracts for its
new FAA-approved Enhanced Ground Proximity Warning System which gives pilots
advance warning time of a collision with terrain.
 
     In June 1998, the Company acquired Pharmaceutical Fine Chemicals S.A. (PFC)
of Lugano, Switzerland, for approximately $390 million, including assumed
liabilities, as part of the Specialty Chemicals & Electronic Solutions segment.
PFC manufactures and distributes active and intermediate 
                                       9

pharmaceutical chemicals and had sales of about $110 million in 1997. Several
other smaller acquisitions were also completed during the year. In April 1998,
the European laminates business of Electronic Materials was sold.

   Turbine Technologies began development of the AS900, its first new turbofan
engine platform in more than 20 years, for the rapidly growing general and
regional aviation market. It is scheduled for FAA certification in the first
quarter of 2001. Turbocharging Systems is entering the small-scale power
generation business to serve a growing demand for low cost, highly reliable and
efficient independent power units. International distribution alliances for the
power systems were formed in 1998. Initial product shipments are scheduled for
mid-1999.
 
     Performance Polymers formed a joint venture with DSM Chemicals North
America to construct and operate an $80 million recycling facility to convert
nylon carpet into caprolactam, the raw material used in carpeting and automobile
parts. Performance Polymers exited its European carpet fibers business and a
portion of the North American textile business in 1998. Performance Polymers
also sold its phenol facility to Sun Company, Inc. in 1998, and as part of the
sale the Company retained a phenol supply arrangement for its nylon business.
 
     In Transportation Products, Truck Brake Systems and its partner,
Knorr-Bremse AG, established a joint venture company with Robert Bosch GmbH
(Bosch) combining their European commercial heavy-duty brake systems businesses.
Bosch contributed its commercial vehicle brake product division to the European
joint venture, in exchange for a 20% interest in the joint venture. The Company
will also have a 20% ownership interest in the European joint venture.
Knorr-Bremse, AlliedSignal's joint venture partner since 1993, will have the
remaining 60% interest.
 
     In June 1998, the Company sold its interest in its automotive catalyst
business to a unit of General Motors Corporation for approximately $50 million
in cash. This business had annual sales of about $250 million.
 
     In 1998, the Company was unsuccessful in its $10 billion unsolicited offer
for AMP Incorporated (AMP), a manufacturer of electrical connection devices. In
connection with this transaction, the Company acquired approximately a 9%
interest in AMP for $890 million. The fair market value of the investment at
December 31, 1998 was $1,041 million.
 
     In January 1999, the Company announced that it will commence realignment of
its aerospace businesses in the first quarter to strengthen their market and
customer focus, simplify the business structure and reduce costs.
 
U.S. GOVERNMENT SALES
 
     Sales to the U.S. Government (primarily aerospace-related), acting through
its various departments and agencies and through prime contractors, amounted to
$1,891 million for 1998 and $1,851 million for 1997, which includes sales to the
U.S. Department of Defense (DoD) of $1,366 million in 1998 and $1,338 million in
1997. Approximately 58% and 59% of sales to the U.S. Government in 1998 and
1997, respectively, were made under fixed-price contracts in which the Company
agrees to perform a contract for a fixed price, retaining any benefits of cost
savings and absorbing any cost overruns. The Company is affected by U.S.
Government budget restraints for defense and space programs. After years of
decline, U.S. defense spending increased slightly in 1998 and is expected to
increase over the next several years.
 
     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 that may reflect military and political
developments, significant changes in contract scheduling, complexity of designs
and the rapidity with which they become obsolete, necessity for constant design
improvements, intense competition for 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.
  
                                       10

     The Company, like 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, individually or in the aggregate, will have a material adverse
effect on the Company. In addition, the Company has a proactive business
compliance program designed to ensure compliance and sound business practices.
 
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 (principally
for aerospace-related products and services) for both government and commercial
contracts was $5,012 million at December 31, 1998 and $5,087 million at
December 31, 1997 of which U.S. and foreign government orders were $1,511
million and $1,908 million for the respective years. The Company anticipates
that approximately $3,553 million of the total 1998 backlog will be filled
during 1999.
 
     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 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.
 
SEGMENT FINANCIAL DATA
 
     Note 23 (Segment Financial Data) of Notes to Financial Statements in the
Company's 1998 Annual Report to shareowners is incorporated herein by reference.
 
DOMESTIC AND FOREIGN FINANCIAL DATA
 
     Note 24 (Geographic Areas -- Financial Data) of Notes to Financial
Statements in the Company's 1998 Annual Report to shareowners is incorporated
herein by reference.
 
COMPETITION
 
     The Company encounters substantial competition, in each of its product
areas, from businesses producing the same or similar products and businesses
producing different products designed for the same uses. Such competition is
expected to continue in all geographic 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.
 
     Certain products and services of the Company are sold in competition with
those of a large number of other companies, some of which have substantial
financial resources and significant technological capabilities. Other products
compete with independent suppliers or with the captive 
 
                                       11

component divisions of the vehicle manufacturers. Still other 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 is 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 net sales in both 1998
and 1997. Foreign manufactured products and services, mainly in Europe, were 21%
and 22% of total Company net sales in 1998 and 1997, 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; foreign investment laws; import and trade
restrictions, including embargoes; and governmental instability.
 
     Approximately 25% of total sales of aerospace-related products and services
were exports of U.S. manufactured products and systems, performance of services
such as aircraft repair and overhaul, and licensing activities. Exports were
principally made to Europe, Asia and Canada. The principal manufacturing
facilities outside of the U.S. are in Europe and Canada. Foreign manufactured
products comprised 11% of total sales of aerospace-related products and
services.
 
     Exports of U.S. manufactured automotive products comprised 5% of total
sales of automotive products. The principal manufacturing facilities outside the
U.S. are in Europe, with less significant operations in Asia, Latin America and
Canada. Foreign manufactured products accounted for 47% of total sales of
automotive products.
 
     Approximately 13% of total sales of chemicals, fibers, plastics and
advanced materials were exports of U.S. manufactured products. Exports were
principally made to Asia, Europe, Latin America and Canada. The principal
manufacturing facilities outside the U.S. are in Europe, with less significant
operations in Asia and Canada. Foreign manufactured products comprised 19% of
total sales of chemicals, fibers, plastics and advanced materials.
 
RAW MATERIALS
 
     The principal raw materials used to produce the Company's products include:
aerospace products -- carbon fiber; electronic, optical and mechanical component
parts and assemblies; electronic and electromechanical devices and metallic
products; automotive products -- castings, forgings, steel and bar stock,
copper, aluminum, platinum and titanium and chemicals, fibers, plastics and
advanced materials -- 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 and butylrubber. 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. In addition, 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, although, temporary shortages may occur from
time to time.
 
PATENTS AND TRADEMARKS
 
     The Company owns approximately 9,000 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

                                       12

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, Holts, Prestone and Redex.
 
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 $394, $349 and $345 million in
1998, 1997 and 1996, respectively. Customer-sponsored (principally the U.S.
Government) research and development activities amounted to an additional $418,
$527 and $536 million in 1998, 1997 and 1996, 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 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 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 or 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 that 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 $52 million in 1998. The Company estimates that during each of
the years 1999 and 2000 such capital expenditures will be in the $60 to $65
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 22 of the
Company's 1998 Annual Report to shareowners, incorporated herein by reference,
for further information regarding environmental matters.
 
EMPLOYEES
 
     The Company had an aggregate of 70,400 employees at December 31, 1998.
Approximately 49,900 were located in the United States, and, of these employees,
about 23% were unionized employees represented by various local or national
unions.
 
                                       13

 
ITEM 2.   PROPERTIES
 
     The Company has approximately 340 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 is located at Morris Township, New Jersey.
 
     The principal plants, which are owned in fee unless otherwise indicated,
are as follows:

                                  AEROSPACE SYSTEMS

Anniston, AL                Olathe, KS (leased)           Mississauga, Ontario
Tempe, AZ                   Columbia, MD                    Canada
Torrance, CA (partially     Teterboro, NJ                 Yeovil, Somerset
  leased)                   Rocky Mount, NC                 United Kingdom
Tucson, AZ                  Urbana, OH                    
South Bend, IN              Redmond, WA                   

                   SPECIALTY CHEMICALS & ELECTRONIC SOLUTIONS

Baton Rouge, LA             Orange, TX                    Seelze, Germany
Geismar, LA

                              TURBINE TECHNOLOGIES

Phoenix, AZ (4 plants,      Torrance, CA                  Singapore
  1 owned, 3 partially      Thaon-Les-Vosges, France      Skelmersdale,
  leased)                   Raunheim, Germany               United Kingdom

                              PERFORMANCE POLYMERS

Moncure, NC                 Chesterfield, VA              Longlaville, France
Pottsville, PA              Churchill, VA                 Rudolstadt, Germany
Columbia, SC                Hopewell, VA                  
Sparta, TN                

                            TRANSPORTATION PRODUCTS

Huntington, IN              Greenville, OH                Glinde, Germany
Fostoria, OH             

ITEM 3.   LEGAL PROCEEDINGS
 
     The first four paragraphs of Note 20 (Commitments and Contingencies) of
Notes to Financial Statements at page 39 of the Company's 1998 Annual Report to
shareowners are incorporated herein by reference.
 
     The Indiana Department of Environmental Management issued a Notice of
Violation (NOV) to the Company on August 18, 1997 alleging, principally, that
the Company had failed to obtain certain air emissions permits required for the
construction and operation of various equipment at its South Bend, Indiana
plant. The Company could be subject to monetary sanctions which may exceed
$100,000. Management does not believe that any such monetary sanctions, if
imposed, will have a material adverse effect on the consolidated results of
operations or financial position of the Company.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
                                   Not Applicable

                                       14

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), 63      Chairman of the Board since January 1992. Chief Executive Officer of the
              1991                 Company since July 1991.

Frederic M. Poses (a), 56        President and Chief Operating Officer since June 1998. Vice Chairman from
              1988                 October 1997 to May 1998. Executive Vice President and President,
                                   AlliedSignal Engineered Materials from April 1988 to September 1997.

Larry E. Kittelberger, 50        Senior Vice President and Chief Information Officer since February 1999.
              1996                 Vice President and Chief Information Officer from August 1995 
                                   to January 1999. Corporate Chairman -- Information Officer
                                   Leadership Committee of Tenneco Inc. (diversified industrial concern)
                                   from June 1989 to July 1995.

Peter M. Kreindler, 53           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, 54          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, 47           Senior Vice President and Chief Financial Officer since March 1995. Vice
              1995                 President and Controller of International Business Machines Corp. (IBM)
                                   from April 1994 to February 1995. General Assistant Controller of IBM from
                                   October 1993 to March 1994.

William J. Amelio, 41            President -- Turbocharging Systems since April 1997. Vice President,
              1998                 Re-Engineering and Information Systems of IBM Personal Computer Company from
                                   1996 to 1997. Vice President, Operations, IBM Personal Computer
                                   Company from 1994 to 1995.

David E. Berges, 49              President -- Consumer Products Group since January 1998. President,
              1998                 Bendix/Jurid unit of Friction Materials from November 1997 to December 1997.
                                   Vice President and General Manager, Engine Systems and Accessories unit of
                                   Aerospace Equipment Systems from July 1994 to October 1997.

Mark H. Breedlove, 42            President -- Friction Materials since October 1998. President,
              1998                 Bendix/Jurid unit of Friction Materials from February 1998 to September
                                   1998. President, Asia Operations, Automotive from June 1996 to January
                                   1998. President, Braking Systems -- Asia, from July 1995 to May 1996. Vice
                                   President, Product Management, Braking Systems -- Americas from August
                                   1994 to June 1995. Vice President, Finance, Braking Systems North America
                                   from June 1993 to July 1994.

Gary A. Cappeline, 49            President -- Specialty Chemicals since December 1998. Group Vice President,
              1998                 Pigments and Additives, Engelhard Corporation (chemical manufacturer) from
                                   January 1997 to November 1998; Group Vice President, Specialty Chemicals of
                                   Ashland Chemical from January 1993 to December 1996.

- - ------------
(a) Also a director.
 
                                                   (list continued on next page)
 
                                       15

 

(list continued from previous page)

          NAME, AGE,
          DATE FIRST
      ELECTED AN OFFICER                                     BUSINESS EXPERIENCE
- - -------------------------------  ----------------------------------------------------------------------------

Karen K. Clegg, 50               President -- Federal Manufacturing & Technologies (FM&T) since May 1995.
              1998                 Vice President of FM&T from February 1995 to April 1995. Vice President,
                                   Field Services and New Markets, AlliedSignal Technical Services
                                   Corporation from January 1994 to January 1995.

Robert D. Johnson, 51            President -- Aerospace Marketing, Sales and Service since January 1999.
              1998                 President -- Electronic & Avionics Systems from October 1997 to December
                                   1998. Vice President and General Manager, Aerospace Services from 1994 to
                                   1997. Group Vice President, Manufacturing and Services of AAR
                                   Corp. from 1993 to 1994.

Steven R. Loranger, 47           President -- Engines since July 1997. President -- Truck Brake Systems from
              1998                 February 1995 to June 1997. Vice President, Air Transport unit of Engines
                                   from May 1993 to January 1995.

Jeffrey I. Sinclair, 49          President -- Truck Brake Systems since October 1997. Vice President, Global
              1998                 Sales and Marketing, Friction Materials from September 1996 to September
                                   1997. Principal of A.T. Kearney (management consulting company) from
                                   September 1995 to August 1996. President of St. James Group (marketing
                                   consulting company) from March 1991 to August 1995.

David N. Weidman, 43             President -- Polymers since March 1998. President -- Fluorine Products unit
              1998                 of Specialty Chemicals from May 1995 to February 1998. Vice President and
                                   General Manager, Performance Additives unit of Specialty Chemicals from May
                                   1994 to April 1995. Vice President and General Manager of American Cyanamid's
                                   Fibers business from 1990 to 1994.

Geoffrey Wild, 42                President -- Electronic Materials since February 1997. President of
              1998                 Electronic Materials of Johnson Matthey plc from August 1992 to January 1997.

 
                                    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 25 (Unaudited Quarterly Financial Information) of Notes to
Financial Statements at page 42 of the Company's 1998 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 1998
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
1998 Annual Report to shareowners is incorporated herein by reference.

                                       16

 

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS
 
     'Management's Discussion and Analysis' on pages 19 through 27 of the
Company's 1998 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 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
 
     Information relating to market risk is included under the caption
'Financial Instruments' in 'Management's Discussion and Analysis' on pages 22
and 23 of the Company's 1998 Annual Report to shareowners, and such information
is incorporated herein by reference.
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The Company's consolidated financial statements, together with the report
thereon of PricewaterhouseCoopers LLP dated February 1, 1999 appearing on pages
27 through 42 of the Company's 1998 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 1998 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,
1998, and such information is incorporated herein by reference. Certain other
information relating to Executive Officers of the Registrant appears at pages 15
and 16 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.
 
                                       17

 

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 1998 Annual Report to shareowners:
          Report of Independent Accountants....................................................          27
          Consolidated Statement of Income for the years ended December 31, 1998, 1997 and
           1996................................................................................          28
          Consolidated Balance Sheet at December 31, 1998 and 1997.............................          29
          Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997 and
           1996................................................................................          30
          Consolidated Statement of Shareowners' Equity for the years ended December 31, 1998,
           1997 and 1996.......................................................................          31
          Notes to Financial Statements........................................................          32

(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
- - -----------   -----------------------------------------------------------------------------------------
           
   13         Pages 18 through 42 (except for the data included under the captions 'Financial
                Statistics' on page 18) of the Company's 1998 Annual Report to shareowners
   21         Subsidiaries of the Registrant
   23         Consent of Independent Accountants
   24         Powers of Attorney
   27         Financial Data Schedule

(b) Reports on Form 8-K
 
     During the three months ended December 31, 1998, a report on Form 8-K was
filed on October 21, 1998 disclosing certain earnings data, updated Year 2000
information and certain new credit facilities.
 
                                       18

 

                                   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.
 
March 4, 1999                              By:  /s/ RICHARD J. DIEMER, JR.
                                              ---------------------------------
                                                    Richard J. Diemer, Jr.
                                                 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                                       Russell E. Palmer
       Chairman of the Board and Chief Executive                               Director
                  Officer and Director

                          *                                                      *
- - ------------------------------------------------------       ------------------------------------------------------
                  Frederic M. Poses                                      Ivan G. Seidenberg
                       Director                                                Director

                          *                                                      *
- - ------------------------------------------------------       ------------------------------------------------------
                    Hans W. Becherer                                       Andrew C. Sigler
                        Director                                               Director

                                                                                 *
- - ------------------------------------------------------       ------------------------------------------------------
                   Marshall N. Carter                                     John R. Stafford
                        Director                                               Director
       (Joined Board of Directors March 1, 1999)

                          *                                                      *
- - ------------------------------------------------------       ------------------------------------------------------
                       Ann M. Fudge                                     Thomas P. Stafford
                         Director                                              Director

                          *                                                      *
- - ------------------------------------------------------       ------------------------------------------------------
                      Paul X. Kelley                                     Robert C. Winters
                         Director                                              Director

                          *                                                      *
- - ------------------------------------------------------       ------------------------------------------------------
                     Robert P. Luciano                                      Henry T. Yang
                         Director                                              Director

                          *                                         /s/ RICHARD J. DIEMER, JR.
- - ------------------------------------------------------       ------------------------------------------------------                 
                     Robert B. Palmer                                  Richard J. Diemer, Jr.
                         Director                                    Vice President and Controller
                                                                    (Principal Accounting Officer)
                /s/ RICHARD F. WALLMAN
- - ------------------------------------------------------
                   Richard F. Wallman
               Senior Vice President and
                Chief Financial Officer
             (Principal Financial Officer)

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

March 4, 1999

                                       19

                                 EXHIBIT INDEX

EXHIBIT NO.                                       DESCRIPTION
- - -----------   ---------------------------------------------------------------------------------------------
           
   2          Omitted (Inapplicable)
   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 February 26, 1986, as amended and restated January 27, 1987,
                as further amended July 1, 1987 and as again amended and restated 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*       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)
  10.8*       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)
  10.9*       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
- - -----------   ---------------------------------------------------------------------------------------------
           
  10.10*      Amended and restated Agreement, dated May 6, 1994, as amended May 12, 1997 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)
  10.11       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)
  10.12       364 Day Backstop Credit Agreement dated as of October 9, 1998 by and among AlliedSignal Inc.,
                Bank of America NT&SA, Citibank, N.A., as Agent, Banque Nationale de Paris, Barclays Bank
                PLC, Citibank, N.A., Deutsche Bank AG and Morgan Guaranty Trust Company of New York, as
                Lenders, and Citibank, N.A., as Agent (incorporated by reference to Exhibit 99.1 to the
                Company's Form 8-K filed October 21, 1998)
  10.13*      AlliedSignal Inc. Supplemental Pension Plan, as amended (incorporated by reference to Exhibit
                10.13 to the Company's Form 10-K for the year ended December 31, 1997)
  11          Omitted (Inapplicable)
  12          Omitted (Inapplicable)
  13          Pages 18 through 42 (except for the data included under the captions 'Financial Statistics'
                on page 18) of the Company's 1998 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'

 

SELECTED FINANCIAL DATA
AlliedSignal Inc. (dollars in millions except per share amounts)

- - --------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31               1998         1997         1996         1995         1994         1993         1992  
- - --------------------------------------------------------------------------------------------------------------------------
                                                                                                  
FOR THE YEAR
Net sales                           $15,128      $14,472      $13,971      $14,346      $12,817      $11,827      $12,042 
Income (loss) from continuing
    operations (1)                    1,331        1,170        1,020          875          759          656          535 
Net income (loss) (2)                 1,331        1,170        1,020          875          759          411         (712)
Per share of common stock:
Earnings (loss) from continuing
    operations-- basic                 2.37         2.07         1.80         1.54         1.34         1.16          .95 
Net earnings (loss)-- basic            2.37         2.07         1.80         1.54         1.34          .73        (1.26)
Earnings (loss) from continuing
    operations -- assuming dilution    2.32         2.02         1.76         1.52         1.32         1.14          .93 
Net earnings (loss)-- 
    assuming dilution                  2.32         2.02         1.76         1.52         1.32          .71        (1.24)
Dividends                               .60          .52          .45          .39        .3238          .29          .25 
- - --------------------------------------------------------------------------------------------------------------------------
AT YEAR-END
Net working capital                 $   408      $ 1,137      $ 2,143      $ 1,086      $ 1,194      $ 1,078      $ 1,414 
Property, plant and
    equipment-- net                   4,397        4,251        4,219        4,742        4,260        4,094        3,897 
Total assets                         15,560       13,707       12,829       12,465       11,321       10,829       10,756 
Long-term debt                        1,476        1,215        1,317        1,366        1,424        1,602        1,777 
Shareowners' equity                   5,297        4,386        4,180        3,592        2,982        2,390        2,251 
Book value per share of
    common stock                       9.49         7.86         7.39         6.35         5.27         4.21         3.97 
Average investment (3)                8,021        6,935        6,468        5,598        4,848        4,506        4,939 
Common shares outstanding
    (in millions)                     558.4        558.3        565.6        565.6        566.2        567.6        567.6 
Common shareowners of record         76,246       78,793       77,856       79,046       82,095       84,248       84,254 
Employees (4)                        70,400       70,500       76,600       88,500       87,500       86,400       89,300 
- - --------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS (5)
Return on net sales (income
    from operations)                   13.0         11.3         10.8          8.8          9.0          8.1          3.4  
Return on net sales (after-tax)         8.8          8.1          7.3          6.1          5.9          5.5          4.4  
Return on average investment
    (after-tax)                        17.8         18.4         17.5         17.4         17.5         16.6         13.8  
Return on average shareowners'
    equity (after-tax)                 27.8         27.5         26.6         26.7         28.9         30.6         26.4  
Interest coverage ratio                10.4          8.7          7.6          6.5          6.8          5.1          3.3  
Long-term debt as a percent of
    total capital                      19.7         19.7         22.2         25.6         30.4         37.9         40.5  
Total debt as a percent of
    total capital                      36.7         31.7         29.5         33.7         34.1         42.7         44.7  
- - --------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS (5)(6)
Return on net sales (income
    from operations)                   13.0         11.4         10.7          9.1          9.0          7.9          6.5   
Return on net sales (after-tax)         8.8          8.1          7.2          6.1          5.9          5.5          4.5   
Return on average investment
    (after-tax)                        17.8         18.3         17.4         17.4         17.5         16.6         13.9   
Return on average shareowners'
    equity (after-tax)                 27.8         27.4         26.3         26.7         28.9         30.5         26.7   
Interest coverage ratio                10.4          8.8          7.5          6.8          6.8          5.0          3.3   
Long-term debt as a percent of
    total capital                      19.7         19.7         22.2         25.6         30.4         37.9         40.5   
Total debt as a percent of
    total capital                      36.7         31.7         29.5         33.7         34.1         42.7         44.7   
==========================================================================================================================

- - --------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31               1991         1990         1989         1988
- - --------------------------------------------------------------------------------------
                                                               
FOR THE YEAR
Net sales                           $11,831      $12,343      $11,942      $11,909
Income (loss) from continuing
    operations (1)                     (273)         462          528          463
Net income (loss) (2)                  (273)         462          528          463
Per share of common stock:
Earnings (loss) from continuing
    operations-- basic                 (.50)         .84          .89          .78
Net earnings (loss)-- basic            (.50)         .84          .89          .78
Earnings (loss) from continuing
    operations -- assuming dilution    (.50)         .84          .89          .78
Net earnings (loss)-- 
    assuming dilution                  (.50)         .84          .89          .78
Dividends                               .40          .45          .45          .45
- - --------------------------------------------------------------------------------------
AT YEAR-END
Net working capital                 $   526       $  892      $ 1,065      $ 1,040
Property, plant and
    equipment-- net                   3,638        3,584        3,321        3,214
Total assets                         10,382       10,456       10,342       10,069
Long-term debt                        1,914        2,051        1,903        2,044
Shareowners' equity                   2,983        3,380        3,412        3,268
Book value per share of
    common stock                       5.40         6.28         5.89         5.53
Average investment (3)                6,771        6,723        6,520        6,629
Common shares outstanding
    (in millions)                     552.6        538.8        580.0        591.8
Common shareowners of record         91,492       97,210      102,042      111,402
Employees (4)                        98,300      105,800      107,100      109,550
- - --------------------------------------------------------------------------------------
FINANCIAL STATISTICS (5)
Return on net sales (income
    from operations)                   (2.5)         5.9          8.0          5.7
Return on net sales (after-tax)        (2.3)         3.7          4.4          3.9
Return on average investment
    (after-tax)                        (1.3)         9.6         11.0         10.3
Return on average shareowners'
    equity (after-tax)                 (8.4)        13.9         15.6         14.5
Interest coverage ratio                 (.9)         2.6          3.0          2.8
Long-term debt as a percent of
    total capital                      34.9         33.6         30.8         33.2
Total debt as a percent of
    total capital                      43.9         40.4         35.7         35.9
- - --------------------------------------------------------------------------------------
FINANCIAL STATISTICS (5)(6)
Return on net sales (income
    from operations)                    4.7          5.9          8.0          7.4
Return on net sales (after-tax)         2.9          3.7          4.4          4.3
Return on average investment
    (after-tax)                         7.8          9.6         11.0         10.9
Return on average shareowners'
    equity (after-tax)                 10.5         13.9         15.6         15.9
Interest coverage ratio                 2.1          2.6          3.0          2.9
Long-term debt as a percent of
    total capital                      34.9         33.6         30.8         33.2
Total debt as a percent of
    total capital                      43.9         40.4         35.7         35.9
=======================================================================================

(1)  In 1997, includes a provision for repositioning and other charges, a gain
     on the sale of the safety restraints business and a charge related to the
     1996 sale of the braking business, resulting in a net after-tax gain of $4
     million, or $0.01 per share. In 1996, includes a provision for
     repositioning and other charges and a gain on the sale of the braking
     business resulting in a net after-tax gain of $9 million, or $0.01 per
     share. In 1992, includes a provision for repositioning charges and a gain
     on the sale of common stock of Union Texas Petroleum Holdings, Inc. (Union
     Texas) resulting in a net after-tax charge of $6 million, or $0.01 per
     share. In 1991, includes a provision for repositioning charges and gains on
     asset sales by Union Texas resulting in a net after-tax charge of $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.

(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 $2.17 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 ratios exclude the impact on income of
     the cumulative effect of changes in accounting principles.

(6)  The returns and interest coverage ratios 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 and 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 and nonrecurring
     income in 1988.

18

MANAGEMENT'S DISCUSSION AND ANALYSIS
AlliedSignal Inc.

1998 COMPARED WITH 1997

RESULTS OF OPERATIONS

Net sales in 1998 were $15,128 million, an increase of $656 million, or 5%,
compared with 1997. Of this increase, $1,103 million was due to volume gains and
$1,083 million was from acquisitions, offset in part by a $1,188 million
reduction for divested businesses, mainly the automotive safety restraints
business. Selling prices were lower by $274 million and the impact of foreign
exchange also reduced net sales by $68 million.

Cost of goods sold as a percent of net sales was 75.8% in 1998 compared with
79.3% in 1997. Included in 1997 are repositioning and other charges (special
charges) totaling $237 million. 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%. The decrease in 1998 in cost of goods sold as
a percent of net sales reflects results of the Company's Six Sigma programs to
improve productivity and lower manufacturing and material costs and the net
gains from divestitures of non-strategic lines of business. Six Sigma refers to
efforts to reach defect-free performance in manufacturing and other business
processes.

Selling, general and administrative expenses as a percent of net sales increased
to 11.2% in 1998 from 10.9% in 1997. Expenses increased by $109 million, or 7%,
reflecting in part the impact of acquisitions and costs associated with the
Company's unsuccessful effort to acquire AMP Incorporated (AMP).

Gain on sale of strategic business units 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 1996 sale of the automotive braking business. See Note 4 of Notes to
Financial Statements for further information.

Income from operations of $1,962 million in 1998 improved by $326 million, or
20%, compared with 1997. Income from operations in 1997 includes the net pretax
gain on the sale of strategic business units and special charges (special
items). Excluding the impact of these special items, income from operations in
1998 improved by $315 million, or 19%. The Company's operating margin was 13.0%
in 1998, compared with 11.4% in 1997. Income from operations is discussed in
detail by segment in the Review of Business Segments section below.

Equity in income of affiliated companies of $150 million decreased by $28
million, or 16%, compared with 1997, mainly due to lower earnings from the UOP
process technology joint venture (UOP), partially offset by a gain on the sale
of a portion of the Company's interest in its European Truck Brake Systems joint
venture.

 

Other income (expense), a $7 million loss in 1998, was unfavorable by $84
million, compared with 1997, reflecting lower investment income and reduced
benefits from foreign exchange hedging.

Interest and other financial charges of $162 million in 1998 decreased by $13
million, or 7%, compared with 1997. The decrease results from lower tax interest
expense due to favorable settlements of worldwide tax audits, offset in part by
higher debt-related interest expense reflecting higher levels of debt.

The effective tax rate in 1998 decreased to 31.5% compared with 33.0% in 1997
adjusted for special items, primarily due to an increase in energy and research
and development tax credits.

Net income in 1998 of $1,331 million, or $2.32 per share, was 14% higher than
1997 net income of $1,170 million, or $2.02 per share. Net income in 1998 was
also 14% higher than 1997 net income of $1,166 million, or $2.01 per share, as
adjusted for special items. The higher net income in 1998 was the result of
substantially improved earnings for Aerospace Systems, Performance Polymers and
Turbine Technologies. Transportation Products and Specialty Chemicals &
Electronic Solutions had significantly lower earnings.

REVIEW OF BUSINESS SEGMENTS

Income from operations for the business segments (see tables below) excludes the
impact of the 1997 special items. (dollars in millions)

AEROSPACE SYSTEMS

                                      INCOME FROM
                          NET SALES    OPERATIONS
                          -----------------------
                                       
1998                         $4,871          $920
1997                          4,117           608
- - -------------------------------------------------
Increase                     $  754          $312
=================================================

Aerospace Systems sales of $4,871 million in 1998 increased by $754 million, or
18%, compared with 1997. The sales increase reflects continued strong demand for
Electronic & Avionics Systems flight safety products, particularly the enhanced
ground proximity warning system and the traffic alert and collision avoidance
system, and increased sales of communication and navigation products such as the
Quantum radio. Aerospace Equipment Systems aftermarket sales also increased
significantly, particularly for environmental control systems, aircraft landing
systems and engine fuel systems. The acquisitions of the Grimes Aerospace
(Grimes) lighting systems business in July 1997, the Banner Aerospace (Banner)
FAA-certified hardware parts business in January 1998, and a controlling
interest in the Normalair-Garrett Ltd. (NGL) environmental controls joint
venture in June 1998 also contributed to higher sales. The divestitures of the
communications and ocean systems businesses in 1998 were a partial offset.

                                                                              19

Aerospace Systems income from operations of $920 million in 1998 improved by
$312 million, or 51%, from the 1997 income from operations. Electronic &
Avionics Systems income from operations was substantially higher due to
increased sales, improved factory performance and the divestitures of the
communications and ocean systems businesses. Aerospace Equipment Systems income
from operations was significantly higher due principally to increased sales of
more profitable aftermarket products. The acquisitions of Grimes, Banner and NGL
also contributed to higher income from operations.

SPECIALTY CHEMICALS & ELECTRONIC SOLUTIONS

                                      INCOME FROM
                          NET SALES    OPERATIONS
                          -----------------------
                                       
1998                         $2,241          $327
1997                          2,218           326
- - -------------------------------------------------
Increase                     $   23          $  1
=================================================

Specialty Chemicals & Electronic Solutions sales of $2,241 million in 1998 were
$23 million, or 1% higher, compared with 1997. Specialty Chemicals sales were
higher primarily reflecting the acquisitions of the Astor Holdings (Astor) wax
business in October 1997 and the Pharmaceutical Fine Chemicals S.A. (PFC)
pharmaceutical chemicals business in June 1998. The sales increase was partially
offset by lower sales for Electronic Materials due to continued softness in the
semiconductor and electronics markets and the divestiture of the European
laminates business in April 1998. The divestiture of the environmental catalyst
business in June 1998 also tempered the sales increase.

Specialty Chemicals & Electronic Solutions income from operations of $327
million in 1998 increased by $1 million from the 1997 income from operations.
Specialty Chemicals income from operations was flat reflecting the negative
impact of pricing pressures, offset by lower raw material costs, acquisitions
and cost structure improvements from census reductions. Electronic Materials
income from operations decreased due to lower sales which was offset by the
divestiture of the environmental catalyst business.

TURBINE TECHNOLOGIES

                                      INCOME FROM
                          NET SALES    OPERATIONS
                          -----------------------
                                       
1998                         $3,638          $458
1997                          3,111           401
- - -------------------------------------------------
Increase                     $  527          $ 57
=================================================

Turbine Technologies sales of $3,638 million in 1998 increased by $527 million,
or 17%, compared with 1997. Engines sales increased significantly due to higher
sales of propulsion engines in the regional and business jet markets and
auxiliary power units in the commercial air transport market. Turbocharging
Systems sales also increased substantially, benefiting from increased
penetration of the turbocharged diesel passenger car market in Europe and the
light truck market in North America.

Turbine Technologies income from operations of $458 million in 1998 improved
by $57 million, or 14%, from the 1997 income from operations. Both Engines
and Turbocharging Systems income from operations was substantially higher
due principally to increased sales and productivity improvements.

 

PERFORMANCE POLYMERS

                                      INCOME FROM
                          NET SALES    OPERATIONS
                          -----------------------
                                       
1998                         $1,928          $307
1997                          2,030           215
- - -------------------------------------------------
(Decrease) Increase          $ (102)         $ 92
=================================================

Performance Polymers sales of $1,928 million in 1998 decreased by $102 million,
or 5%, compared with 1997. The sales decrease reflects the loss of sales
resulting from the divestiture of the phenol business and the exiting of the
European carpet fibers business and a portion of the North American textile
business. Sales increases for specialty films and engineering plastics were a
partial offset.

Performance Polymers income from operations of $307 million in 1998 increased by
$92 million, or 43%, from the 1997 income from operations. The improvement in
income from operations was primarily driven by a more favorable price-cost
relationship in nylon and polyester, improved productivity at the caprolactam
facility and the divestiture of the phenol business.

TRANSPORTATION PRODUCTS

                                      INCOME FROM
                          NET SALES    OPERATIONS
                          -----------------------
                                       
1998                         $2,441          $106
1997                          2,983           194
- - -------------------------------------------------
(Decrease)                   $ (542)         $(88)
=================================================

Transportation Products sales of $2,441 million in 1998 were $542 million, or
18%, lower compared with 1997 reflecting the disposition of the safety
restraints business. Excluding the divested safety restraints business,
Transportation Products sales increased 8%. The increase in sales reflects the
acquisitions of Prestone Products (Prestone) in June 1997 and the Holt Lloyd
Group Ltd. (Holt Lloyd) in November 1997 in the Consumers Products Group. Sales
for Truck Brake Systems also improved significantly, as strong
original-equipment sales were driven by an improvement in truck builds and
increased market penetration for anti-lock brake systems (ABS). Sales for
Friction Materials were moderately lower.

Transportation Products income from operations of $106 million in 1998 declined
by $88 million, or 45%, from the 1997 income from operations. The decrease
reflects the absence of income from operations from the divested safety
restraints business. Income from operations from the Consumer Products Group
also decreased substantially due in part to the initial costs of new
distribution facilities, higher advertising expense to increase brand awareness
and other expenses to improve future operations. Friction Materials income from
operations was lower due primarily to decreased sales. Income from operations
from Truck Brake Systems was substantially higher due to strong sales growth and
plant cost reductions.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Total assets at December 31, 1998 were $15,560 million, an increase of $1,853
million, or 14%, from December 31, 1997. The increase mainly reflects
acquisitions and the Company's investment in AMP.

20

[GRAPHIC REPRESENTATION of Net Sales (Dollars in billions), expressed
numerically below.]

                    1996          1997            1998
                    ----          ----            ----
                    14.0          14.5            15.1

[GRAPHIC REPRESENTATION of Earnings per Share (Dollars), expressed
numerically below.]

                  1996            1997            1998
                  ----            ----            ----
                  1.76            2.02            2.32

[GRAPHIC REPRESENTATION of Income From Operations (Dollars in millions),
expressed numerically below.]
 
                   1996          1997          1998
                   ----          ----          ----
                  1,509         1,636          1,962

[GRAPHIC REPRESENTATION of Long-term Debt as a Percent of Total Capital
(Percent), expressed numerically below.]
 
                   1996          1997          1998
                   ----          ----          ----
                   22.2          19.7          19.7

Cash provided by operating activities of $1,195 million during 1998 decreased by
$111 million compared with 1997 as higher net income was more than offset by the
increase in net taxes paid on sales of businesses, primarily related to prior
year divestitures.

Cash used for investing activities was $1,079 million during 1998 compared with
$1,283 million during 1997. The Company spent $322 million for acquisitions in
1998, a decrease of $896 million compared with 1997. The significant
acquisitions are discussed in detail in Note 2 of Notes to Financial Statements.
In 1998, the Company was unsuccessful in its effort to acquire AMP, a
manufacturer of electrical connection devices. In connection with this
transaction, the Company acquired approximately a 9% interest in AMP for $890
million. The fair market value of this investment at December 31, 1998 was
$1,041 million. In 1998, the Company received proceeds of $306 million from the
sales of certain non-strategic businesses and other assets. In 1997, the Company
disposed of its safety restraints business for $710 million in cash. See Note 4
of Notes to Financial Statements for further information. In 1998, the Company
also liquidated short-term investments of $430 million principally to fund
acquisitions and repurchases of the Company's common stock.

The Company continuously assesses the relative strength of each business in its
portfolio 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 identifies 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 actions.

Capital expenditures during 1998 were $684 million, a decrease of $33 million
from the $717 million spent in 1997, primarily due to the divestiture of the
safety restraints business. Spending by the segments and Corporate since 1996 is
shown in Note 23 of Notes to Financial Statements. The Company's total capital
expenditures in 1999 are currently projected at approximately $670 million.
These expenditures are expected to be financed principally by internally
generated funds. Approximately 56% of the projected 1999 expenditures are

planned for expansion and cost reduction, 35% for replacement and maintenance
and 9% for environmental projects.

Cash used for financing activities was $15 million during 1998 compared with
$877 million during 1997. Total debt at year-end 1998 of $3,487 million
increased by $1,180 million. Long-term debt increased by $261 million during
1998. The increase in total debt resulted principally from acquisitions, common
stock repurchases and the investment in AMP. The Company's total debt as a
percent of capital was 36.7% at year-end 1998, up from 31.7% at year-end 1997.
Long-term debt as a percent of capital was 19.7% at both December 31, 1998 and
1997.

The Company maintains two bank revolving credit facilities: (a) a $750 million
Five-Year Credit Agreement and (b) a $900 million 364-Day Backstop Credit
Agreement. The $750 million Five-Year Credit Agreement supports the issuance of
commercial paper for normal working capital purposes and the $900 million
364-Day Backstop Credit Agreement was established in 1998 to support the
issuance of commercial paper used to finance the investment in AMP and for any
other general corporate purpose. There was $1,773 and $821 million of commercial
paper outstanding at year-end 1998 and 1997, respectively. Commercial paper
borrowing reached a high of $2,059 million during 1998. See Note 15 of Notes to
Financial Statements for details of long-term debt and the credit agreements.

Shares of the Company's common stock are repurchased under a program to offset
the dilution created by shares issued under employee benefit plans, a shareowner
dividend reinvestment plan and for acquisitions. In May 1998, the Company
announced a new program to repurchase up to $2.2 billion of its common stock
over the next two years, including share repurchases under the program to offset
dilution. In 1998, the Company repurchased 22.0 million shares of its common
stock under both of these programs for $942 million. At December 31, 1998, the
Company was authorized to repurchase 57.6 million additional shares of its
common stock.

The Board of Directors approved a quarterly dividend increase of 13.3%, from
$0.15 to $0.17 per share. The dividend increase will be effective with the first
quarter of 1999.

                                                                              21

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

                            1996           1997            1998
                            ----           ----            ----

Company-funded R&D           345            349             394
Capital Expenditures         755            717             684
                           -----          -----           -----
   Total                   1,100          1,066           1,078
                           -----          -----           -----
                           -----          -----           -----

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

                  1996            1997            1998
                  ----            ----            ----
                  26.6            27.5            27.8

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 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 $74 and $90 million in
1998 and 1997, respectively, and are currently estimated to be approximately $75
million in 1999. The Company expects it will be able to fund such future
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, 1998, the recorded liability for environmental matters was $372
million. In addition, in 1998 the Company incurred operating costs for ongoing
businesses of approximately $70 million and capital expenditures of $52 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 envi-

 

ronmental matters will have a material adverse effect on the consolidated
financial position of the Company.

See Note 20 of Notes to Financial Statements for a discussion of the Company's
commitments and contingencies, including those related to environmental matters.

FINANCIAL INSTRUMENTS

The Company, as a result of its global operating and financing activities, 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 position. The Company seeks to minimize the risks from these interest
rate and foreign currency exchange rate fluctuations through its normal
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 does not use leveraged
derivative financial instruments. A discussion of the Company's accounting
policies for derivative financial instruments is included in Note 1 of Notes to
Financial Statements.

The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations. As described in Notes 15
and 17 of Notes to the Financial Statements, the Company issues both fixed and
variable rate debt and uses interest rate swaps to manage the Company's exposure
to interest rate movements and reduce borrowing costs.

The Company's exposure to market risk for 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
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, with gains or losses recognized immediately in
income. The Company's principal foreign currency exposures relate to the French
franc, the German mark, the British pound and the U.S. dollar. At December 31,
1998, the Company held or had written foreign currency forward and option
agreements, maturing through 2002. The Company writes foreign currency options
only 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 concentrations of credit risk. The Company's derivative instrument
counterparties are substantial investment and commercial banks with significant
experience using such derivative instruments. The Company monitors the impact of
market risk on the fair value and cash flows of its derivative and other
instruments considering reasonably possible changes in interest and currency
rates. The

22

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 owns approximately 9% of the outstanding common shares of AMP and
classifies this investment as an available-for-sale security, which is carried
at its quoted market value. At December 31, 1998, the carrying and fair value of
this investment was $1,041 million. A 10% decrease in the value of AMP common
stock at December 31, 1998 would result in a $104 million decrease in fair
value.

The following table illustrates the potential change in fair value for interest
rate sensitive instruments based on a hypothetical immediate one percentage
point increase in interest rates across all maturities and the potential change
in fair value for foreign exchange rate sensitive instruments based on a 10%
increase in U.S. dollar per local currency exchange rates across all maturities
at December 31, 1998 and 1997: (dollars in millions)

                                                                                                  ESTIMATED
                                                            FACE OR                                INCREASE
                                                           NOTIONAL   CARRYING        FAIR        (DECREASE)
                                                             AMOUNT   VALUE (1)   VALUE (1)   IN FAIR VALUE
                                                           --------------------------------------------------
                                                                                        
December 31, 1998
INTEREST RATE SENSITIVE INSTRUMENTS
Long-term debt (including current maturities) (2)            $1,609    $(1,593)    $(1,767)         $   (78)
Interest rate swaps                                             450          3        --                  3

FOREIGN EXCHANGE RATE SENSITIVE INSTRUMENTS
Foreign currency forward agreements held (3)                    264         (1)         (1)             (17)
Foreign currency forward agreements written (3)                 573          2           1               49
Foreign currency options held                                    89          2           2                7
Foreign currency options written                                 89         (2)         (2)              --
- - -------------------------------------------------------------------------------------------------------------
December 31, 1997
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 held (3)                    708          1           1             (64)
Foreign currency forward agreements written (3)                 649         22          23              51
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 approximately 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 methods used by the Company to assess and mitigate risk discussed
above should not be considered projections of future events.

 

OTHER MATTERS

YEAR 2000

Computer programs and embedded computer chips that are not Year 2000 compliant
are unable to distinguish between the calendar year 1900 and the calendar year
2000. The Company recognizes the need to ensure that its business operations
will not be adversely affected by the upcoming calendar year 2000 and is
cognizant of the time sensitive nature of the Year 2000 problem.

The Company assessed how it may be impacted by the Year 2000 problem and is
implementing a comprehensive plan to address all known aspects of the Year 2000
problem: information systems (both critical information systems, the failure of
which could have a material effect on the Company's operations and noncritical
information systems), production and facilities equipment, products, customers
and suppliers (both high-impact suppliers, suppliers who would materially impact
the Company's operations if they were unable to provide supplies or services on
a timely basis, and other suppliers).

The Company completed an inventory of and assessed the impact of the Year 2000
problem with respect to its information systems, production and facilities
equipment, products, customers and suppliers. Based on the results of the
assessment, the Company prioritized the various projects to remedy potential
Year 2000 problems. The Company is developing and implementing plans to
remediate known Year 2000 problems. Testing to ensure that the remediation is
successfully completed is part of the remediation process. The Company expects
to develop in the first quarter of 1999 contingency plans and trained specialist
teams to implement such contingency plans to address any Year 2000 problems
which are unexpected or are not remedied in a timely manner under the Company's
remediation plans.

The following table sets forth the estimated dates for substantially completing
assessment, development of remediation plans and remediation with respect to the
various aspects of the Year 2000 problem:

                                                 DEVELOPMENT OF
                                                    REMEDIATION
                                 ASSESSMENT                PLAN          REMEDIATION
                                 -----------------------------------------------------
                                                                        
Critical Information Systems             SC                  SC                   SC
Other Information Systems                SC                  SC              3/31/99
Production and Facilities Equipment      SC                  SC              3/31/99
Products                                 SC                  SC              3/31/99
Customers                                SC                  SC              3/31/99
High Impact Suppliers                    SC                  SC              3/31/99
Other Suppliers                          SC             3/31/99              6/30/99
======================================================================================

SC = Substantially Complete

The remediation plans for information systems involve a combination of software
modifications, upgrades and replacements. The remediation plans for production
and facilities equipment involve a combination of software or hardware
modifications, upgrades and replacements, or changes to operating procedures to
circumvent equipment failures caused by the Year 2000 problem. The remediation
plans for products involve modifying software and/or hardware contained in
products, or issuing service letters or other industry standard communications
providing customers with

                                                                              23

instructions on correcting Year 2000 issues in the Company's products. The
remediation plans for suppliers (including financial institutions, governmental
agencies and public utilities) and customers involve obtaining information about
their Year 2000 programs through surveys, meetings and other communication, the
evaluation of the information received and the development of appropriate
responses. While the Company expects that development of remediation plans and
remediation with respect to suppliers and customers will be completed by the
dates set forth in the table above, the Company can provide no assurance that
the Year 2000 problem will be successfully corrected by suppliers and customers
in a timely manner.

The Company's estimate of the total cost for Year 2000 compliance is
approximately $150 million, of which approximately $95 million has been incurred
through December 31, 1998. The estimated cost of $150 million includes an
estimated $130 million for assessment, planning and remediation activities which
are expected to be substantially completed in the first half of 1999 and an
estimated $20 million for monitoring of remediation which has been completed and
the development of and preparation for contingency plans which will be expended
primarily during 1999. These estimates do not include the Company's potential
share of costs for Year 2000 issues by partnerships and joint ventures in which
the Company participates but is not the operator. Incremental spending has not
been and is not expected to be material because most Year 2000 compliance costs
will be met with amounts that are normally budgeted for procurement and
maintenance of the Company's information systems and production and facilities
equipment. The redirection of spending from procurement of information systems
and production and facilities equipment to implementation of Year 2000
compliance plans may in some instances delay productivity improvements.

The Company believes that the Year 2000 issue will not cause material
operational problems for the Company. However, if the Company is not successful
in identifying all material Year 2000 problems, or the assessment and
remediation of identified Year 2000 problems is not completed in a timely
manner, there may be an interruption in, or failure of, certain normal business
activities or operations. Such interruptions or failures could have a material
adverse impact on the Company's consolidated results of operations and financial
position or on its relationships with customers, suppliers or others.

EURO CONVERSION

On January 1, 1999, certain member countries of the European Union established
fixed conversion rates between their existing currencies and the European
Union's common currency (Euro). The transition period for the introduction of
the Euro is between January 1, 1999 and January 1, 2002. The Company is
presently identifying and ensuring that all Euro conversion compliance issues
are addressed. Although the Company cannot predict the overall impact of the
Euro conversion at this time, the Company does not expect that the Euro
conversion will have a material adverse effect on its consolidated results of
operations.

 

SALES TO THE U.S. GOVERNMENT

Sales to the U.S. Government, acting through its various departments and
agencies and through prime contractors, amounted to $1,891 and $1,851 million in
1998 and 1997, respectively. This included sales to the Department of Defense
(DoD), as a prime contractor and subcontractor, of $1,366 and $1,338 million in
1998 and 1997, respectively. Sales to the DoD accounted for 9% of the Company's
total net sales in both 1998 and 1997. The Company is affected by U.S.
Government budget constraints for defense and space programs. After years of
decline, however, total U.S. defense spending increased slightly in 1998 and is
expected to increase over the next several years.

BACKLOG

At December 31, 1998 and 1997, the Company had firm orders for its aerospace
products from the U.S. and foreign governments of $1,511 and $1,908 million,
respectively. Total backlog, including commercial contracts, at year-end 1998
and 1997 was $5,012 and $5,087 million, respectively. The Company anticipates
that approximately $3,553 million of the 1998 backlog will be filled in 1999.

INFLATION

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

NEW ACCOUNTING PRONOUNCEMENT

In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133), effective for fiscal years beginning after June 15,
1999. SFAS No. 133 requires derivatives to be recorded on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in values of derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. The Company is
completing an analysis of SFAS No. 133, which is not expected to have a material
impact on the Company's results of operations or financial position.

1997 COMPARED WITH 1996

RESULTS OF OPERATIONS

Net sales in 1997 were $14,472 million, an increase of $501 million, or 4%,
compared with 1996. Of this increase, $1,178 million was due to volume gains and
$482 million was from acquisitions, offset in part by a $744 million reduction
for divested businesses, mainly the safety restraints and braking businesses.
The impact of foreign exchange reduced net sales by $238 million and selling
prices were lower by $177 million.

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

24

manufacturing and material costs and the improved mix of higher-margin
businesses.

Gain on sale of strategic business units 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 1996 sale of the braking business. 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. Income from operations in both 1997 and 1996 includes
pretax gains on the sales of strategic business units as well as special charges
(special items). Excluding the impact of these special items, income from
operations improved by $156 million, or 10%. The Company's operating margin was
11.4% in 1997, compared with 10.7% in 1996. Income from operations is discussed
in detail by segment in the Review of Business Segments section below.

Equity in income of affiliated companies of $178 million increased by $35
million, or 24%, compared with 1996, mainly due to higher earnings from 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 increased benefits from foreign exchange hedging.

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 favorable settlements of worldwide tax audits, 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 $2.02 per share, was 15% higher than
1996 net income of $1,020 million, or $1.76 per share. Adjusted for special
items in both years, net income for 1997 was $1,166 million, or $2.01 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 Turbine
Technologies and Aerospace Systems and moderately higher earnings by Specialty
Chemicals & Electronic Solutions and Performance Polymers. Transportation
Products had significantly lower earnings.

REVIEW OF BUSINESS SEGMENTS

Income from operations for the business segments (see tables below) excludes the
impact of the 1997 and 1996 special items. (dollars in millions)

 

AEROSPACE SYSTEMS

                                      INCOME FROM
                          NET SALES    OPERATIONS
                          -----------------------
                                       
1997                         $4,117          $608
1996                          3,635           469
- - -------------------------------------------------
Increase                     $  482          $139
=================================================

Aerospace Systems sales of $4,117 million in 1997 increased by $482 million, or
13%, compared with 1996. Aerospace Equipment Systems sales were substantially
higher, driven by continued aftermarket strength and higher original-equipment
shipments of engine fuel systems, environmental control systems and aircraft
landing systems. The acquisition of Grimes also contributed to the sales
increase. 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.
Electronic systems sales to the U.S. and foreign governments, however, were
lower, mainly at the communications and ocean systems businesses. Sales of
management and technical services to the U.S. Government were moderately higher.

Aerospace Systems income from operations of $608 million in 1997 improved by
$139 million, or 30%, from the 1996 income from operations. Aerospace Equipment
Systems income from operations was substantially higher due principally to
higher sales and productivity improvements. Electronic & Avionics Systems income
from operations was moderately higher reflecting increased demand, improved
manufacturing operations and material cost savings for flight safety avionics.
However, electronic systems had lower income from operations on reduced sales to
the U.S. and foreign governments at the communications and ocean systems
businesses.

SPECIALTY CHEMICALS & ELECTRONIC SOLUTIONS

                                      INCOME FROM
                          NET SALES    OPERATIONS
                          -----------------------
                                       
1997                         $2,218          $326
1996                          2,117           355
- - -------------------------------------------------
Increase (decrease)          $  101          $(29)
=================================================

Specialty Chemicals & Electronic Solutions sales of $2,218 million in 1997 were
$101 million, or 5%, higher compared with 1996. 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.

Specialty Chemicals & Electronic Solutions income from operations of $326
million in 1997 decreased by $29 million, or 8%, from the 1996 income from
operations. Specialty Chemicals had lower income from operations driven

                                                                              25

principally by pricing pressures in the fluorines business. Electronic Materials
also had lower income from operations due principally to pricing pressures and
poor results in the European laminates business. This was partially offset by an
increase in income from operations for advanced microelectronic materials and
the absence of operating losses from the micro-optic devices business.

TURBINE TECHNOLOGIES

                                      INCOME FROM
                          NET SALES    OPERATIONS
                          -----------------------
                                       
1997                         $3,111          $401
1996                          2,775           264
- - -------------------------------------------------
Increase                     $  336          $137
=================================================

Turbine Technologies sales of $3,111 million in 1997 increased by $336 million,
or 12%, compared with 1996. Engines had significantly higher shipments of
auxiliary power units and commercial propulsion end units and spares.
Turbocharging Systems sales were also significantly higher, primarily reflecting
the flow of new products and the increasing popularity of turbocharged vehicles
in Europe.

Turbine Technologies income from operations of $401 million in 1997 improved by
$137 million, or 52%, from the 1996 income from operations. Both Engines and
Turbocharging Systems income from operations were substantially higher due
principally to increased sales and productivity improvements.

PERFORMANCE POLYMERS

                                      INCOME FROM
                          NET SALES    OPERATIONS
                          -----------------------
                                       
1997                         $2,030          $215
1996                          1,888           211
- - -------------------------------------------------
Increase                     $  142          $  4
=================================================

Performance Polymers sales of $2,030 million in 1997 were $142 million, or 8%,
higher compared with 1996. 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.

Performance Polymers income from operations of $215 million in 1997 increased by
$4 million, or 2%, from the 1996 income from operations. Income from operations
from chemical intermediates, engineering plastics and specialty films was higher
due to increased sales. This was largely offset by lower income from operations
from carpet fibers, industrial polyester and industrial nylon due to higher raw
material costs and lower selling prices.

 

TRANSPORTATION PRODUCTS

                                      INCOME FROM
                          NET SALES    OPERATIONS
                          -----------------------
                                       
1997                         $2,983          $194
1996                          3,539           280
- - -------------------------------------------------
Decrease                     $ (556)         $(86)
=================================================

Transportation Products sales of $2,983 million in 1997 were $556 million, or
16%, lower compared with 1996 reflecting the disposition of the braking and
safety restraints businesses. Excluding these businesses, Transportation
Products sales increased 9%. Truck Brake Systems improved significantly,
benefiting from an upturn in truck builds and increased installation rates of
ABS. The Consumer Products Group sales were moderately higher reflecting the
acquisitions of Prestone and Holt Lloyd, both suppliers of car care products.
Lower sales of other aftermarket products, reflecting in part unfavorable market
conditions, were a partial offset. Friction Materials sales were also lower.

Transportation Products income from operations of $194 million in 1997 declined
by $86 million, or 31%, from the 1996 income from operations. The decrease
reflects the absence of income from operations from the divested braking and
safety restraints businesses. Income from operations from the Consumer Products
Group decreased substantially, primarily in the North American aftermarket
business. Income from operations from Truck Brake Systems was substantially
higher due principally to strong sales volume.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Total assets at December 31, 1997 were $13,707 million, an increase of $878
million, or 7%, from December 31, 1996. The increase mainly results from
acquisitions.

Cash provided by operating activities of $1,306 million during 1997 increased by
$110 million compared with 1996 principally due to the increase in net income.

Cash used for investing activities was $1,283 million during 1997 compared with
cash provided by investing activities of $273 million during 1996. During 1997,
the Company spent $1.2 billion on acquisitions, an increase of $1.1 billion
compared with 1996. The significant acquisitions are discussed in detail in Note
2 of Notes to Financial Statements. During 1997 the Company also disposed of its
safety restraints business for $710 million in cash. In 1996, the Company sold
its braking business for $1.5 billion in cash, subject to certain post closing
adjustments which were finalized in 1997. See Note 4 of Notes to Financial
Statements for further information. During 1997, the Company also sold certain
non-strategic businesses and other assets.

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 1996 is shown in Note 23 of Notes to Financial Statements.

26

Cash used for financing activities was $877 million during 1997 compared with
$544 million during 1996. Total debt at year-end 1997 of $2,307 million
increased $376 million. The increase resulted principally 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.

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 $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. See Note 15 of Notes to Financial
Statements for details of long-term debt and a discussion of the Credit
Agreement.

Shares of the Company's common stock are repurchased under a program to offset
the dilution created by shares issued under employee benefit plans, a shareowner
dividend reinvestment plan and for acquisitions. In 1997, the Company
repurchased 21.0 million shares of its common stock under this program for $814
million.

ENVIRONMENTAL MATTERS

Remedial response and voluntary cleanup expenditures were $90 and $87 million in
1997 and 1996, respectively. 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.

OTHER MATTERS

SALES TO THE U.S. GOVERNMENT

Sales to the U.S. Government, acting through its various departments and
agencies and through prime contractors, amounted to $1,851 and $1,833 million in
1997 and 1996, respectively. This included sales to the DoD, as a prime
contractor and subcontractor, of $1,338 and $1,237 million in 1997 and 1996,
respectively. Sales to the DoD accounted for 9% of the Company's total net sales
in both 1997 and 1996.

- - --------------------------------------------------------------------------------
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: All statements in this annual report, 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 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 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.

 

REPORT OF INDEPENDENT ACCOUNTANTS

[LOGO]

February 1, 1999

To the Shareowners and Directors of AlliedSignal Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of shareowners' equity and of cash flows
present fairly, in all material respects, the financial position of AlliedSignal
Inc. and its subsidiaries at December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, 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.

/S/ PricewaterhouseCoopers LLP

Florham Park, NJ

                                                                              27

CONSOLIDATED STATEMENT OF INCOME
AlliedSignal Inc.

Years ended December 31                            ---------------------------------
(dollars in millions except per share amounts)          1998       1997       1996
                                                   ---------------------------------
                                                                      
Net sales                                            $15,128    $14,472    $13,971
- - ------------------------------------------------------------------------------------
Cost of goods sold                                    11,476     11,481     11,606
Selling, general and administrative expenses           1,690      1,581      1,511
Gain on sale of strategic business units                  --       (226)      (655)
- - ------------------------------------------------------------------------------------
Total costs and expenses                              13,166     12,836     12,462
- - ------------------------------------------------------------------------------------
Income from operations                                 1,962      1,636      1,509
Equity in income of affiliated companies                 150        178        143
Other income (expense)                                    (7)        77         87
Interest and other financial charges                    (162)      (175)      (186)
- - ------------------------------------------------------------------------------------
Income before taxes on income                          1,943      1,716      1,553
Taxes on income                                          612        546        533
- - ------------------------------------------------------------------------------------
Net income                                            $1,331    $ 1,170    $ 1,020
====================================================================================
Earnings per share of common stock -- basic           $ 2.37    $  2.07    $  1.80
Earnings per share of common stock --
     assuming dilution                                $ 2.32    $  2.02    $  1.76
====================================================================================

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

28

CONSOLIDATED BALANCE SHEET
AlliedSignal Inc.

                                          ------------------------
December 31 (dollars in millions)              1998         1997
                                          ------------------------
                                                  
Assets
- - ------------------------------------------------------------------
Current assets:
   Cash and cash equivalents                $   712       $   611
   Short-term investments                        --           430
   Accounts and notes receivable              1,993         1,886
   Inventories                                2,332         2,093
   Other current assets                         556           553
- - ------------------------------------------------------------------
Total current assets                          5,593         5,573
Investments and long-term receivables         1,488           480
Property, plant and equipment -- net          4,397         4,251
Cost in excess of net assets of
   acquired companies -- net                  2,999         2,426
Other assets                                  1,083           977
- - ------------------------------------------------------------------
Total assets                                $15,560       $13,707
==================================================================

Liabilities
- - ------------------------------------------------------------------
Current liabilities:
   Accounts payable                         $ 1,423       $ 1,345
   Short-term borrowings                         80            47
   Commercial paper                           1,773           821
   Current maturities of
      long-term debt                            158           224
   Accrued liabilities                        1,751         1,999
- - ------------------------------------------------------------------
Total current liabilities                     5,185         4,436
Long-term debt                                1,476         1,215
Deferred income taxes                           795           694
Postretirement benefit obligations
   other than pensions                        1,732         1,775
Other liabilities                             1,075         1,201
- - ------------------------------------------------------------------

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         2,982         2,425
Common stock held in treasury, at cost:
        1998 -- 157,991,553 shares
        1997 -- 158,114,964 shares           (3,413)       (2,665)
Accumulated other nonowner changes              (70)         (179)
Retained earnings                             5,082         4,089
- - ------------------------------------------------------------------
Total shareowners' equity                     5,297         4,386
- - ------------------------------------------------------------------
Total liabilities and shareowners' equity   $15,560       $13,707
==================================================================

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

                                                                              29

CONSOLIDATED STATEMENT OF CASH FLOWS
AlliedSignal Inc.

Years ended December 31                         ------------------------------------------------
(dollars in millions)                              1998               1997               1996
                                                ------------------------------------------------
                                                                               
Cash flows from operating activities
- - ------------------------------------------------------------------------------------------------
Net income                                       $ 1,331            $ 1,170            $ 1,020
Adjustments to reconcile net
   income to net cash provided
   by operating activities:
      Gain on sale of strategic
         business units                               --               (226)              (655)
      Repositioning and other charges                 --                250                622
      Depreciation and amortization                  609                609                602
      Undistributed earnings
         of equity affiliates                        (14)               (55)               (33)
      Deferred income taxes                          233                138                213
      (Increase) in accounts
         and notes receivable                       (143)              (104)              (163)
      (Increase) in inventories                      (57)               (92)               (87)
      Decrease (increase) in
         other current assets                          3                (88)               134
      Increase in accounts payable                    37                226                117
      (Decrease) in accrued liabilities             (366)              (188)               (77)
      Net taxes paid on sale
         of businesses                              (300)               (21)               (49)
      Other                                         (138)              (313)              (448)
- - ------------------------------------------------------------------------------------------------
Net cash provided by
   operating activities                            1,195              1,306              1,196
- - ------------------------------------------------------------------------------------------------

Cash flows from
   investing activities
- - ------------------------------------------------------------------------------------------------
Expenditures for property,
   plant and equipment                              (684)              (717)              (755)
Proceeds from disposals of
   property, plant and equipment                      82                 67                 77
Decrease in investments                               --                 25                 20
(Increase) in investments                             (1)                (6)               (12)
Purchase of investment in
   AMP Incorporated                                 (890)                --                 --
Cash paid for acquisitions                          (322)            (1,218)              (114)
Proceeds from sales of businesses                    306                695              1,358
Decrease (increase) in
   short-term investments                            430               (129)              (301)
- - ------------------------------------------------------------------------------------------------
Net cash (used for) provided by
   investing activities                           (1,079)            (1,283)               273
- - ------------------------------------------------------------------------------------------------

Cash flows from financing activities
- - ------------------------------------------------------------------------------------------------
Net increase in commercial paper                     952                351                412
Net increase (decrease) in short-term
   borrowings                                          5                 18               (356)
Proceeds from issuance of preferred
   stock of subsidiary                                --                112                 --
Proceeds from issuance of common stock               156                151                147
Proceeds from issuance of long-term debt             435                 33                 48
Payments of long-term debt                          (295)              (307)              (124)
Repurchase of preferred stock
   of subsidiary                                      --               (112)                --
Repurchases of common stock                         (930)              (786)              (409)
Cash dividends on common stock                      (338)              (295)              (262)
Other                                                 --                (42)                --
- - ------------------------------------------------------------------------------------------------
Net cash (used for) financing activities             (15)              (877)              (544)
- - ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
   cash equivalents                                  101               (854)               925
Cash and cash equivalents at beginning
   of year                                           611              1,465                540
- - ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year         $   712            $   611            $ 1,465
================================================================================================

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

30

CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
AlliedSignal Inc.

                                               COMMON                        COMMON STOCK      ACCUMULATED 
                                            STOCK ISSUED     ADDITIONAL    HELD IN TREASURY     OTHER NON-              TOTAL
                                          -----------------   PAID-IN     ------------------      OWNER     RETAINED  SHAREOWNERS'
(in millions except per share amounts)    SHARES     AMOUNT   CAPITAL     SHARES      AMOUNT     CHANGES    EARNINGS    EQUITY
                                                                                                
Balance at December 31, 1995               716.4      $716     $2,131     (150.8)     $(1,658)    $  88      $2,315     $3,592
- - ----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                                                    1,020      1,020
Foreign currency translation adjustments
    (net of tax benefit of $39)                                                                     (59)                   (59)
Unrealized holding loss on marketable
    securities (net of tax benefit of $8)                                                           (15)                   (15)
                                                                                                                        ------
Nonowner changes in shareowners' equity                                                                                    946
Common stock issued for acquisitions                                          .4            3                                3
Common stock issued for employee benefit
    plans (including related tax benefits)                         58       13.6          111                              169
Repurchases of common stock                                                (14.0)        (409)                            (409)
Cash dividends on common stock
    ($.45 per share)                                                                                           (262)      (262)
Other                                                                                                           141        141
- - -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996               716.4       716      2,189     (150.8)      (1,953)       14       3,214      4,180
- - -------------------------------------------------------------------------------------------------------------------------------
Net income                                                                                                    1,170      1,170
Foreign currency translation adjustments
    (net of tax benefit of $120)                                                                   (183)                  (183)
Unrealized holding loss on marketable
    securities (net of tax benefit of $8)                                                           (10)                   (10)
                                                                                                                        ------
Nonowner changes in shareowners' equity                                                                                    977
Common stock issued for acquisitions                               32        1.0            8                               40
Common stock issued for employee benefit
    plans (including related tax benefits)                        240       12.7           94                              334
Repurchases of common stock                                                (21.0)        (814)                            (814)
Cash dividends on common stock
    ($.52 per share)                                                                                           (295)      (295)
Other                                                             (36)                                                     (36)
- - -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997               716.4       716      2,425     (158.1)      (2,665)     (179)      4,089      4,386
- - -------------------------------------------------------------------------------------------------------------------------------
Net income                                                                                                    1,331      1,331
Foreign currency translation
    adjustments (net of taxes of $7)                                                                 19                     19
Unrealized holding gain on marketable
    securities (net of taxes of $59)                                                                 90                     90
                                                                                                                        ------
Nonowner changes in shareowners' equity                                                                                  1,440
Common stock issued for acquisitions                              322       11.1           98                              420
Common stock issued for employee benefit
    plans (including related tax benefits)                        234       11.0           96                              330
Repurchases of common stock                                                (22.0)        (942)                            (942)
Cash dividends on common stock
    ($.60 per share)                                                                                           (338)      (338)
Other                                                               1                                                        1
- - -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998               716.4      $716     $2,982    (158.0)      $(3,413)     $(70)     $5,082     $5,297
===============================================================================================================================

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

                                                                              31

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

NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION AND USE OF ESTIMATES -- The 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 in the financial
statements and related disclosures in the accompanying notes. Actual results
could differ from those estimates. Certain reclassifications were made to prior
year amounts to conform with the 1998 presentation.

INVENTORIES -- 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 -- 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 -- 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 -- Cost in excess of net
assets of acquired companies (goodwill) is amortized on a straight-line basis
over appropriate periods up to 40 years. Goodwill is periodically reviewed to
determine recoverability based on expected future cash flows. The cumulative
amount of goodwill amortized at December 31, 1998 and 1997 is $559 and $476
million, respectively.

REVENUE RECOGNITION -- Recognition of contract revenues relates primarily to the
Aerospace Systems and Turbine Technologies segments. 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 losses on contracts are charged to income when identified.
Contracts that are part of a program are evaluated on an overall program basis.

ENVIRONMENTAL EXPENDITURES --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 that 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, 1998 and 1997 were $111 and $261 million and $110 and $304 million,
respectively.

 

FINANCIAL INSTRUMENTS -- 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 -- Deferred tax liabilities or assets reflect temporary differences
between amounts of assets and liabilities for financial and tax reporting. Such
amounts are 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 -- Effective December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128),
which requires the Company to report both basic earnings per share (based on the
weighted-average number of common shares outstanding) and diluted earnings per
share (based on the weighted-average number of common shares outstanding and all
dilutive potential common shares outstanding). All earnings per share data in
this report reflect earnings per share -- assuming dilution, unless otherwise
indicated.

RECENT ACCOUNTING PRONOUNCEMENTS -- Effective January 1, 1998, the
Company adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130), which establishes standards for the
reporting and presentation of changes in equity from nonowner sources in the
financial statements. Nonowner changes in shareowners' equity consists of net
income, foreign currency translation adjustments and unrealized holding gains
and losses on marketable securities and, as permitted under the provisions of
SFAS No. 130, are presented in the Consolidated Statement of Shareowners'
Equity. Prior year

32

financial statements have been reclassified to conform to the SFAS No. 130
requirements. The components of Accumulated Other Nonowner Changes are as
follows:

                                           1998       1997      1996
                                         ----------------------------
                                                       
Cumulative foreign exchange
   translation adjustment                 $(162)     $(181)     $ 2
Unrealized holding gains
   on marketable securities                  92          2       12
- - ---------------------------------------------------------------------
                                           $(70)     $(179)     $14
=====================================================================

Reclassification adjustments are as follows:

                                           1998       1997      1996
                                         ----------------------------
                                                       
Unrealized holding gains
   (losses) arising during period          $ 90      $ (3)     $(12)
Less-reclassification adjustment
   for gains previously included
   in other nonowner changes                 --         7         3
- - ---------------------------------------------------------------------
Net unrealized holding gains (losses)
   on marketable securities                $ 90      $(10)     $(15)
=====================================================================

Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131), which establishes standards for reporting
information about operating segments in annual financial statements and requires
that selected information about operating segments be reported in interim
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The adoption
of SFAS No. 131 increased the number and changed the composition of the
Company's reportable operating segments. Prior year financial statements have
been reclassified to conform to the SFAS No. 131 requirements. See Notes 23 and
24.

Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS No. 132), which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practical, requires additional information on changes in the benefit obligations
and fair values of plan assets and eliminates certain disclosures. Prior year
financial statements have been reclassified to conform to the SFAS No. 132
requirements. See Note 21.

NOTE 2
ACQUISITIONS

In 1998, the Company acquired substantially all the assets of Banner Aerospace
(Banner), distributors of FAA-certified aircraft hardware, for common stock
valued at approximately $350 million. Banner has annual sales of approximately
$250 million, principally to commercial air transport and general aviation
customers. The Company also acquired Pharmaceutical Fine Chemicals S.A. (PFC)
for approximately $390 million, including assumed liabilities. PFC manufactures
and distributes active and intermediate pharmaceutical chemicals and had sales
of approximately $110 million in 1997.

 

In 1997, the Company acquired Prestone Products Corporation (Prestone) for
approximately $400 million, including assumed liabilities. Prestone is a
supplier of car care products and had 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 had
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, had 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 had annual sales of approximately $150 million.

The Company also made other smaller acquisitions in 1998, 1997 and 1996.

NOTE 3
REPOSITIONING AND OTHER CHARGES

In the fourth quarter of 1997, the Company recorded a pretax charge of $124
million related to the costs to eliminate its three sector offices, consolidate
its Consumer Products Group and reposition some of its businesses. These actions
enhanced the Company's competitiveness and productivity. The components of this
charge included severance costs of $59 million, asset writedowns of $34 million
and other exit costs of $31 million. All of the actions were substantially
completed in 1998. The Company also recorded other charges in the fourth quarter
of 1997, including $40 million related 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 were included as part of
Cost of Goods Sold for 1997. Equity in Income of Affiliated Companies included a
charge of $13 million related to the writedown of an equity investment. The
total pretax impact of the repositioning and other charges for 1997 was $250
million (after-tax $159 million, or $0.27 per share).

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

Also, 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 was accounted for as a
change in estimate. The Company also

                                                                              33

recorded other charges primarily related to changes made in employee benefit
programs and in connection with customer and former employee claims.

Repositioning and other charges totaling $637 million were included as part of
Cost of Goods Sold for 1996. Other Income (Expense) for 1996 included 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 was $622 million (after-tax $359 million, or $0.62 per
share).

NOTE 4
GAIN ON SALE OF STRATEGIC BUSINESS UNITS

In October 1997, the Company sold its automotive safety restraints business to
Breed Technologies for $710 million in cash. 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
$0.34 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 automotive 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 $0.63 per share). The Company received consideration of $1.5
billion, subject to certain post-closing adjustments which were finalized in
1997.

NOTE 5
OTHER INCOME (EXPENSE)

Years ended December 31                    1998       1997      1996
                                         ----------------------------
                                                       
Interest income and other                 $  47      $  95      $ 94
Minority interests                          (37)       (45)      (18)
Foreign exchange gain (loss)                (17)        27        11
- - ---------------------------------------------------------------------
                                          $  (7)     $  77      $ 87
=====================================================================

NOTE 6
INTEREST AND OTHER FINANCIAL CHARGES

Years ended December 31                    1998       1997      1996
                                         ----------------------------
                                                       
Total interest and other
   financial charges                      $ 187      $ 196     $209
Less -- capitalized interest                (25)       (21)     (23)
- - ---------------------------------------------------------------------
                                          $ 162      $ 175     $186
=====================================================================

 

NOTE 7
TAXES ON INCOME

INCOME BEFORE TAXES ON INCOME

Years ended December 31                    1998       1997      1996
                                         -----------------------------
                                                       
United States                            $1,600     $1,526     $1,099
Foreign                                     343        190        454
- - ----------------------------------------------------------------------
                                         $1,943     $1,716     $1,553
======================================================================

TAXES ON INCOME

Years ended December 31                    1998       1997      1996
                                         -----------------------------
                                                       
United States                            $  478     $  466     $  359
Foreign                                     134         80        174
- - ----------------------------------------------------------------------
                                         $  612     $  546     $  533
======================================================================

Years ended December 31                    1998       1997      1996
                                         -----------------------------
                                                       
Taxes on income consist of:
Current:
   United States                         $  298     $  292     $  190
   State                                     16         54         41
   Foreign                                   65         62         89
- - ---------------------------------------------------------------------
                                            379        408        320
- - ---------------------------------------------------------------------
Deferred:
   United States                            100         98        133
   State                                     64         22         (5)
   Foreign                                   69         18         85
- - ---------------------------------------------------------------------
                                            233        138        213
- - ----------------------------------------------------------------------
                                         $  612     $  546     $  533
======================================================================

Years ended December 31                    1998       1997      1996
                                         -----------------------------
                                                       
The U.S. statutory federal income
   tax rate is reconciled to the
   Company's overall effective
   income tax rate as follows:
U.S. statutory federal income
   tax rate                               35.0%      35.0%      35.0%
Taxes on foreign earnings over
   U.S. tax rate                            .8          .2        .4
Asset basis differences                   (1.9)       (2.4)      (.1)
Nondeductible amortization                 1.3         1.4       2.1
State income taxes                         2.5         2.6       1.3
Tax benefits of Foreign Sales
   Corporation                            (2.6)       (3.0)     (1.9)
Dividends received deduction                --         (.3)      (.2)
ESOP dividend tax benefit                  (.6)        (.7)      (.7)
Tax credits                               (1.5)        (.2)       --
All other items -- net                    (1.5)        (.8)     (1.6)
- - ----------------------------------------------------------------------
                                          31.5%       31.8%     34.3%
======================================================================

DEFERRED INCOME TAXES

December 31                                           1998       1997
                                                    ------------------
                                                          
Included in the following balance sheet accounts:
Other current assets                                $  408     $  394
Other assets                                            84        117
Accrued liabilities                                     (8)        --
Deferred income taxes                                 (795)      (694)
- - ----------------------------------------------------------------------
                                                    $ (311)    $ (183)
======================================================================

34

DEFERRED TAX ASSETS (LIABILITIES)

December 31                                           1998       1997
                                                    ------------------
                                                          
The principal components of
   deferred tax assets and (liabilities)
   are as follows:
Property, plant and equipment
   basis differences                                $ (660)    $ (690)
Postretirement benefits other than
   pensions and postemployment benefits                786        795
Investment and other asset basis differences          (508)      (567)
Other accrued items                                    406        561
Net operating losses                                   209        218
Deferred foreign gain                                  (39)       (48)
Undistributed earnings of subsidiaries                 (55)       (45)
All other items -- net                                (420)      (381)
- - ----------------------------------------------------------------------
                                                      (281)      (157)
Valuation allowance                                    (30)       (26)
- - ----------------------------------------------------------------------
                                                    $ (311)    $ (183)
======================================================================

The amount of federal tax net operating loss carryforwards available for 1998 is
$197 million. These loss carryforwards were generated by certain subsidiaries
prior to their acquisition in 1997 and have 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 $429 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 $552 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
EARNINGS PER SHARE

The following table sets forth the computations of basic and diluted earnings
per share:

                                                   AVERAGE     PER SHARE
                                   INCOME           SHARES        AMOUNT
                                 -----------------------------------------
                                                          
1998
Earnings per share of
   common stock -- basic           $1,331      561,979,359         $2.37
Dilutive securities:
   Stock options                                12,107,890
   Restricted stock units                          289,300
- - --------------------------------------------------------------------------
Earnings per share of common
   stock -- assuming dilution      $1,331      574,376,549         $2.32
==========================================================================
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
==========================================================================

 

                                                   AVERAGE     PER SHARE
                                   INCOME           SHARES        AMOUNT
                                 -----------------------------------------
                                                          
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
==========================================================================

The diluted earnings per share calculation excludes the effect of stock options
when the options' exercise prices exceed the average market price of the common
shares during the period. In 1998, 1997 and 1996, the number of stock options
not included in the computations was 1,438,074, 1,201,900 and 35,000,
respectively. These stock options were outstanding at the end of each of the
respective years.

NOTE 9
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. There
were no short-term investments at December 31, 1998. The fair values of
marketable debt and equity securities at December 31, 1997 were $152 million
($152 million at cost) and $214 million ($206 million at cost), respectively.
The Company also had other short-term investments held for sale of $64 million
at December 31, 1997, carried at cost, which approximates market value.

NOTE 10
ACCOUNTS AND NOTES RECEIVABLE

December 31                                           1998       1997
                                                    ------------------
                                                          
Trade                                               $1,554     $1,466
Other                                                  476        457
- - ----------------------------------------------------------------------
                                                     2,030      1,923
Less -- allowance for doubtful
   accounts and refunds                                (37)       (37)
- - ----------------------------------------------------------------------
                                                    $1,993     $1,886
======================================================================

The Company is a party to agreements under which it can sell undivided interests
in designated pools of trade accounts receivable. At both December 31, 1998 and
1997, trade 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.

                                                                              35

NOTE 11
INVENTORIES

December 31                                           1998       1997
                                                    ------------------
                                                          
Raw materials                                       $  568      $  605
Work in process                                        655         722
Finished products                                    1,174         905
Supplies and containers                                 96          89
- - ----------------------------------------------------------------------
                                                     2,493       2,321
Less --
Progress payments                                      (54)        (88)
Reduction to LIFO cost basis                          (107)       (140)
- - ----------------------------------------------------------------------
                                                    $2,332      $2,093
======================================================================

Inventories valued at LIFO amounted to $214 and $191 million at December 31,
1998 and December 31, 1997, respectively, which amounts were below estimated
replacement cost by $107 and $140 million, respectively.

NOTE 12
INVESTMENTS AND LONG-TERM RECEIVABLES

December 31                                           1998       1997
                                                    ------------------
                                                          
Investment in AMP Incorporated (1)                  $1,041        $ --
Investments (2)                                        370         403
Long-term receivables                                   77          77
- - ----------------------------------------------------------------------
                                                    $1,488        $480
======================================================================

(1)  Includes unrealized holding gain of $151 million at December 31, 1998.

(2)  Includes unrealized holding gains of $1 and $3 million at December 31, 1998
     and 1997, respectively, on equity securities classified as available-for-
     sale. The cost basis of the equity securities was $7 million at December
     31, 1998 and 1997.

NOTE 13
PROPERTY, PLANT AND EQUIPMENT

December 31                                           1998       1997
                                                    ------------------
                                                          
Land and land improvements                          $  336      $  330
Machinery and equipment                              5,999       6,017
Buildings                                            1,571       1,455
Office furniture and equipment                         846         851
Transportation equipment                               119         126
Construction in progress                               487         410
- - ----------------------------------------------------------------------
                                                     9,358       9,189
Less -- accumulated depreciation and amortization   (4,961)     (4,938)
- - ----------------------------------------------------------------------
                                                    $4,397      $4,251
======================================================================

NOTE 14
ACCRUED LIABILITIES

December 31                                           1998       1997
                                                    ------------------
                                                          
Wages                                               $  168      $  246
Customer advance payments/deposits                     126         126
Insurance                                              137         110
Other                                                1,320       1,517
- - ----------------------------------------------------------------------
                                                    $1,751      $1,999
======================================================================

 

NOTE 15
LONG-TERM DEBT AND CREDIT AGREEMENTS

December 31                                           1998       1997
                                                    ------------------
                                                          
Employee stock ownership plan
   floating rate notes, 4.12% - 4.72%,
   due 1999                                         $   --      $   85
6.75% notes due August 15, 2000                        100         100
9-7/8% debentures due June 1, 2002                     171         250
9.20% debentures due February 15, 2003                  62         100
6-1/8% notes due July 1, 2005                          117          --
Medium term notes, 8.93% - 9.28%, 
   due 1999 - 2001                                      25          69
6.20% notes due February 1, 2008                       200          --
Zero coupon bonds and money multiplier notes,
   13.0% - 14.26%, due 1999 - 2009                     174         157
5-3/4% dealer remarketable securities
   due March 15, 2011                                  200          --
9-1/2% debentures due June 1, 2016                      49         100
Industrial development bond obligations,
   2.8% - 6.75%, maturing at various
   dates through 2027                                   99         105
9.065% debentures due June 1, 2033                      51         --
Other (including capitalized leases),
   1.54% - 15.0%, maturing at various
   dates through 2016                                  228         249
- - ----------------------------------------------------------------------
                                                    $1,476      $1,215
======================================================================

During 1998, the Company issued $200 million of 6.20% notes due February 1,
2008, and $200 million of 5-3/4% dealer remarketable securities due March 15,
2011. During 1998, the Company also made two exchange offers to holders of
certain of its outstanding debt securities. In the first debt exchange offer,
holders of approximately $51 million principal amount of the Company's 9-1/2%
debentures due June 1, 2016 tendered debentures for a like principal amount of
the Company's 9.065% debentures due June 1, 2033. In the second debt exchange
offer, holders of approximately $79 million principal amount of the Company's
9-7/8% debentures due June 1, 2002 and approximately $38 million principal
amount of the Company's 9.20% debentures due February 15, 2003 tendered
debentures for approximately $133 million principal amount of the Company's
6-1/8% notes due July 1, 2005. The debt exchange did not result in a substantial
modification of the original debt terms for financial reporting purposes.

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

                                            LONG-TERM
At December 31, 1998                             DEBT
                                        ---------------
                                               
1999                                           $  158
2000                                              206
2001                                               55
2002                                              197
2003                                               89
Thereafter                                        929
- - -------------------------------------------------------
                                                1,634
Less -- current portion                           158
- - -------------------------------------------------------
                                               $1,476
=======================================================

The Company maintains two bank revolving credit facilities: (a) a $750 million
Five-Year Credit Agreement (Credit Agreement) with a group of 18 banks, dated as
of June 30, 1995, as amended June 28, 1996 and June 13, 1997 and (b) a $900
million 364-Day Backstop Credit Agreement (364-Day Credit Agreement) with a
group of 6 banks, dated as of October 7, 1998. The Credit Agreement was
established to

36

support the issuance of commercial paper for normal working capital purposes and
the 364-Day Credit Agreement was established to support the issuance of
commercial paper used to finance the acquisition of 20 million shares of common
stock of AMP Incorporated (AMP) and for any other general corporate purpose. The
Company had no balance outstanding under either agreement at December 31, 1998.

Both of the credit agreements do not restrict the Company's ability to pay
dividends; however, they do require the Company to maintain a minimum net worth
of $3.1 billion. The failure to comply with customary conditions or the
occurrence of customary events of default, contained in the credit agreements,
would prevent any further borrowings and would generally require the repayment
of any outstanding borrowings under such credit agreements. 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 agreements 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).

Loans under the Credit Agreement are required to be repaid no later than June
30, 2002. 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.

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 commitments under the 364-Day Credit Agreement terminate on October 6, 1999.
Annually, prior to the Agreement's anniversary date, the Company may request
that the termination date of the 364-Day Credit Agreement be extended by another
year. Upon the termination date, the Company may request that any outstanding
loans be converted into a term loan maturing no later than the first anniversary
of the commitment termination date. The Company has agreed to pay a facility fee
of 0.055% per annum on the aggregate commitment for the 364-Day Credit
Agreement, subject to increase or decrease in the event of changes in the
Company's long-term debt ratings.

Interest on borrowings under the 364-Day 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 the
three reference banks plus 0.170% (applicable margin). Upon conversion of the
364-Day Credit Agreement to a term loan the applicable margin increases to

 

0.225% (the facility fee is discontinued at the conversion date). The 364-Day
Credit Agreement is subject to utilization fees of up to 0.025% of borrowings.
The applicable margin over the Eurocurrency rate and the utilization fee on the
364-Day Credit Agreement are subject to increase or decrease if the Company's
long-term debt ratings change.

NOTE 16
LEASE COMMITMENTS

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

                                                LEASE
At December 31, 1998                         PAYMENTS
                                           ------------
                                              
1999                                             $ 96
2000                                               87
2001                                               67
2002                                               49
2003                                               40
Thereafter                                        127
- - -------------------------------------------------------
Total                                            $466
=======================================================

Rent expense of $120, $109 and $98 million was included in costs and expenses
for 1998, 1997 and 1996, 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 position. In
seeking to minimize these market risks, the Company manages exposure to changes
in interest rates and foreign currency exchange rates through its normal
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 and does not use leveraged derivative
financial instruments.

At December 31, 1998 and 1997, interest rate swap agreements effectively changed
$300 million of fixed-rate debt at an average rate of 7.13% and 9.53%,
respectively, to U.S. commercial paper and London Interbank Offer Rate (LIBOR)
based floating rate debt with an average effective rate of 6.53% and 8.04%,
respectively. Based on its terms, one of 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, 1998 and 1997 effectively changed $150
and $58 million, respectively, of U.S. commercial paper and LIBOR based floating
rate debt at an average rate of 5.18% and 4.80%, respectively, to fixed rate
debt with an average effective rate of 6.25% and 6.81%, respectively. The
Company's interest rate swaps mature through the year 2008.

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,

                                                                              37

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 the net income of a number of foreign
subsidiaries. Forward and option agreements used to hedge net income are marked
to market, with gains or losses recognized immediately in income. The Company's
principal foreign currency exposures relate to the French franc, the German
mark, the British pound and the U.S. dollar. At December 31, 1998, the Company
held or had written foreign currency forward and option agreements maturing
through 2002. The Company writes foreign currency options only 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 concentrations of credit risk. The Company's derivative instrument
counterparties are substantial investment or commercial banks with significant
experience using such derivative instruments. The Company monitors the impact of
market risk on the fair value and cash flows of its derivative and other
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.

The values of the Company's outstanding derivative financial instruments at
December 31, 1998 and 1997 are as follows:

                                                 NOTIONAL
                                                PRINCIPAL    CARRYING       FAIR
                                                   AMOUNT       VALUE    VALUE(1)
                                              ------------------------------------
                                                                    
December 31, 1998
Interest rate swap agreements held                   $450        $  3       $ --
Foreign currency forward agreements held              264          (1)        (1)
Foreign currency forward agreements written           573           2          1
Foreign currency options held                          89           2          2
Foreign currency options written                       89          (2)        (2)
- - ----------------------------------------------------------------------------------
December 31, 1997
Interest rate swap agreements held                   $358        $ --       $  3
Foreign currency forward agreements held              708           1          1
Foreign currency forward agreements written           649          22         23
Foreign currency options held                         150           4          4
- - ----------------------------------------------------------------------------------

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

Other 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 (excluding
capitalized leases of $41 and $43 million at December 31, 1998 and 1997,
respectively) are $1,593 and $1,396 million and the fair values are $1,767 and
$1,584 million at December 31, 1998 and 1997, 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,
1998, the Company has remaining authority to repurchase from time to time up to
57.6 million shares of common stock.

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 11,181,184 and 10,468,811 shares available
for future grants under the terms of the Company's stock option plans at
December 31, 1998 and 1997, 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, 1998, there were 1,491,547 Units outstanding, including 277,471
Units granted in 1998, the restrictions on which generally lapse over periods
not exceeding ten years from date of grant. Compensation expense is recognized
over the restricted period.

38

The following table summarizes information about stock option activity for the
three years ended December 31, 1998:

                                                                        Average
                                               Number                   Exercise
                                             of Options                   Price
                                             -----------------------------------

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
Granted                                       5,904,362                    37.99
Exercised                                    (8,169,444)                   17.96
Lapsed or canceled                           (4,115,892)                   25.88
- - --------------------------------------------------------------------------------
Outstanding at December 31, 1998             43,301,181                    23.99
================================================================================

The following table summarizes information about stock options outstanding at
December 31, 1998:

                        Options Outstanding                Options Exercisable
                        -------------------                --------------------

Range of                                   Average                     Average
Exercise               Number   Average   Exercise         Number     Exercise
Prices            Outstanding     Life(1)    Price    Exercisable        Price
- - ----------------------------------------------------  -------------------------

$ 7.18 - $17.18      8,848,427     3.2      $13.54       8,848,427     $13.54
$17.19 - $19.54     14,515,480     5.6       18.20      12,815,480      18.25
$21.25 - $35.44      9,119,628     7.3       27.02       4,253,701      25.16
$35.79 - $45.41     10,817,646     8.7       37.75         486,316      43.54
                    ----------                          ----------
                    43,301,181     6.2       23.99      26,403,924      18.25
===============================================================================

(1) Average remaining contractual life in years.

There were 29,850,357 and 28,365,464 options exercisable at average exercise
prices of $17.08 and $15.14 at December 31, 1997 and 1996, respectively.

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." 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 for its fixed stock option plans 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."

                                              1998      1997         1996
                                              --------------------------- 

Weighted-average fair value per
  share of options granted 
  during the year (1)                        $9.24     $9.15        $6.22
Reduction of:
  Net income                                   $27       $33          $24
  Earnings per share of common
    stock--basic                              $.05      $.06         $.04
  Earnings per share of common
    stock--assuming dilution                  $.05      $.06         $.04
Assumptions:
  Historical dividend yield                    1.6%      1.8%         1.8% 
  Historical volatility                       20.7%     19.1%        21.1%
  Risk-free rate of return                     5.3%      6.4%         5.5%
  Expected life (years)                        5.0       5.0          5.0
===============================================================================

(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
1998 and 1997 and in Retained Earnings in prior years.

NOTE 20
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.

In accordance with the Company's accounting policy (see Note 1), 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.

The Company holds an investment of 20 million shares of common stock of AMP
which was acquired in a cash tender offer in October 1998 at a price of $44.50
per share. Under Subchapter H of the Pennsylvania Business Corporation Law, if
the Company realizes a profit on disposition of AMP stock prior to February
2000, such profit may be recovered by AMP. The Company intends to hold the AMP
stock for investment purposes. Tyco Industries Ltd. (Tyco) and AMP have signed a
merger agreement pursuant to which AMP is to merge into a subsidiary of Tyco.
AMP shareholders will be entitled to receive Tyco common stock under the terms
of the merger. The Company believes that the merger, if effected, would not
constitute a disposition of the Company's AMP stock for purposes of
Subchapter H.

With respect to all other matters, including those relating to commercial
transactions, government contracts, product liability and nonenvironmental
health and safety 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.

                                                                            39

NOTE 21
PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company's pension plans, most of which are defined benefit plans and almost
all of which are noncontributory, cover substantially all employees. The
Company's U.S. retiree medical plans cover employees who retire with pension
eligibility for hospital, professional and other medical services. The following
table summarizes the balance sheet impact, including the benefit obligations,
assets, funded status and rate assumptions associated with the Company's
significant pension and retiree medical benefit plans.

                                                                              Other
                                                        Pension           Postretirement
                                                        Benefits             Benefits
                                                   -----------------------------------------
                                                     1998       1997      1998       1997
                                                   -----------------------------------------

Change in benefit obligation
Benefit obligation at January 1                   $ 5,941    $ 5,419     $ 1,634      $ 1,533
Service cost                                          139        124          21           21
Interest cost                                         422        412         103          111
Plan amendments                                        20         --           5         (121)
Actuarial (gains) losses                              352        470         (27)         188
Acquisitions                                           91         --          --           16
Benefits paid                                        (447)      (454)       (127)        (114)
Settlements and curtailments                          (65)        (8)        (32)          --
Translation effect                                      2        (22)         --           --
- - ---------------------------------------------------------------------------------------------
Benefit obligation at December 31                   6,455      5,941       1,577        1,634
- - ---------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at January 1              6,428      5,843          --           --
Actual return on plan assets                          853      1,018          --           --
Company contributions                                  46         40          --           --
Participants' contributions                            --          1          --           --
Acquisitions                                           63         --          --           --
Settlements                                           (48)        (9)         --           --
Benefits paid                                        (447)      (454)         --           --
Translation effect                                    (10)       (11)         --           --
- - ---------------------------------------------------------------------------------------------
Fair value of plan assets at December 31            6,885      6,428          --           --
- - ---------------------------------------------------------------------------------------------
Funded status of plans                                430        487      (1,577)      (1,634)
Unrecognized transition (asset)                       (22)       (26)         --           --
Unrecognized net (gain) loss                         (569)      (659)        (99)         (77)
Unrecognized prior service cost                       102         93        (188)        (221)
- - ---------------------------------------------------------------------------------------------
(Accrued) benefit cost                            $   (59)   $  (105)    $(1,864)     $(1,932)
=============================================================================================
Assumptions as of December 31
Discount rate                                        6.75%      7.25%       6.75%        7.25%
Assumed rate of return on plan assets               10.00%     10.00%         --           --
Assumed annual rate of compensation increase         5.00%      5.00%         --           --
=============================================================================================

 

The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of the fair value of plan assets were $328, $281 and $43 million,
respectively, as of December 31, 1998 and $285, $246 and $31 million,
respectively, as of December 31, 1997.

Net periodic pension and other postretirement benefit costs include the
following components.

                                                                                       Other
                                                        Pension                   Postretirement
                                                        Benefits                     Benefits
                                            ------------------------------------------------------
                                            1998       1997      1996      1998     1997      1996
                                            ------------------------------------------------------

Service cost                                $139       $124      $133       $21      $21      $ 24
Interest cost                                422        412       398       103      111       111
Assumed return on plan assets               (580)      (519)     (458)       --       --        --
Amortization of transition asset              (4)        (7)       (7)       --       --        --
Amortization of prior service cost            12         11        11       (19)     (15)      (10)
Recognition of actuarial (gains) losses        1          1         1        (2)      (9)       (4)
- - --------------------------------------------------------------------------------------------------
Benefit cost (credit)                       $(10)       $22       $78      $103     $108      $121
==================================================================================================

Most of the U.S. retiree medical plans 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 retiree
medical plans 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
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.

For measurement purposes, the assumed annual rates of increase in the per capita
cost of covered health care benefits for 1998 were 6.50% 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%).

Assumed health care cost trend rates have a significant effect on the amounts
reported for the retiree medical plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects.

                                          One-Percentage-      One-Percentage-
                                           Point Increase       Point Decrease
                                         --------------------------------------

Effect on total of service
  and interest cost components                   $11                 $(10)
Effect on postretirement 
  benefit obligation                            $122                $(109)
===============================================================================

40

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 1998, 1997 and 1996 included interest of $267, $191
and $178 million and income taxes of $391, $269 and $221 million, respectively.

The weighted-average interest rate on short-term borrowings and commercial paper
outstanding at December 31, 1998 and 1997 was 5.8% and 6.0%, respectively.

NOTE 23
SEGMENT FINANCIAL DATA

The Company operates globally through eleven strategic business units (SBUs)
that offer products and services which are sold principally in the following
markets: commercial and military aviation, defense, space, automotive and heavy
vehicle, electronics, carpeting, refrigeration, construction, computers,
utilities, pharmaceutical and agriculture. The Company's SBUs have been
aggregated into five reportable segments. The SBUs and their major classes of
products included in each reportable segment follows:

> AEROSPACE SYSTEMS includes Aerospace Equipment Systems (environmental control
  systems; engine and fuel controls; power systems; aircraft lighting; and
  aircraft wheels and brakes); Electronic & Avionics Systems (flight safety
  communications, navigation, radar and surveillance systems; and advanced
  systems and instruments); and Aerospace Marketing, Sales & Service (repair
  and overhaul services; hardware; logistics; and management and technical
  services).

> SPECIALTY CHEMICALS & ELECTRONIC SOLUTIONS includes Specialty Chemicals
  (fluorine-based products; pharmaceutical and agricultural chemicals; specialty
  waxes, adhesives and sealants; and process technology); and Electronic
  Materials (insulation materials for integrated circuitry; copper-clad
  laminates for printed circuit boards; advanced chip packaging; and amorphous
  metals).

> TURBINE TECHNOLOGIES includes Engines (auxiliary power units; and propulsion
  engines); and Turbocharging Systems (turbochargers; charge-air coolers; and
  portable power systems).

> PERFORMANCE POLYMERS includes the Polymers unit (fibers; plastic resins;
  specialty films; and intermediate chemicals).

> TRANSPORTATION PRODUCTS includes the Consumer Products Group (car care
  products including anti-freeze, filters, spark plugs, cleaners, waxes and
  additives); Friction Materials (friction material and related brake system
  components); and Truck Brake Systems (air brake and anti-lock braking
  systems).

The Company's sales are not materially dependent on a single customer or small
group of customers.

 

                                       Specialty
                                       Chemicals &                                        Corporate
                              Aerospace Electronic  Turbine    Performance Transportation  and Un-
                               Systems  Solutions Technologies   Polymers    Products     allocated (1)   Other(2)  Total
                     ----------------------------------------------------------------------------------------------------

Net sales            1998       $4,871    $2,241     $3,638      $1,928      $2,441         $9             $--   $15,128
                     1997        4,117     2,218      3,111       2,030       2,983         13              --    14,472
                     1996        3,635     2,117      2,775       1,888       3,539         17              --    13,971

Depreciation and     1998          159       109        114         103          81         43              --       609
amortization         1997          128       110        110         130          96         35              --       609
                     1996          129        94        107         123         108         41              --       602

Income from          1998          920       327        458         307         106       (156)             --     1,962
operations           1997          608       326        401         215         194        (97)            (11)    1,636
                     1996          469       355        264         211         280        (88)             18     1,509

Capital              1998          146       158        125         150          77         28              --       684
expenditures         1997          132       135        111         174         115         50              --       717
                     1996           83       111        103         220         163         75              --       755

Investment in        1998           --       260         --           2          85          3              --       350
equity affiliates    1997           41       233         --           1         103          6              --       384
                     1996           43       181         --           2          98          4              --       328

Total assets         1998        4,510     2,975      3,049       1,498       1,994      1,534              --    15,560
                     1997        3,734     2,528      2,653       1,541       2,137      1,114              --    13,707   
                     1996        2,972     1,975      2,611       1,469       1,779      2,023              --    12,829
=========================================================================================================================

Intersegment sales approximate market and are not significant. 

(1) The Corporate and Unallocated column includes amounts for Corporate items
    and businesses sold.
 
(2) The Other column includes in 1997 a provision for repositioning and other
    charges of $237 million, a gain on the sale of the safety restraints 
    business of $277 million and a charge related to the settlement of the 1996
    braking business sale of $51 million. Includes in 1996 a provision for
    repositioning and other charges of $637 million and a gain on the sale of 
    the braking business of $655 million.

                                                                              41

NOTE 24
GEOGRAPHIC AREAS -- FINANCIAL DATA

                                  United                 Other
                                  States     Europe   International    Total   
                        -----------------------------------------------------

Net sales (1)           1998      $11,880   $2,264        $984        $15,128
                        1997       11,319    2,171         982         14,472
                        1996       10,774    2,397         800         13,971
- - -----------------------------------------------------------------------------
Long-lived assets       1998        3,057      827         513          4,397
                        1997        3,249      691         311          4,251
                        1996        3,207      739         273          4,219
=============================================================================

Sales between geographic areas approximate market and are not significant.
(1) Net sales are classified according to their country of origin. Included in
    United States net sales are export sales of $2,613, $2,467 and 
    $2,399 million for each of the respective years.

NOTE 25
UNAUDITED QUARTERLY FINANCIAL INFORMATION

                                                 1998                                           1997
                            -----------------------------------------------    ----------------------------------------------------
                            Mar. 31   June 30   Sept. 30    Dec. 31     Year   Mar. 31   June 30   Sept. 30   Dec. 31         Year
                            -------------------------------------------------------------------------------------------------------

Net sales                    $3,646     $3,869    $3,741    $3,872   $15,128   $3,327    $3,578    $ 3,657     $3,910       $14,472
Gross profit                    837        920       903       992     3,652      722       814        817        638(1)      2,991
Net income                      300        350       329       352     1,331      259       305        292        314(1)(2)   1,170
Earnings per share-- basic      .53        .62       .59       .63      2.37      .46       .54        .52        .56(1)(2)    2.07
Earnings per share--
 assuming dilution              .52        .61       .58       .62      2.32      .45       .52        .50        .55          2.02
Dividends paid                  .15        .15       .15       .15       .60      .13       .13        .13        .13           .52
Market price (3)
High                          43.81      47.56     46.69     44.94     47.56    38.25     42.50      47.13      43.94         47.13
Low                           34.63      39.63     32.63     33.06     32.63    33.25     33.88      41.13      31.63         31.63
===================================================================================================================================

(1) Includes a provision of $237 million, after-tax $159 million and $0.27 per
    share for repositioning and other charges.
(2) Includes an after-tax gain of $196 million and $0.34 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.
(3) From composite tape -- stock is traded primarily on the New York
    Stock Exchange.

42 

                                                                      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 Laminate Systems Inc. ..............................    Delaware        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,
333-14673, 333-57509, 333-57515, 333-57517 and 333-57519), on Forms S-3 (Nos.
33-13211, 33-14071, 33-55425, 33-64245, 333-22355, 333-44523, 333-45555,
333-49455 and 333-68847) and on Form S-8 (filed as an amendment to Form S-14,
No. 2-99416-01) of our report dated February 1, 1999 appearing in the 1998
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,
1998.
 
PRICEWATERHOUSECOOPERS LLP
 
Florham Park, New Jersey
March 4, 1999

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:   February 5, 1999

 

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:   February 5, 1999

 

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:  February 5, 1999

 

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:  February 5, 1999

 

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:  February 5, 1999

 

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:  February 5, 1999

 

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:  February 5, 1999

 

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:  February 5, 1999

 

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:  February 5, 1999

 

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:  February 5, 1999

 

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:  February 5, 1999

 

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:  February 5, 1999

 

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:  February 5, 1999

 

                                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 and Richard J. Diemer, Jr., 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, 1998,

            (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:  February 5, 1999

 

  

                              5

This schedule contains summary financial information extracted from the
consolidated balance sheet at December 31, 1998 and the consolidated statement
of income for the year ended December 31, 1998 and is qualified in its
entirety by reference to such financial statements.

                           1,000,000

                          YEAR
                      DEC-31-1998
                           DEC-31-1998
                                         712
                                     0
                                1,554
                                    37
                                  2,332
                             5,593
                                       9,358
                               4,961
                              15,560
                        5,185
                                      1,476
                            0
                                      0
                                       716
                                   4,581
                15,560
                                     15,128
                            15,128
                                       11,476
                               11,476
                                 0
                                 0
                             162
                              1,943
                                   612
                          1,331
                                   0
                                  0
                                        0
                                 1,331
                                 2.37
                                 2.32