________________________________________________________________________________
________________________________________________________________________________
 
                       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, 1995
                                       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 (201)455-2000
 
Securities registered pursuant to Section 12(b) of the Act:

                                       
                                                      Name of Each Exchange
          Title of Each Class                          on Which Registered
- ----------------------------------------  --------------------------------------
Common Stock, par value $1 per share*                New York Stock Exchange
                                                     Chicago  Stock Exchange
                                                     Pacific  Stock Exchange
Money Multiplier Notes due 1996-2000                 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 1997-2009               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  Amsterdam, Basle,
   Frankfurt, Geneva, London, Paris and Zurich stock exchanges.
 
Securities registered pursuant to Section 12(g) of the Act:  None
 
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12  months (or  for such shorter  period that  the Registrant  was
required  to  file  such reports),  and  (2)  has been  subject  to  such filing
requirements for the past 90 days. Yes X No _
 
Indicate by check mark if disclosure  of delinquent filers pursuant to Item  405
of  Regulation S-K is  not contained herein,  and will not  be contained, to the
best of Registrant's  knowledge, in definitive  proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
 
The  aggregate market  value of  the voting stock  held by  nonaffiliates of the
Registrant was approximately $13.4 billion at December 31, 1995.
 
There were 282,769,564 shares of Common Stock outstanding at December 31, 1995.
 
                      Documents Incorporated by Reference
                      -----------------------------------
         Part I and II: Annual Report to Shareowners for the Year Ended December
31, 1995.
        Part III: Proxy Statement for Annual Meeting of Shareowners to be held
April 22, 1996.
 
________________________________________________________________________________
________________________________________________________________________________

                               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, 1995                       Report
- ----------------------------------  ------------------------------------------------------------    ------------

 1. Business                        Note 23. Segment Financial Data ............................         37
                                    Note 24. Geographic Areas -- Financial Data ................         38
                                    Management's Discussion and Analysis .......................         19
 3. Legal Proceedings               Note 19. Commitments and Contingencies .....................         35
 5. Market for the Regis-           Note 25. Unaudited Quarterly Financial
    trant's Common Equity           Information ................................................         38
    and Related Stock-              Selected Financial Data ....................................         39
    holder Matters
 6. Selected Financial Data         Selected Financial Data ....................................         39
 7. Management's Discussion and     Management's Discussion and Analysis .......................         19
    Analysis of Financial
    Condition and Results of
    Operations
 8. Financial Statements and        Report of Independent Accountants ..........................         38
    Supplementary Data              Consolidated Statement of Income ...........................         26
                                    Consolidated Statement of Retained Earnings ................         26
                                    Consolidated Balance Sheet .................................         27
                                    Consolidated Statement of Cash Flows .......................         28
                                    Notes to Financial Statements ..............................         29

                                                 Heading(s) in Proxy Statement for                   Page(s) in
                                                   Annual Meeting of Shareowners                       Proxy
                                                     to be held April 22, 1996                       Statement
                                    ------------------------------------------------------------    ------------
                                                                                              
10. Directors and Executive         Election of Directors; Voting Securities ...................         *
    Officers of the Registrant
11. Executive Compensation          Election of Directors -- Compensation of Directors;
                                    Executive Compensation .....................................         *
12. Security Ownership of Certain   Voting Securities ..........................................         *
    Beneficial Owners and
    Management

- ------------
 
*  To  be  included  in  a  definitive Proxy  Statement  to  be  filed  with the
   Securities and Exchange Commission not later than 120 days after December 31,
   1995.
 
                                       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...............................................................................    15
           4  Submission of Matters to a Vote of Security Holders.............................................    15
           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.........................................................................    17
           7  Management's Discussion and Analysis of Financial Condition and Results of Operations...........    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.................................    17(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,  1995. 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 sometimes 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.
 
     The  Company's  operations  are conducted  under  three  business segments:
Aerospace, Automotive and Engineered Materials.
 
     The Company's  products  are  used  by  many  major  industries,  including
electronics,   motor  vehicles,  chemicals,  textiles,  construction,  plastics,
housing, telecommunications,  utilities,  packaging, agriculture,  military  and
commercial aviation, and in the space program. The following is a description of
the   Company's  three  business  segments  and  their  principal  products  and
activities.
 
AEROSPACE
 
     The Aerospace  segment  is  among the  world's  largest  manufacturers  and
suppliers  of  advanced  technology  products  and  services  for  the military,
commercial and general aviation, and space markets.
 
     Aerospace's principal  product  lines  are organized  into  four  strategic
business  units:  AlliedSignal  Engines (Engines),  Aerospace  Equipment Systems
(Equipment Systems),  Government  Electronic Systems  (Electronic  Systems)  and
Commercial Avionics Systems (Avionics Systems).
 
     The  Company serves key  military and commercial  segments of the aviation,
defense and space markets with a broad array of systems, subsystems,  components
and  services. It designs, develops, manufactures, markets and services hundreds
of products found on all types of aircraft, from single-piston engine  aircraft,
executive  aircraft  and wide-bodied  'jumbos' flown  by the  world's commercial
carriers, to trainers, transports, bombers, fighters and helicopters used by the
U.S. and other  countries for  national defense. The  Company's global  business
consists primarily of original equipment (OE) sales and an extensive aftermarket
business,  including  spare  parts, maintenance  and  repair,  and retrofitting.
Worldwide customers include the U.S. and  foreign governments, all of the  major
airframe and engine manufacturers, including Boeing, McDonnell Douglas, Lockheed
Martin,   Airbus  Industrie  (Airbus),  British  Aerospace,  Cessna,  Fairchild,
Dassault, Gulfstream,  Bombardier,  Rockwell  International,  Pratt  &  Whitney,
General Electric (GE) and Rolls Royce, as well as the world's leading airlines.
 
     Principal products, manufactured for military aircraft, civil air transport
and   general  aviation  markets,  include  primary  propulsion,  consisting  of
turboprop, turbofan, turbojet  and turboshaft engines,  and auxiliary power  gas
turbine  engines; environmental control systems, consisting of air conditioning,
cabin  pressure  and  temperature  controls;  airborne  weather  avoidance   and
collision  avoidance radar systems;  forward-looking windshear detection systems
and wing ice detection systems; aircraft communications -- both voice and  data;
microwave  landing systems; automatic flight  control systems; pneumatic control
systems; engine and  flight instruments;  motion sensing and  air data  systems;
navigation   and   identification   equipment,   including   identification   of
friend-or-foe systems; flight  data recorders; cockpit  voice recorders;  ground
proximity  warning  systems;  electric power  generating  systems;  fuel control
systems; aircraft  wheels  and  brakes; brake  control  systems;  test  systems;
electromechanical  and hydraulic systems and components; heat transfer equipment
and engine  oil  cooling  systems. Other  products  include  electronic  cooling
systems and infrared radiation suppressors.
 
     The  Company also  manufactures products  for missiles,  spacecraft defense
command,  control   communication   and  intelligence   programs   and   oceanic
applications,  primarily  for  defense markets.  Products  include cryptographic
equipment, radar proximity fuzes, space-pointing  devices for deep space  probes
and  control  systems  for  spacecraft,  gyroscopes  for  tactical  missiles and
military aircraft, antisubmarine  warfare systems as  well as field  engineering
management  and technical support services to the National Aeronautics and Space
Administration (NASA) and the U.S. Department of Energy (DOE).
 
     In October 1994 the Company completed the purchase of the Lycoming  Turbine
Engine  Division of Textron Inc. (Lycoming Engine). The acquisition extended the
Company's turbine engine product
 
                                       4

offerings into the 50- to 115-seat  regional aircraft market and in  helicopters
and  other commercial and military applications.  Lycoming Engine had 1994 sales
of $550 million.
 
     In January 1996, the Company completed the acquisition of Northrop  Grumman
Corporation's  precision products business based  in Norwood, Massachusetts. The
business, which  has  annual sales  of  approximately $39 million,  manufactures
inertial  and sensor products  for military and space  markets. In addition, the
Company sold its military  landing gear business  to Coltec Industries'  Menasco
unit.
 
     The  Company is affected by the level of expenditures for defense and space
programs and  the  level  of  production  of  commercial  and  general  aviation
aircraft.  The Company's  aerospace products are  sold directly to  the U.S. and
foreign governments,  aircraft manufacturers  and  commercial airlines,  and  to
dealers and distributors of general aviation products.
 
     Moderate growth in the Company's commercial business for aerospace products
is  expected,  over the  long  term, to  mitigate  a reduction  in  U.S. defense
spending. Moreover, aerospace  sales are not  dependent on any  one key  defense
program   or  commercial   customer.  However,   contract  awards   by  aircraft
manufacturers, some of which are discussed below, can be canceled or reduced  if
aircraft  orders are cut back. The products and services are sold in competition
with those of a large number of other companies, some of which have  substantial
financial  resources  and  significant technological  capabilities.  Among those
companies that  compete with  several of  the segment's  product areas  are  GE,
Honeywell,  Rockwell  International,  Sundstrand, United  Technologies  and B.F.
Goodrich.
 
     Sales to the U.S.  government, acting through  its various departments  and
agencies  and through prime contractors, amounted to $1,806 million for 1995 and
$1,886 million  for 1994,  which  amounts include  sales  to the  Department  of
Defense  of $1,205 million in 1995 and $1,300 million in 1994. Approximately 54%
and 59% of sales  to the U.S.  government in 1995  and 1994, respectively,  were
made  under fixed-price  contracts in  which the  Company agrees  to perform the
contract for a fixed price and retains  for itself any benefits of cost  savings
or must bear the burden of cost overruns.
 
     Government  contracts are generally  terminable by the  government at will.
Upon termination,  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.
 
     The Company, as are other government contractors, is subject to  government
investigations  of business practices and compliance with government procurement
regulations.  Although  such  regulations  provide  that  a  contractor  may  be
suspended or debarred from government contracts under certain circumstances, and
the  outcome  of  pending  government investigations  cannot  be  predicted with
certainty, management is not presently aware of any such investigation which  it
expects will have a material adverse effect on the Company.
 
     Orders  for  certain  products  sold  to  general  and  commercial aviation
customers  mainly  consist  of  relatively  short-term  and  frequently  renewed
commitments.  Government procurement agencies generally issue contracts covering
relatively long periods  of time. Total  backlog for products  and services  for
both government and commercial contracts was $4,523 million at December 31, 1995
and  $4,730 million at  December 31, 1994  of which U.S.  and foreign government
orders were $1,871  million and  $1,803 million  for the  respective years.  The
Company  anticipates that approximately $3,010 million of the total 1995 backlog
will be filled during 1996.
 
     The Aerospace  segment's  international  operations  consist  primarily  of
exporting   U.S.  manufactured  products,  performance  of  services,  operating
aircraft repair and overhaul facilities and licensing activities. The  principal
manufacturing facility outside of the U.S. is in Canada.
 
     In 1995, as in the prior year, world defense spending continued to decline.
However,  most major  U.S. and international  airlines operated  in an improving
economic environment. The  modest turnaround that  began in the  second half  of
1993,  continued in  1994 and strengthened  significantly in  1995. The regional
airlines experienced strong growth while the high-end corporate aviation  market
showed moderate growth.
 
     Aerospace received a number of significant contracts during 1995.
 
                                       5

     The  Company's flight safety systems were chosen by several major airlines.
Singapore Airlines  selected the  Company's flight  safety and  data  management
avionics  for its 67 Boeing 747-400 and  Airbus A340-300E aircraft in a contract
with a potential sales value of more than $20 million. Scandinavian Airlines and
Continental  Airlines  became  the  first   two  customers  for  the   Company's
Electro-Thermal  Ice  Protection  System  on  their  MD-80  aircraft.  Southwest
Airlines selected Avionics  Systems to  supply a complete  package of  avionics,
including  forward-looking windshear detection systems, and Equipment Systems to
provide maintenance for wheels and brakes in contracts with a combined potential
sales value of $175 million.
 
     Engine's new TFE731-40 turbofan engine was  chosen by Dassault for its  new
Falcon  50EX business jet. Engines was  also selected to provide TPE331-14-GR/HR
turboprop engines for 69 Jetstream 41 aircraft ordered by Trans States  Airlines
Inc. and SA Airlink of South Africa; the contract, including spares and service,
has  a  potential sales  value of  $220  million. Engines  was chosen  to supply
TFE731-5BR turbofan engines  for the  new Raytheon  Hawker 800XP  aircraft in  a
contract  with a  potential sales  value of  $300 million.  Engines and Avionics
Systems received a contract with a potential sales value of $240 million for the
LF-507 engines  and  avionics for  the  Avro  RJ-85 aircraft  chosen  by  Sabena
Airlines  and Swissair. Equipment Systems was selected by GE Aircraft Engines to
supply the start system for the CF34-8C.
 
     In military markets,  Electronic Systems won  several key awards.  Northrop
Grumman  selected Electronic Systems  to be the sole  supplier of the navigation
system for  the  U.S.  Army's  brilliant  anti-armor  submunition  program;  the
contract  has  a  potential  sales  value  of  $200  million.  McDonnell Douglas
Helicopter Systems selected the Company to provide multipurpose displays for its
AH-64D Longbow Apache  advanced attack  helicopter in  a contract  with a  sales
potential  in excess of $300 million. Equipment Systems will provide the turbine
cooling valve for Pratt & Whitney's F119 engine, currently under development  to
power  the twin-engine F-22 Advanced Tactical Fighter; the award has a potential
sales value  of more  than $12  million. Equipment  Systems also  was awarded  a
contract having a potential sales value of $20 million by the U.S. Navy (USN) to
provide F-18 wheel and brake spare parts and contracts for various valve systems
on  the Seawolf and  New Attack submarines.  Raytheon Aircraft selected Avionics
Systems to supply avionics for the  new U.S. Air Force (USAF)/USN Joint  Primary
Aircraft  Training  System  aircraft.  The  USN/Marine  Corps  selected Avionics
Systems' new flat-panel,  color liquid  crystal displays  to replace  up to  700
mechanical horizontal situation indicators in its H46 helicopters.
 
     In  the general aviation  market, the Company  received several significant
contracts. Engine's new RE100 Auxiliary Power Unit (APU) was selected by Learjet
as the  standard option  for its  new Lear  45 business  jet. Equipment  Systems
received  a  contract to  supply the  air conditioning  system for  Cessna's new
Citation Excel turbofan aircraft. Avionics Systems was selected by Cessna to  be
the  exclusive supplier of avionics for  the rebirth of the single-piston-engine
aircraft.
 
     A number of airlines selected Equipment Systems for their wheels and brakes
for new aircraft, including: Japan Air System for wheels and brakes for its  new
fleet  of Boeing 777 aircraft  in a contract with  potential sales valued at $54
million; Egyptair for  wheels and  carbon brakes  for the  airline's new  Airbus
A340s  and Boeing 777s; and Shandong Airlines  for wheels and brakes for its new
Boeing 737  aircraft.  The Company  was  also  chosen by  McDonnell  Douglas  to
assemble  and deliver an integrated landing system, including wheels and brakes,
for its new MD-95 twin-jet aircraft.
 
     In the helicopter market, McDonnell Douglas chose the Company's Bendix/King
and Global Wulfsberg avionics for its new Explorer helicopter in a contract with
a sales potential  of $50 million.  Light Helicopter Turbine  Engine Company,  a
partnership  with the Allison  Engine Company, signed  a contract with Hindustan
Aeronautics Ltd.  to provide  CTS800  commercial turboshaft  engines for  a  new
advanced  light helicopter. Projections of 300  helicopters could result in more
than $150 million in engine sales.
 
     AlliedSignal Technical Services  Corp. (ATSC)  received a  contract with  a
$200  million sales potential from the  USAF to provide maintenance, engineering
services and modifications to the Air Force Satellite Control Network.
 
                                       6

     Equipment Systems  received  a  contract  from  Bombardier  Aerospace-North
America   to  provide  the  integrated  electrical  power  system  for  the  new
deHavilland Dash  8 Series  400 regional  aircraft. McDonnell  Douglas  selected
Avionics  Systems to supply liquid  crystal displays as part  of a field upgrade
program to retrofit the electro-mechanical flight instruments on the DC-8, DC-9,
DC-10 and MD-80 aircraft.
 
     The Company was also awarded a number of significant contracts in 1994.
 
     Aerospace was awarded several significant contracts related to Boeing's new
737-700 program totaling about  $3 billion in potential  sales over the life  of
the  program.  The  most  significant of  these  awards  included  the Company's
designation as the sole supplier  of APUs for this  new family of aircraft;  the
contract  has a sales  potential of $2 billion.  Equipment Systems won contracts
for the environmental control  and bleed air systems  with a sales potential  of
$370  million. GE's Aircraft Engines unit awarded contracts to Equipment Systems
for the main  fuel control  and the  air turbine  start system  for its  CFM56-7
engine  on the new 737 program with  a combined sales potential of $260 million.
Southwest Airlines awarded a contract with a sales potential of $225 million  to
Equipment  Systems  for  wheels and  brakes  on  its new  Boeing  737-700 fleet.
Equipment Systems was also awarded a contract for the engine nose cowl  anti-ice
valve with a sales potential of $22 million.
 
     The  Company has received  contracts for the  MD-95. Equipment Systems will
supply the environmental control systems  and Avionics Systems will provide  the
communications and navigational systems on a supplier-furnished-equipment basis.
The combined sales potential of the two contracts is more than $500 million.
 
     Aero  Vodochody  of Czechoslovakia  selected International  Turbine Engines
Corp., a joint venture between Engines and the Aero Industry Development  Center
of  the Republic of China (Taiwan), to  supply F124-GA-100 engines for its L-159
light attack/advanced trainer aircraft. The  sales potential of the contract  is
$290  million. Aero Vodochody also chose  a Rockwell-AlliedSignal team to supply
the avionics suite for its L-159 program; Electronic Systems is responsible  for
supplying and integrating selected avionics subsystems. Lockheed Martin Aircraft
Services  awarded a  contract to  Electronic Systems  to upgrade  the integrated
cockpit displays and mission avionics in A-4M SkyHawk tactical fighters sold  by
the U.S. government to the Republic of Argentina's Air Force.
 
     Engines  received an order  to supply the  Garrett Turbine Compressor Power
180C engine for  up to 750  ground carts for  the USAF for  the San Antonio  Air
Logistics  Center's  Large  Aircraft  Start System.  The  contract  has  a sales
potential of $75 million.
 
     Electronic Systems  received a  contract  with a  sales potential  of  $200
million to produce an inertial measurement unit for Northrop Grumman's Brilliant
Anti-Tank Weapon.
 
     The  USAF's  Philips Laboratory  awarded  Equipment Systems  a  contract to
develop a turbopump. This contract has  sales potential of about $5 million  and
is  considered strategically significant because  it positions Equipment Systems
for entry into the turbopump market.
 
     Two important APU maintenance service agreements (MSA) were awarded  during
the  year. Southwest Airlines, for its fleet of 737 aircraft, awarded a contract
with a  sales potential  of $100  million  to the  Company and  Alaska  Airlines
selected the Company to service its APUs with a sales potential of $7.6 million.
 
     The  Australian Civil Aviation Authority awarded  a contract for $9 million
to Electronic Systems to  provide a parallel approach  radar monitor (PARM)  for
Sydney's  airport;  it will  be the  third airport  in the  world and  the first
outside the U.S. with a PARM.
 
     The Company was  also awarded new  contracts in general  aviation in  1994.
Avionics Systems successfully penetrated the safety avionics market by winning a
contract  from Gulfstream to provide a  safety avionics suite for the Gulfstream
GV aircraft. The award included a  traffic alert and collision avoidance  system
(TCAS  II), ground  proximity warning  systems and  maintenance data acquisition
units. Israeli Aircraft Industries selected the Company for three contracts with
a combined  sales  potential exceeding  $30  million. The  TFE731-40  engine,  a
turbofan  from the Company's  generation of TFE731 engines,  was selected as the
propulsion system  for  the  Astra  SPX aircraft  and  the  Company's  APUs  and
environmental  control  systems  were  selected  for  the  Galaxy  business jet.
Dassault Aviation
 
                                       7

selected Engines  to supply  the most  powerful of  its new  family of  turbofan
engines,  the TFE731-60,  for Dassault's  new Falcon  900EX. Engines  received a
contract for  69  TPE331-14  turboprop  engines  from  Jetstream  with  a  sales
potential  of $220  million. Canadair  selected Engines  to supply  APUs and air
turbine start systems for its fleet  of Global Express aircraft with a  combined
sales potential of $50 million.
 
     NASA  awarded ATSC  the test, evaluation  and maintenance  contract for its
White Sands Test Facility in New Mexico. The initial three-year contract, plus a
two-year option, has a sales potential of $163 million. In an award that secured
a strong position  for future  potential space station  work, Equipment  Systems
received a contract from NASA's Lewis Research Center to develop the first space
flight  demonstration of a solar dynamic electric power generation system with a
sales potential of $15 million. Aerospace  was part of four industry teams  that
will  share in  $98 million in  technology reinvestment project  grants from the
U.S. government's Advanced Research Projects Agency. Among the projects is a $42
million award for the development of a radar system to be used in an  Autonomous
Landing Guidance System and a $43 million award to develop Fly-by-Light Advanced
Systems  Hardware.  ATSC  is developing  and  installing the  ground  system for
Taiwan's new  satellite  program  under  a  contract  with  a  sales  potential,
including options, of $32 million.
 
     The  Company expects  that these programs  will require  only minimal fixed
capital spending.
 
AUTOMOTIVE
 
     The Automotive  segment designs,  engineers  and manufactures  systems  and
components  for worldwide  vehicle manufacturers and  aftermarket customers. The
segment's principal  business  areas  are braking  systems,  engine  components,
safety  restraint systems  and the  aftermarket. Within  each area,  the segment
offers a wide range of products for  passenger cars and light, medium and  heavy
trucks.
 
     For  manufacturers of passenger cars and light trucks, the Company provides
disc and drum brakes, power brake  boosters and master cylinders, brake  valves,
wheel  end products, friction materials, spark plugs, turbochargers and occupant
protection systems (seat belts, air bags and related components).
 
     The Company's primary product offerings for the manufacturers of medium and
heavy trucks and  off-road vehicles  primarily include air  and hydraulic  brake
actuation  components, air and hydraulic drum and disc brakes, anti-lock braking
systems (ABS), compressors,  air dryers, friction  materials, turbochargers  and
charge-air intercoolers.
 
     The  aftermarket business includes replacement parts  for most of the above
items as well as air, oil and  fuel filters, wire and cable products, and  brake
sealants and fluids.
 
     Automotive  operations are located in  the U.S., Australia, Brazil, Canada,
China, France, Germany, India, Ireland, Italy, Japan, Malaysia, Mexico,  Poland,
Portugal,  South Korea, Spain,  Turkey and the  United Kingdom. Distribution and
marketing  are  conducted  in  these  and  numerous  other  countries  as  well.
Internationally, products are marketed under the Bendix, Fram, Autolite, Garrett
and Jurid trademarks.
 
     Worldwide  passenger car and truck OE sales accounted for approximately 74%
in both  1995  and  1994  of  the net  sales  of  the  Automotive  segment  with
aftermarket  sales  accounting  for the  balance.  In 1995  and  1994 Automotive
operations outside the U.S. accounted for  $2,499 and $2,217 million, or 45%  in
both years, of worldwide sales.
 
     In 1995 and 1994 sales of automotive OE systems and components were made to
approximately  30  customers  of  which the  Company's  five  largest automotive
manufacturing customers accounted for  approximately 52% and 56%,  respectively,
of  such sales. Total worldwide sales (for  OE and aftermarket use) for 1995 and
1994 to the Company's five  largest automotive manufacturing customers  amounted
to  $2,138 and $2,063 million, including sales to Ford Motor Company (Ford), the
segment's largest customer, of $887 and $782 million for the respective years.
 
                                       8

     The segment's operations  outside the  U.S. are  conducted through  various
foreign  companies  in which  it has  interests ranging  from minor  to complete
control.  International   operations  also   include  the   exporting  of   U.S.
manufactured products and licensing activities.
 
     The Automotive segment's products are sold in highly competitive markets to
customers  who demand performance, quality and competitive prices. Virtually all
automotive components are sold in  competition with other independent  suppliers
or  with the captive component divisions of the vehicle manufacturers. While the
Company's competitive position varies among  its products, the Company  believes
it  is a  significant factor  in each  of its  major product  markets. The major
independent competitors in one or more major business areas include: ITT  Teves,
Lucas  Girling,  Rockwell-WABCO,  Dana, Autoliv,  Cooper  Industries, Schwitzer,
Midland, Bosch, Kelsey Hayes, KKK,  TRW, Purolator, Delco, AM Brake,  Raybestos,
Takata and Morton.
 
     In  1994 the  Company established  two joint  ventures in  Europe, one with
Sogefi S.p.A. and the other with Gilardini, a subsidiary of Fiat, and Sequa. The
joint venture with  Sogefi S.p.A.,  a European manufacturer  and distributor  of
automotive  filters and other automotive products,  has enabled both partners to
penetrate new markets through a joint  distribution network and to reduce  costs
through  consolidation of  both warehouses  and distribution  centers. The joint
venture with Gilardini and Sequa -- BAG, S.p.A. -- which began operations in the
third quarter  of  1995,  manufactures and supplies hybrid inflators for driver-
and passenger-side air bag modules that are assembled by the Company's new plant
in  Italy.  Hybrid  inflators  provide  a cost-efficient method of inflating air
bags, using  compressed  argon  gas  and  a proprietary environmentally-friendly
solid generant from the Atlantic Research Corporation, which is used to heat the
gas. These operations  provide  the  Company with an entry into the European air
bag  market.  In January 1995 the Company and Jidosha Kiki Co. of Japan formed a
joint venture to supply brake boosters for vehicles built in Europe  by Japanese
manufacturers. The venture is based in Pamplona, Spain.
 
     In late December 1994 the Company acquired Ford's spark plug  manufacturing
plant  in  Treforest,  South  Wales.  The  acquisition  enhanced  the  Company's
relationship with Ford as its sole supplier of spark plugs in both North America
and Europe  and  provides a  manufacturing  base in  Europe  for growth  in  the
aftermarket spark plug business.
 
     In  April  1995 the  Company acquired  the Budd  Company's Wheel  and Brake
Division, whose products include: rotors, hubs, drums and related assemblies for
passenger cars  and  light trucks;  steel  disk  wheels for  heavy  trucks;  and
demountable  rims and hub and drum assemblies for medium- and heavy-duty trucks.
The Wheel and Brake Division had 1994 sales of over $300 million.
 
     In June 1995 the  Company acquired Fiat Auto  Poland S.A. (Fiat)'s  braking
business  in  Poland,  whose  products  include  disc  and  drum  brakes, master
cylinders and  brake boosters;  and  became the  exclusive supplier  of  braking
systems to Fiat in Poland. The manufacturing facility of the business is located
in Twargodora, Poland. Annual sales approximate $30 million.
 
     In 1995 the Company purchased Transturk Holding's 68% interest in Transturk
Fren  Donanim Industriesi AS, a leading Turkish manufacturer of braking systems.
The acquisition brings the  Company's investment in the  company to 80%.  Annual
sales approximate $27 million.
 
     Construction  of a new turbocharger plant  in Shanghai, China was completed
and production began  in September 1995.  This facility enables  the Company  to
serve   the  rapidly  growing   diesel  engine  market   in  China  and  provide
turbochargers to international markets as opportunities develop.
 
     Automotive, as previously announced, has decided to exit the  light-vehicle
ABS  business  and  is  conducting  discussions  concerning  the  future  of its
light-vehicle braking  business.  Exiting  the ABS  business  could  hinder  the
Company's  ability to remain a first  tier supplier of complete braking systems.
The Company expects that neither exiting the ABS business nor the absence of  an
agreement  regarding the  light-vehicle braking  business would  have a material
impact on the Company's results of operations or financial position in 1996. The
ABS actions do not affect the  heavy-truck ABS business, in which the  Company's
joint venture with Knorr-Bremse has a significant market position.
 
     In  addition, a  reduction in  the Automotive  workforce was  announced and
substantially completed in the fourth quarter of 1995. The reduction  eliminates
approximately  3,100 full-time-equivalent positions.  The workforce reduction is
expected to be completed by the end of 1996.
 
                                       9

ENGINEERED MATERIALS
 
     The Engineered  Materials  segment is  composed  of four  major  divisions:
Polymers,  Fluorine Products, Specialty Chemicals  and Electronic Materials. The
Specialty Chemicals and Electronic Materials  divisions were formed in  February
1996 by realigning some of Engineered Materials' businesses in order to increase
the focus on the rapidly growing global markets these divisions serve.
 
     Polymers.  The  Polymers  division  consists  of  the  Fibers  and Plastics
businesses  which  were  combined  in  1995  to  enhance  the  units'   vertical
integration and ensure optimization throughout the nylon system.
 
     The Company's Fibers business is a leading producer of type 6 nylon and the
third  largest producer  of nylon in  the U.S.  The Company is  also the largest
domestic producer of  caprolactam, the  primary intermediate for  type 6  nylon,
from  which it produces fine and heavy  denier nylon yarns and molding compounds
and film. These  yarns are sold  under the trademarks  Anso'r', Anso X'r',  Anso
IV'r',  Anso V'r', Worry-Free'r', CrushResisterTM  and Caprolan'r'. In addition,
the Company produces heavy denier  polyester yarns. The Company primarily  sells
yarns to the carpet, textile, motor vehicle and industrial markets.
 
     In the carpet yarn markets, both continuous filament and staple nylon yarns
are  sold to yarn processors  and mills for the  manufacture of carpeting. Nylon
filament and staple are the dominant fiber yarns used in carpet production.  The
four  largest  producers,  including  the Company,  have  over  90%  of domestic
capacity.  The  Company  has  achieved  recognition  as  a  leader  in   product
development and has developed a strong customer base. Brand identity, service to
customers  and quality are important competitive factors in the market and there
is considerable price competition.
 
     In the motor vehicle and industrial markets, the Company's primary products
are nylon  and  polyester  yarns  for  use in  tire  cord,  seat  belts,  hoses,
tarpaulins  and  outdoor  furniture.  In 1995  the  Company  announced  plans to
increase capacity  at its  industrial polyester  yarn facility  in  Longlaville,
France  at a  cost of  approximately $45 million.  In November  1995 the Company
acquired Bridgestone/Firestone's  50  million-pound industrial  polyester  fiber
plant  in  Hopewell,  Virginia.  With  anticipated  modernization,  the  Company
believes that the Hopewell  plant will have annual  sales of approximately  $100
million.  The  Company  believes that  polyester  yarn will  become  the primary
reinforcement for passenger car radial tires in the world in the late 1990s  and
is exploring development opportunities in the Asia/Pacific region.
 
     The  textile fibers markets, where the Company sells Caprolan'r' nylon flat
yarns for warp knit and  weaving applications, include intimate apparel,  sports
outerwear,  jackets and such recreational products  as sleeping bags, back packs
and luggage. The industry is highly price competitive.
 
     The Plastics  business manufactures  and  markets engineering  resins.  The
Company  is a leading producer of nylon 6 engineering resins (Capron'r') for the
automotive, electrical and electronic component,  food packaging, lawn care  and
power tool markets.
 
     In  October 1995  the Company  acquired the  nylon plastics  and industrial
fibers manufacturing facilities in Rudolstadt, Germany, from the German state of
Thuringia. The Company plans to invest about $100 million during the next  three
years to expand and upgrade the facility.
 
     Fluorine Products. The Fluorine Products business consists of Hydrofluoric
Acid (HF), Fluorocarbons,  Nuclear  Services,  Sulfur  Hexafluoride  (SF6)  and
Sterilant Gases.
 
     The Company is the world's largest producer of HF and an industry leader in
the production and sale  of products derived  from HF, including  fluorocarbons,
SF6 and uranium hexafluoride (UF6).
 
     Genetron'r'  fluorocarbons  are  sold  mainly  as  refrigerants  to  OE and
replacement manufacturers of air conditioning and refrigeration equipment and as
foam blowing agents to rigid foam producers. Genesolv'r' fluorocarbons are  sold
as  solvents in precision cleaning applications  such as electronics, optics and
aerospace applications. The Montreal Protocol (Protocol), which has been  signed
by  the United States, regulates  worldwide chlorofluorocarbons (CFC) production
and consumption. With few exceptions, the Protocol required 100% elimination  of
fully  halogenated CFC production by industrialized countries as of December 31,
1995. The amended U.S. Clean Air Act also regulates CFCs and similarly  required
that  most  U.S.  production  of  CFCs  be  phased  out  by  the  end  of  1995.
 
                                       10

CFCs produced in the U.S. are also  subject to the Ozone Depleting Chemical  Tax
of  the Revenue Reconciliation  Act of 1989. In  accordance with applicable law,
the Company's Genetron'r' and Genesolv'r' products include CFCs.
 
     The Company is continuing  its efforts to develop  environmentally-friendly
fluorocarbon  products as it replaces the  current CFC product line. An existing
commercial plant in El Segundo, California was converted in 1991 to  manufacture
hydrochlorofluorocarbon  (HCFC)-141b,  a key  substitute  for CFC-11,  a blowing
agent in urethane foams,  and as a replacement  for CFC-113 in critical  solvent
applications.  By 1994 the Company more than  tripled the plant's capacity to 60
million pounds  per year.  The  Company has  commercialized key  CFC  substitute
products  in  various applications,  including  automotive air  conditioning and
residential, commercial and  industrial refrigeration. In  this connection,  the
Company  began manufacturing environmentally-friendly alternatives  to CFCs at a
new $70 million multi-product commercial facility in Geismar, Louisiana targeted
primarily at  the  substitute  products  HCFC-123,  HCFC-124,  hydrofluorocarbon
(HFC)-125  and HFC-134a. The Company is  continuing its research and development
efforts in view of the changing regulatory environment in which it operates. The
Company cannot predict the impact of possible future regulatory issues.
 
     The Company acquired the  CFC business of Akzo  NV, with facilities in  the
Netherlands,  in  April 1994.  This acquisition  has  provided the  Company with
access to new markets for its fluorocarbon products.
 
     The Company's Nuclear Services business processes uranium ore  concentrates
into  UF6 which is an essential intermediate  in the production of fuel elements
for nuclear  power  reactors  for  domestic and  foreign  customers.  A  Company
subsidiary  is in  partnership with a  General Atomics' affiliate  to market UF6
conversion services supplied by the Company's Metropolis, Illinois manufacturing
facility. The partnership, ConverDyn,  competes for the  open world market  with
four foreign processors that are either government owned or controlled.
 
     The  Company is one of two domestic  producers of SF6, a gas primarily used
by  utilities  because  of  its  electrical  insulatory  properties  in  circuit
breakers, switches, transmission lines and electronic minisubstations.
 
     The Company also produces sterilant gases which primarily consist of blends
of  ethylene oxide and fluorocarbons that  are sold to hospitals, medical device
manufacturers and  contract  sterilizers.  The Company  holds  the  patents  for
selected sterilant gas blends using environmentally-friendly fluorocarbons.
 
     Specialty  Chemicals. Businesses  included are  Riedel-de Haen, Performance
Chemicals,  A-C'r'  Performance  Additives,   the  UOP  joint  venture,   Carbon
Materials, the Environmental Catalysts joint venture and Specialty Films.
 
     In  October  1995  the Company  purchased  Hoechst AG's  95.8%  interest in
Riedel-de Haen  AG,  a  specialty  chemicals  manufacturer  located  in  Seelze,
Germany.  Riedel-de  Haen  manufactures  products  for  the  pharmaceutical  and
electronics industries, as well as  coatings, photo dyes and specialty  pigments
markets. Annual sales approximate $250 million.
 
     The Performance Chemicals business is a leading supplier of specialty oxime
chemicals  for use in the  agricultural, coatings, photographic, pharmaceutical,
adhesives and  sealants,  and  mining  industries. The  Company  has  some  cost
benefits from its captive source of hydroxylamine sulfate.
 
     A-C'r'  Performance Additives are low-molecular weight polyethylene polymer
additives which primarily serve the  textiles, plastics, adhesives and  polishes
specialty markets worldwide.
 
     UOP  is an equally owned joint venture with Union Carbide Corporation which
designs and  licenses processes,  and  produces and  markets catalysts  for  the
petroleum refining, gas processing, petrochemical and food industries.
 
     The  Carbon Materials business produces binder pitch for electrodes for the
aluminum and  carbon industries,  creosote oils  as preservatives  for the  wood
products   and  carbon  black   markets,  refined  naphthalene   as  a  chemical
intermediate, and driveway  sealer tar  and roofing pitch  for the  construction
industry.  All of the tar products are  distilled from coal tar, a by-product of
the steel industry's coking operations.
 
                                       11

     The Environmental  Catalysts  business is  a  major worldwide  supplier  of
catalysts  used in  catalytic converters for  automobiles. In  November 1994 the
Company and General Motors  Corporation (GM) formed a  joint venture to  produce
coated  automotive catalytic  converter substrates. The  Company contributed its
environmental catalysts business and  GM contributed coating-related  technology
and a long-term supply contract to the joint venture.
 
     Major   products  in  the  Specialty  Films  business  include  cast  nylon
(Capran'r'), biaxially  oriented nylon  film  (Biax'r') and  fluoropolymer  film
(Aclar'r').  Specialty  film  markets include  food,  pharmaceutical,  and other
packaging and industrial applications. The Company plans to begin  manufacturing
SpectraVueTM, a line of thin plastic films that significantly improves the image
quality  of Liquid Crystal  Displays, during 1996.  The Company will manufacture
SpectraVueTM components  from  a new  $25  million facility  in  Elizabeth,  New
Jersey.
 
     Electronic  Materials. Businesses  included are  Laminate Systems, Advanced
Microelectronic Materials and Amorphous Metals.
 
     Laminate Systems manufactures  circuit board laminates  for the  electronic
and  electrical industries. The Company's product  line includes copper clad and
unclad  laminates  used  in  computer,  telecommunication,  instrumentation  and
military  applications.  Approximately 55%  of  sales are  to  the international
market, primarily  in southeast  Asia  and throughout  Europe. The  industry  is
highly  price competitive.  The Company, in  partnership with  Mitsui Mining and
Smelting Company, is backward integrated in electro deposited copper foil.  This
unit  also manufactures electrical grade glass yarns in partnership with Nittobo
Corporation of Japan.
 
     The Advanced  Microelectronics  Materials business  designs,  develops  and
manufactures  materials for semiconductor companies  worldwide. The Company is a
leader in  technology  that smoothes  integrated  circuits under  the  trademark
ACCUGLASS'r'.
 
     The  Company manufactures  amorphous metals (METGLAS'r'  Alloys) that offer
significant  efficiency  gains  in  electrical  distribution  transformers  over
conventional electrical steel which is currently used. Amorphous metals are also
a key component in theft deterrent systems used by retail companies.
 
     In  December 1995 the  Company exited its  high-density polyethylene (HDPE)
business. Paxon Polymer Company,  L.P., a partnership of  the Company and  Exxon
Chemical Company, transferred the HDPE business to Exxon.
 
     The  principal raw materials  used in the  Engineered Materials segment are
generally  readily   available  and   include  cumene,   natural  gas,   sulfur,
terephthalic   acid,  ethylene  and  ethylene   glycol,  fluorspar,  HF,  carbon
tetrachloride, chloroform,  nylon  resins, fiberglass,  copper  foil,  platinum,
rhodium and coal tar pitch. The Company is producing virtually all of its HF and
nylon  resin  requirements. Important  competitors are:  Du Pont,  GE, Monsanto,
Hoechst/Celanese, BASF Fibers,  Koppers, U.S.I., Phillips,  Soltex, Atochem  and
Nan Ya.
 
SEGMENT FINANCIAL DATA
 
     Note  23 (Segment Financial  Data) of Notes to  Financial Statements in the
Company's 1995 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  1995 Annual Report  to shareowners is incorporated
herein by reference.
 
FOREIGN ACTIVITIES
 
     The Company's foreign businesses are  subject to the usual risks  attendant
upon investments in foreign countries, including nationalization, expropriation,
limitations  on repatriation of  funds, restrictive action  by local governments
and changes in foreign currency exchange rates.
 
                                       12

     The Company's principal foreign manufacturing operations are in  Australia,
Brazil,   Canada,  France,  Germany,  Ireland,  Italy,  Japan,  Mexico,  Poland,
Portugal, South Korea, Spain, Singapore, Taiwan, the Netherlands and the  United
Kingdom.  The Company maintains sales and  business offices in these and various
other countries, including Austria, Belgium, China, Denmark, Finland, Hong Kong,
India,  New  Zealand,  Norway,  Sweden  and  Turkey  as  well  as   warehousing,
distribution  and  aircraft repair  and overhaul  facilities to  support foreign
operations and export  sales. Further  information about  foreign activities  is
discussed in the segment narratives.
 
RAW MATERIALS
 
     Among the principal raw materials used by the Company, in addition to those
previously  discussed  for  the Engineered  Materials  segment,  are electronic,
optical  and  mechanical   component  parts  and   assemblies,  electronic   and
electromechanical  devices, metallic products, castings, forgings, steel and bar
stock, copper,  aluminum,  platinum  and titanium.  The  Company  believes  that
sources of supply for raw materials and components are generally adequate.
 
PATENTS AND TRADEMARKS
 
     The   Company  owns   approximately  14,000   patents  or   pending  patent
applications and  is  licensed  under  other patents  covering  certain  of  its
products  and processes.  It believes that,  in the aggregate,  the rights under
such patents and licenses  are generally important to  its operations, but  does
not  consider that any patent or license 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, Jurid,  King and Norplex
Oak.
 
RESEARCH AND DEVELOPMENT
 
     The Company's research  activities are  directed toward  the discovery  and
development of new products and processes, improvements in existing products and
processes, and the development of new uses of existing products.
 
     Research  and development  expense totaled $353,  $318 and  $313 million in
1995, 1994  and 1993,  respectively.  Customer-sponsored (principally  the  U.S.
government)  research and development activities amounted to an additional $536,
$486 and $514 million in 1995, 1994 and 1993, respectively.
 
     The Company has approximately 48  research facilities which provide  direct
support to the operating segments.
 
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 particular  operations and products  of the Company,  as it is  with
other  companies  engaged in  similar businesses.  (See  the description  of the
Engineered Materials  segment, above,  for information  regarding regulation  of
CFCs.)
 
     The  Company is and has  been engaged in the  handling, manufacture, use or
disposal of many substances which are classified as hazardous or toxic by one or
more regulatory agencies. The  Company believes that, as  a general matter,  its
handling,  manufacture, use and  disposal of such substances  are in accord with
environmental laws  and  regulations.  It  is  possible,  however,  that  future
knowledge   or  other  developments,  such  as  improved  capability  to  detect
substances in  the  environment,  increasingly  strict  environmental  laws  and
standards  and enforcement  policies thereunder,  could bring  into question the
Company's handling, manufacture, use or disposal of such substances.
 
     Among other  environmental  requirements, the  Company  is subject  to  the
federal  Superfund law, and similar state laws, under which the Company has been
designated as a potentially  responsible party which may  be liable for  cleanup
costs  associated with various hazardous  waste sites, some of  which are on the
U.S. Environmental Protection Agency's Superfund priority list. Although,  under
some  court  interpretations  of  these  laws, there  is  a  possibility  that a
responsible party might have to bear
 
                                       13

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 $44 million in 1995.  The Company estimates that during each  of
the  years 1996  and 1997 such  capital expenditures will  be in the  $40 to $45
million range. In addition to capital expenditures, the Company has incurred and
will continue to incur operating costs in connection with such facilities.
 
     Reference is made to Management's Discussion and Analysis at page 21 of the
Company's 1995 Annual Report to  shareowners, incorporated herein by  reference,
for further information regarding environmental matters.
 
EMPLOYEES
 
     The  Company had  an aggregate of  88,500 salaried and  hourly employees at
December 31, 1995. Of the  approximately 33,000 unionized employees, 19,000  are
employed  in  the  Company's  U.S. and  Canadian  plants  and  other facilities.
Unionized employees are represented by local unions that are either  independent
or  affiliated with  the United Auto  Workers, the  International Association of
Machinists, the United  Steelworkers of  America, the Oil,  Chemical and  Atomic
Workers International Union, the International Brotherhood of Teamsters and many
other  international unions. Relations between the Company and its employees and
their various  representatives have  been generally  satisfactory, although  the
Company  has experienced work stoppages from  time to time. Approximately 39% of
the Company's  U.S.  and  Canadian  unionized employees  are  covered  by  labor
contracts  scheduled to  expire in 1996.  Major labor  negotiations will include
locations in all of the segments.
 
ITEM 2.   PROPERTIES
 
     The Company has 372 locations consisting of plants, research  laboratories,
sales  offices and other  facilities. The plants are  generally located to serve
large marketing areas and  to provide accessibility to  raw materials and  labor
pools.  The  properties are  generally maintained  in good  operating condition.
Utilization of these plants may vary with government spending and other business
conditions; however,  no major  operating facility  is significantly  idle.  The
facilities, together with planned expansions, are expected to meet the Company's
needs  for  the  foreseeable  future. The  Company  owns  or  leases warehouses,
railroad cars, barges, automobiles, trucks, airplanes and materials handling and
data processing equipment.  It also  leases space for  administrative and  sales
staffs.  The Company's  headquarters and  administrative complex  are located at
Morris Township, New Jersey.
 
     The principal plants, which  are owned in  fee unless otherwise  indicated,
are as follows:
 
                                   AEROSPACE
 
Phoenix, AZ (4 plants, 3 fully leased, 1 partially leased)
Tempe, AZ
Tucson, AZ (partially leased)
Torrance, CA (partially leased)
Stratford, CT (owned by the U.S. Government and managed by the Company)
Fort Lauderdale, FL
South Bend, IN
Lawrence, KS
Olathe, KS
Columbia, MD
Towson, MD
Teterboro, NJ
Rocky Mount, NC
Rexdale, Ont., Canada (partially leased)
Raunheim, Germany
 
                                   AUTOMOTIVE
 
Greenville, AL
Torrance, CA
St. Joseph, MI
Fostoria, OH
Greenville, OH
Sumter, SC
Jackson, TN
Maryville, TN
Campinas, Brazil
Angers, France
Conde, France
Moulins, France
Thaon-Les-Vosges, France
Crema, Italy
Glinde, Germany
Skelmersdale, United Kingdom
 
                              ENGINEERED MATERIALS
 
Metropolis, IL
Baton Rouge, LA
Geismar, LA
Moncure, NC
Philadelphia, PA
Pottsville, PA
Columbia, SC
Chesterfield, VA
Hopewell, VA
Longlaville, France
Seelze, Germany
 
                                       14

ITEM 3.   LEGAL PROCEEDINGS
 
     The  first and second paragraphs of Note 19 (Commitments and Contingencies)
of Notes to Financial Statements at page 35 of the Company's 1995 Annual  Report
to shareowners are incorporated herein by reference.
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
                                 Not Applicable
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The  executive officers of  the Registrant, listed  as follows, are elected
annually in April. There are no family relationships among them.

          NAME, AGE,
          DATE FIRST
      ELECTED AN OFFICER                                     BUSINESS EXPERIENCE
- -------------------------------  ----------------------------------------------------------------------------
                              
Lawrence A. Bossidy (a), 60      Chairman of the  Board since January  1992. Chief Executive  Officer of  the
                                   Company  since  July  1991. Vice  Chairman  and Executive  Officer  of the
              1991                 General Electric Company (diversified industrial corporation) from 1984 to
                                   June 1991.
John W. Barter, 49               Executive  Vice  President  and  President,  AlliedSignal  Automotive  since
                                   October  1994. Senior Vice President and Chief Financial Officer from July
              1985                 1988 to September 1994.
Daniel P. Burnham, 49            Executive Vice President and President, AlliedSignal Aerospace since January
                                   1992. Executive Vice President and President-Elect, AlliedSignal Aerospace
              1991                 Company from July 1991 to December 1991. President, AiResearch Group  from
                                   March 1990 to June 1991.
Frederic M. Poses, 53            Executive  Vice President  and President,  AlliedSignal Engineered Materials
                                   since April 1988.
              1988
Isaac R. Barpal, 56              Senior Vice President and Chief  Technology Officer since August 1993.  Vice
                                   President  -- Science  & Technology  of Westinghouse  Electric Corporation
              1993                 (electric equipment manufacturer) from June 1987 to July 1993.
Peter M. Kreindler, 50           Senior Vice President,  General Counsel and  Secretary since December  1994.
                                   Senior  Vice President  and General  Counsel from  March 1992  to November
              1992                 1994. Senior Vice President and General Counsel-Elect from January 1992 to
                                   February 1992. Partner, Arnold  & Porter (law firm)  from January 1990  to
                                   December 1991.
Donald J. Redlinger, 51          Senior  Vice President -- Human  Resources and Communications since February
                                   1995. Senior  Vice  President --  Human  Resources from  January  1991  to
              1991                 January 1995.
Paul R. Schindler, 54            Senior  Vice  President  --  International since  August  1993.  Chairman of
                                   Imperial Chemical  Industries  Asia/Pacific (chemical  manufacturer)  from
              1993                 April  1991 to July  1993. Chairman of  Imperial Chemical Industries China
                                   from July 1989 to March 1991.
James E. Sierk, 57               Senior Vice President -- Quality and Productivity since January 1991.
              1991

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

(table continued from previous page)

          NAME, AGE,
          DATE FIRST
      ELECTED AN OFFICER                                     BUSINESS EXPERIENCE
- -------------------------------  ----------------------------------------------------------------------------
                              
Richard F. Wallman, 44           Senior Vice President  and Chief  Financial Officer since  March 1995.  Vice
                                   President  and Controller  of International Business  Machines Corp. (IBM)
              1995                 (manufacturer of information-handling systems) from April 1994 to February
                                   1995. General Assistant Controller of IBM from October 1993 to March 1994.
                                   Assistant  Controller  --  Sales  &  Marketing  of  Chrysler   Corporation
                                   (automobile manufacturer) from April 1989 to September 1993.
Kenneth W. Cole, 48              Vice President -- Government Relations since January 1989.
              1989
G. Peter D'Aloia, 51             Vice  President  and  Controller  since February  1994.  Vice  President and
                                   Treasurer from August 1988 to January 1994.
              1985
Catherine M. de Lacy, 38         Vice President,  Health,  Safety and  Environmental  since July  1995.  Vice
                                   President  --  Health, Safety  and  Environmental of  Occidental Petroleum
              1995                 Corporation (oil and gas explorer, developer, producer and marketer)  from
                                   April  1993 to  June 1995. Director  -- Environmental  Affairs & Technical
                                   Support of Occidental Petroleum Corporation from May 1990 to March 1993.
Nancy A. Garvey, 46              Vice   President   and   Treasurer   since   February   1994.   Staff   Vice
                                   President -- Investor Relations from November 1989 to January 1994.
              1994
Larry E. Kittelberger, 47        Vice  President and Chief  Information Officer since  August 1995 (Executive
                                   Officer since February  1996). Corporate Chairman  -- Information  Officer
              1996                 Leadership Committee of Tenneco Inc. (diversified industrial concern) from
                                   June 1989 to July 1995.
Frederick H. McClintock, 59      Vice   President  --   Materials  Management   since  February   1996.  Vice
                                   President -- Materials Management  AlliedSignal Aerospace from March  1992
              1996                 to January 1996. Owner and operator of Global Supply Institute (consulting
                                   business) from June 1990 to February 1992.
Richard P. Schroeder, 44         Vice  President -- Manufacturing since June 1994. Vice President of Quality,
                                   Operations and Supply Management at Asea Brown Boveri Inc.  (international
              1994                 electrical  engineering company)  -- Industrial  Group and  North American
                                   operations from  August  1991 to  May  1994. Vice  President  and  General
                                   Manager  Customer Service, Corporate Quality, and Government Compliance of
                                   Codex (communications for both voice  and data communications systems),  a
                                   unit of Motorola, Inc., from November 1986 to July 1991.

                                    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  38  of  the  Company's  1995  Annual  Report to
shareowners, and such information is incorporated herein by reference.
 
                                       16

     The number of record holders of the Registrant's common stock is  contained
in  the statement  'Selected Financial  Data' at page  39 of  the Company's 1995
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 39 of the Company's
1995 Annual Report to shareowners is incorporated herein by reference.
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS
 
     'Management's Discussion  and  Analysis' on  pages  19 through  25  of  the
Company's 1995 Annual Report to shareowners is incorporated herein by reference.
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The  Company's consolidated financial statements,  together with the report
thereon of Price  Waterhouse LLP dated  February 1, 1996  appearing on pages  26
through  38 of the Company's 1995 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 and 7, the 1995
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,
1995,  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.
 
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.
 
                                       17

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 1995 Annual Report to shareowners:
          Report of Independent Accountants....................................................          38
          Consolidated  Statement of  Income for  the years ended  December 31,  1995, 1994 and
           1993................................................................................          26
          Consolidated Statement of Retained  Earnings for the years  ended December 31,  1995,
           1994 and 1993.......................................................................          26
          Consolidated Balance Sheet at December 31, 1995 and 1994.............................          27
          Consolidated  Statement of Cash Flows for the years ended December 31, 1995, 1994 and
           1993................................................................................          28
          Notes to Financial Statements........................................................          29
 
(a)(2.) Consolidated Financial Statement Schedules

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

EXHIBIT NO.                                          DESCRIPTION
- -----------   -----------------------------------------------------------------------------------------
           
   13         Pages  19  through  39  (except  for the  data  included  under  the  captions 'Financial
                Statistics' on page 39) of the Company's 1995 Annual Report to shareowners
   21         Subsidiaries of the Registrant
   23         Consent of Independent Accountants
   24         Powers of Attorney
   27         Financial Data Schedule

     The exhibits  identified  in the  Exhibit  Index with  an  asterisk(*)  are
management contracts or compensatory plans or arrangements.
 
(b) Reports on Form 8-K
 
     No  reports on Form 8-K were filed  for the three months ended December 31,
1995.
 
                                       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.
 
February 27, 1996                          By:     /s/ G. PETER  D'ALOIA
                                              ----------------------------------
                                                      G. Peter D'Aloia
                                                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
 
                            *                                                            *
- ------------------------------------------------------        ------------------------------------------------------
                     Hans W. Becherer                                            Ivan G. Seidenberg
                         Director                                                     Director
 
                            *                                                            *
- ------------------------------------------------------        ------------------------------------------------------
                   Eugene E. Covert                                               Andrew C. Sigler
                       Director                                                       Director
 
                            *                                                            *
- ------------------------------------------------------        ------------------------------------------------------
                      Ann M. Fudge                                                John R. Stafford
                        Director                                                      Director
 
                            *                                                            *
- ------------------------------------------------------        ------------------------------------------------------
                     Paul X. Kelley                                              Thomas P. Stafford
                        Director                                                      Director
 
                            *                                                            *
- ------------------------------------------------------        ------------------------------------------------------
                   Robert P. Luciano                                             Robert C. Winters
                        Director                                                      Director
 
                            *
- ------------------------------------------------------
                    Robert B. Palmer
                         Director

               /s/ RICHARD F. WALLMAN                                          /s/ G. PETER D'ALOIA
- ------------------------------------------------------        ------------------------------------------------------
                  Richard F. Wallman                                               G. Peter D'Aloia
              Senior Vice President and                                     Vice President and Controller
                 Chief Financial Officer                                       (Chief Accounting Officer)

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

 

February 27, 1996
 
                                       19

                STATEMENT OF DIFFERENCES

The registered trademark symbol shall be expressed as 'r'
The trademark symbol shall be expressed as 'tm'
The subscript numerics in chemistry notation shall be expressed as baseline
numerics, e.g., sulfur hexafluoride would be expressed SF6.

                                 EXHIBIT INDEX

EXHIBIT NO.                                       DESCRIPTION
- -----------   ---------------------------------------------------------------------------------------------
           
   3(i)       Restated  Certificate  of  Incorporation  of  the  Company  (incorporated  by
                reference to Exhibit 99.1 to the Company's  Form 10-Q for the quarter ended
                March 31, 1993)
   3(ii)      By-laws of the Company, as amended (incorporated by reference to Exhibit 99.2
                to the Company's Form 10-Q for the quarter ended March 31, 1993)
   4          The Company is a party to several  long-term debt instruments under which, in
                each case, the total amount of securities authorized does not exceed 10% of
                the total  assets of the Company  and its  subsidiaries  on a  consolidated
                basis.  Pursuant to paragraph  4(iii)(A) of Item 601(b) of Regulation  S-K,
                the Company agrees to furnish a copy of such  instruments to the Securities
                and Exchange Commission upon request.
   9          Omitted (Inapplicable)
  10.1        Master  Support  Agreement,  dated as of  February  26,  1986 as amended  and
                restated as of January 27, 1987, as further  amended as of July 1, 1987 and
                as again  amended and  restated  as of  December 7, 1988,  by and among the
                Company,   Wheelabrator   Technologies   Inc.,   certain   subsidiaries  of
                Wheelabrator  Technologies  Inc.,  The Henley Group,  Inc. and Henley Newco
                Inc.  (incorporated by reference to Exhibit 10.1 to the Company's Form 10-K
                for the year ended December 31, 1988)
  10.2*       Deferred  Compensation Plan for Non-Employee  Directors of AlliedSignal Inc.,
                as amended (incorporated by reference to Exhibit 10.2 to the Company's Form
                10-K for the year ended December 31, 1993)
  10.3*       Retirement Plan for Non-Employee  Directors of AlliedSignal  Inc., as amended
                (incorporated  by reference to Exhibit 19.2 to the Company's  Form 10-Q for
                the quarter ended June 30, 1990)
  10.4*       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)
  10.5*       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)
  10.6*       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)
  10.7*       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)
  10.8*       1982 Stock Option Plan for Executive  Employees of Allied Corporation and its
                Subsidiaries,  as amended (incorporated by reference to Exhibit 19.4 to the
                Company's Form 10-Q for the quarter ended September 30, 1991)
  10.9*       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)
  10.10*      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)

EXHIBIT NO.                                       DESCRIPTION
- -----------   ---------------------------------------------------------------------------------------------
                                                                                              
  10.11*      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)
  10.12*      Amended and  restated  Agreement  dated May 6, 1994  between  the Company and
                Lawrence A.  Bossidy  (incorporated  by  reference  to Exhibit  10.3 to the
                Company's Form 10-Q for the quarter ended June 30, 1994)
  10.13       Five-Year  Credit  Agreement  dated  as of  June  30,  1995  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  Form
                10-Q for the quarter ended June 30, 1995)
  10.14       364-Day  Credit   Agreement  dated  as  of  June  30,  1995  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 10.2 to the Company's  Form
                10-Q for the quarter ended June 30, 1995)
  11          Omitted (Inapplicable)
  12          Omitted (Inapplicable)
  13          Pages  19  through  39  (except  for the  data  included under  the  captions
                'Financial  Statistics' on page  39) of the  Company's  1995 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS  AlliedSignal Inc.

1995 Compared with 1994

IN 1995 THE COMPANY DEDICATED  SUBSTANTIAL RESOURCES TO LINKING A PROGRESSION OF
INNOVATIVE  PROCESS  IMPROVEMENTS  TO FOCUS MORE ON CUSTOMER  SATISFACTION.  The
initiatives  focus our efforts to provide our customers with a quality  product,
delivered on time,  without defects,  at a highly competitive price. The Company
continued  to grow its  businesses  through the  introduction  of new  products,
market expansion, niche acquisitions and globalization.  The Company accelerated
its aggressive global growth strategy, and international  customers provided 40%
of the  Company's  total  1995  sales.  These  process  improvements  and growth
initiatives  contributed to strong operating  results in 1995 despite  increased
customer-driven  price  constraints  and  unfavorable  results  by  Automotive's
anti-lock braking systems (ABS) business.

IN 1995 THE COMPANY TOOK FURTHER  ACTIONS TO IMPROVE  PROFITABILITY,  INTRODUCED
SEVERAL NEW PRODUCTS AND GLOBALIZED A NUMBER OF KEY BUSINESSES  THROUGH INTERNAL
GROWTH AND ACQUISITIONS:

Aerospace made a significant  contribution toward making aircraft safer with the
development  of an early warning  system for  windshear  and a ground  proximity
warning system. In addition, the Company's traffic alert and collision avoidance
system (TCAS),  initially developed for large aircraft,  had strong sales to the
regional airlines in 1995. In January 1996 the Company completed the acquisition
of Northrop Grumman Corporation's  precision products business based in Norwood,
Massachusetts.  The  acquisition,  which has annual sales of  approximately  $39
million,  is expected to bolster  Aerospace's  navigation  and guidance  systems
business  for  military  and space  applications.  During 1995 the Company  also
increased its investment in Societe D'Etudes et de Constructions Aero-Navales to
83% by  purchasing an additional  34% interest in Europe's  leading  supplier of
aircraft  heat  exchange  equipment.  To  facilitate  future  growth and further
establish  a global  presence,  Aerospace  formed a joint  venture  in Russia to
market wheels,  brakes and brake systems for civilian aircraft and has agreed to
form other joint ventures in Russia and China.

Automotive,  as previously announced,  has decided to exit the light-vehicle ABS
business  and  is   conducting   discussions   concerning   the  future  of  its
light-vehicle  braking  business.  Exiting  the ABS  business  could  hinder the
Company's  ability to remain a first tier supplier of complete  braking systems.
The Company  expects that neither exiting the ABS business nor the absence of an
agreement  regarding the  light-vehicle  braking  business would have a material
impact on the Company's results of operations or financial position in 1996. See
Note 3 of Notes to Financial Statements for additional information. In addition,
a  reduction  in  the  Automotive  workforce  was  announced  and  substantially
completed in the fourth quarter of 1995. The reduction eliminates  approximately
3,100 salaried and hourly  full-time-equivalent  positions and is expected to be
completed  by the end of 1996.  In  April  1995 the  Company  acquired  the Budd
Company's Wheel & Brake Division (Budd Wheel & Brake), which has annual sales of
more than $300 million.  In June 1995 the Company acquired Fiat Auto Poland S.A.
(Fiat)'s  braking  business,  which is expected to continue to supply Fiat's two
automotive assembly facilities in Poland.  Annual sales approximate $30 million.
In October 1995  Automotive  increased to 80% its ownership in the Turkish brake
manufacturer,  Transturk Fren Donanim  Industriesi AS. Annual sales  approximate
$27  million.  Also in  1995 a new  joint  venture  began  manufacturing  hybrid
inflators  for  driver-  and  passenger-side  air bag  modules  that  are  being
assembled at the  Company's new plant in Italy.  Production  also began at a new
turbocharger plant in Shanghai, China.

Engineered  Materials purchased Hoechst AG's 95.8% interest in Riedel-de Haen AG
(Riedel-de  Haen), a German  specialty  chemicals  manufacturer in October 1995.
Riedel-de Haen  manufactures  chemicals for the  pharmaceutical  and electronics
industries,  as well as the coatings, photo dyes and specialty pigments markets.
Annual sales  approximate  $250 million.  Also in October the Company acquired a
nylon  plastics and  industrial  fibers  manufacturing  facility in  Rudolstadt,
Germany with annual sales of  approximately  $60 million.  The Company  plans to
invest about $100 million  during the next three years to expand and upgrade the
facility.  In November  1995 the  Company  acquired  Bridgestone/Firestone's  50
million-pound  industrial  polyester  fiber plant in  Hopewell,  Virginia.  With
anticipated  modernization,  the Company  believes that the Hopewell  plant will
have annual sales of  approximately  $100 million.  In December 1995 the Company
exited its high-density  polyethylene  (HDPE)  business.  Paxon Polymer Company,
L.P.  (Paxon),  a partnership of the Company and Exxon Chemical Company (Exxon),
transferred  the HDPE  business  to  Exxon.  See  Note 3 of  Notes to  Financial
Statements for additional information.

THE BOARD OF DIRECTORS VOTED TO INCREASE THE REGULAR  QUARTERLY  DIVIDEND ON THE
COMMON STOCK BY 15%, FROM $0.195 TO $0.225 PER SHARE. The dividend increase will
be effective in the first quarter of 1996. The Company had previously  increased
its regular quarterly dividend by 16% in the first quarter of 1995.

RESULTS OF  OPERATIONS.  Record sales and net income were achieved again in 1995
as gains were realized in all business  segments  through growth,  strong demand
and productivity initiatives.

NET SALES in 1995 were  $14,346  million,  an increase of 12% over 1994.  Of the
$1,529 million  increase,  $613 million was the result of strong volume gains by
the  Engineered  Materials  and  Aerospace  segments  and $760  million from the
consolidation of recent  acquisitions  offset in part by a $91 million reduction
for  disposed  businesses,  $181  million  was the result of  favorable  foreign
exchange rate fluctuations in the Automotive  segment and $66 million was due to
higher prices in the Engineered Materials segment.  Automotive's sales increased
$627 million, or 13%, Engineered  Materials was $441 million, or 13%, higher and
Aerospace had a $461 million, or 10%, gain.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percent of net sales decreased
from 10.7% in 1994 to 10.5% in 1995.

                                                                              19

Expenses  increased by $137  million,  or 10%,  reflecting in part the impact of
acquisitions.

INCOME FROM  OPERATIONS of $1,260  million in 1995 improved by $108 million,  or
9%, compared with last year.  Excluding the nonrecurring items in 1995 (see Note
3 of Notes to Financial  Statements  for  information),  income from  operations
improved by $152 million,  or 13%.  Engineered Materials' and Aerospace's income
from  operations  both  increased  20%;  while  Automotive  had  a 1%  decrease.
Operating  margins  increased  slightly,  from 9.0% in 1994 to 9.1% in 1995, and
productivity  (the constant dollar basis  relationship of sales to costs) of the
Company's businesses increased 5.2% over last year reflecting  manufacturing and
materials  management  initiatives  and unit sales  increases.  See the detailed
discussion of net income below for information by industry segment.

EQUITY  IN INCOME OF  AFFILIATED  COMPANIES  of $191  million  increased  by $62
million,  or 48%,  compared  with last year  mainly  because of  improved  joint
venture  earnings  for Paxon,  UOP process  technology  (UOP),  Knorr-Bremse  AG
(Knorr-Bremse)'s European truck brake systems and Converdyn conversion services.

OTHER INCOME  (EXPENSE),  a $22 million  loss,  improved by $5 million,  or 19%,
compared with a loss of $27 million in 1994  primarily  reflecting a gain on the
sale of an  investment  and  lower  foreign  exchange  losses.  Higher  minority
interest was a partial offset.

INTEREST AND OTHER FINANCIAL  CHARGES of $168 million  increased by $25 million,
or 17%, from 1994 largely due to higher average  interest rates and an increased
level of debt.

NET  INCOME  in 1995 was $875  million,  or $3.09 a share,  an  increase  of 15%
compared with $759  million,  or $2.68 a share,  for 1994.  The higher income in
1995 was the result of strong operating  performance by the Engineered Materials
and Aerospace segments and a small increase by Automotive.

A DISCUSSION OF THE OPERATIONS OF THE BUSINESS  SEGMENTS  follows.  Adjusted net
income for the Automotive and Engineered  Materials segments excludes the impact
of the 1995 nonrecurring items. (Dollars in millions)

Aerospace                                 NET SALES                   NET INCOME
- --------------------------------------------------------------------------------
                                                                
1995                                        $ 5,084                        $ 303
- --------------------------------------------------------------------------------
1994                                          4,623                          260
- --------------------------------------------------------------------------------
Increase                                    $   461                        $  43
- --------------------------------------------------------------------------------

Aerospace's sales increased 10% reflecting the acquisition of Textron's Lycoming
Turbine Engine  Division  (Lycoming  Engine) in October 1994,  continued  strong
demand  for  safety-related  commercial  avionics  systems,  such as  predictive
windshear,  ground proximity  warning,  global  positioning and TCAS, and higher
sales of auxiliary power units (APUs).  TCAS sales were  particularly  strong as
U.S.  operators of  10-to-30-seat  aircraft  complied with the Federal  Aviation
Administration's  mandate to  install  TCAS by the end of 1995.  Commercial  and
military  aftermarket  showed  strong  growth.  Equipment  Systems'  repair  and
overhaul services and environmental  control systems also had higher sales. This
increase was somewhat offset by lower sales for Government  Electronics Systems,
where comparisons were adversely  affected by one-time  contract  settlements in
1994 and the closeout of certain programs.

Overall, the Company's 1995 sales to the Department of Defense (DoD), as a prime
contractor and subcontractor,  declined 7% compared with 1994 because of reduced
defense  spending.  Sales  to the  commercial  and  foreign  government  markets
increased 19%, while sales to the National  Aeronautics and Space Administration
(NASA) and other U.S. government agencies increased 2% in 1995. Sales to the DoD
accounted for 24% of Aerospace's  total sales, a decrease of 4 percentage points
compared with 1994.

Aerospace's net income improved 17% compared with last year.  Synergies from the
Lycoming Engine acquisition, process improvements,  organizational efficiencies,
higher sales of APUs and continued strong demand for  safety-related  Commercial
Avionics  Systems  contributed to  significantly  higher income.  Profit margins
benefited by the early product  development and marketing of the  safety-related
avionics  systems.  Strong  sales  of  higher  margin  commercial  and  military
aftermarket  products also contributed to higher income.  Equipment  Systems had
higher earnings from improved sales of environmental  control systems as well as
from  increased  repair and overhaul  business.  Earnings  related to government
services  also  improved,  but  Government  Electronic  Systems had lower income
primarily due to earnings related to one-time  contract  settlements in 1994 and
manufacturing difficulties.

The U.S.  defense  budget is  expected  to  continue  to decline for a number of
years,  but at a progressively  slower rate. A number of the Company's  military
and space programs may be stretched  out,  curtailed or canceled.  However,  the
Company does not expect that its  defense-related  sales will decline as rapidly
as the defense budget because of recent  acquisitions,  opportunities to grow in
certain  markets  and the  Company's  strong  competitive  position  on  various
programs.  The  Company's  ability to  successfully  retain and compete for such
business is highly  dependent on  continually  advancing  its  technology  base,
management procifiency, strategic alliances and cost-effective performance.

The Company  believes  that the cyclical  downturn for the  commercial  aircraft
industry  reached  bottom in 1995 and a small  improvement  is expected in 1996.
Regional  airline  traffic  continues  to grow  significantly  and new  regional
aircraft  orders were higher in 1995. The commercial  aftermarket  showed strong
growth during 1995.

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

At December  31,  1995 and 1994 the  Company  had firm orders for its  aerospace
products  from the U.S. and foreign  governments  of $1,871 and $1,803  million,
respectively.  Total backlog,  including commercial contracts,  at year-end 1995
and 1994 was $4,523 and $4,730 million,  respectively.  The Company  anticipates
that  approximately  $3,010  million  of the total 1995  backlog  will be filled
during 1996.

                                                                        ADJUSTED
Automotive                    NET SALES         NET INCOME            NET INCOME
- --------------------------------------------------------------------------------
                                                                   
1995                            $ 5,549              $ 146                 $ 217
- --------------------------------------------------------------------------------
1994                              4,922                215                   215
- --------------------------------------------------------------------------------
Increase/(Decrease)             $   627              $ (69)                $   2
- --------------------------------------------------------------------------------

Automotive's sales were up 13% compared with 1994 reflecting improvements in all
major business units.  Automotive's sales benefited from the acquisition of Budd
Wheel & Brake as well as growing demand for braking systems in Europe.  Although
North American  vehicle  production  volumes  decreased  slightly in 1995, North
American braking systems' content per vehicle

20

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

                                                            1993    1994    1995
                                                            ----    ----    ----
                                                                   
                                                            11.8    12.8    14.3

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

                                                            1993    1994    1995
                                                            ----    ----    ----
                                                                   
                                                            656*    759     875

- ----------
*   Before cumulative effect of 1993 change in accounting principle.

[GRAPHIC  REPRESENTATION  of Earnings Per  Share  (dollars per share), expressed
numerically below.]

                                                            1993    1994    1995
                                                            ----    ----    ----
                                                                   
                                                            2.31*   2.68    3.09

- ----------
*   Before cumulative effect of 1993 change in accounting principle.

increased as a result of key business  wins with the Ford Motor  Company  (Ford)
and the Chrysler  Corporation  (Chrysler).  ABS sales were  significantly  lower
during the year. The acquisition of the seat belt business of the General Safety
Corporation in late 1994 resulted in significant sales gains.  Safety restraints
also  experienced  increased sales due to higher air bag demand in North America
and the  startup  of an air bag  plant  in  Italy.  European  spark  plug  sales
increased  largely due to the  acquisition  of a spark plug plant in the U.K. in
1994.  Record  production levels of heavy trucks translated into increased sales
for North American truck braking systems and turbochargers.  The continuation of
the trend toward  producing  diesel-powered  cars in Europe and penetration into
the Asian market also favorably impacted turbocharger sales. Turbocharger plants
continue to operate at capacity  levels.  The segments  sales  improvement  also
reflects the impact of favorable foreign exchange rate fluctuations.

Automotive's  adjusted net income  improved by 1% compared with 1994. Net income
was  substantially  higher  for North  American  safety  restraints  principally
reflecting materials management and operational initiatives and for the European
aftermarket  largely  due to cost  savings,  improved  distribution  and pricing
improvements.  Turbochargers and truck braking systems had significantly  higher
income on strong sales growth.  In addition,  turbochargers  experienced  higher
operating  margins  due  to  operational   excellence  and  other  manufacturing
initiatives.  Rapid growth in the European turbodiesel  passenger car market and
growth  initiatives in the  Asia/Pacific  region have strained our  turbocharger
manufacturing  capacity.  Process  improvements  and  a  planned  expansion  are
expected to alleviate the capacity  constraints.  Offsets  included  significant
losses  for ABS and  reduced  profit  margins  on North  American  light-vehicle
braking systems.

                                                                      ADJUSTED
Engineered Materials          NET SALES         NET INCOME            NET INCOME
- --------------------------------------------------------------------------------
                                                              
1995                            $ 3,713              $ 473                 $ 402
- --------------------------------------------------------------------------------
1994                              3,272                330                   330
- --------------------------------------------------------------------------------
Increase                        $   441              $ 143                 $  72
- --------------------------------------------------------------------------------

Engineered  Materials sales increased 13% compared with 1994.  Sales were higher
for all Engineered Materials  business units,  especially polymers,  performance
materials  and  laminate  systems.   In  the  polymers   business,   sales  were
significantly higher because of price improvement for intermediate chemicals and
increased  sales  volumes and prices for  industrial  polyester,  especially  in
Europe.  Plastics had strong sales growth in all product  lines.  Carpet  fibers
experienced  price  pressure and lower volumes  throughout the fourth quarter of
1995 as the industry attempted to correct high levels of inventory.  Performance
materials  had  substantially   higher  sales  reflecting   increased  sales  of
performance  additives,   advanced  microelectronic  materials  and  performance
chemicals,  in part  reflecting the  acquisition of Riedel-de Haen in late 1995.
Laminate systems had  significantly  higher sales volumes mainly in the U.S. and
Asia/Pacific region.

Engineered  Materials'  adjusted net income increased 22% compared with the same
period last year. Net income was  substantially  higher for polymers as a result
of price  improvement for intermediate  chemicals and increased sales volume and
prices for plastics and higher sales  volumes of  industrial  polyester  fibers.
Carpet  fibers and textile  nylon also had higher  income  largely the result of
productivity  improvements.  Performance materials improved substantially due to
higher sales of performance  chemicals and advanced  microelectronic  materials.
Uranium ore processing  operations  also improved.  Laminate  systems had higher
income  on  significantly  higher  sales.  Environmental  catalysts  and  carbon
materials  also had income gains.  There was also a substantial  increase in net
income from the Paxon and UOP joint  ventures.  Fluorine  products  had slightly
lower net income,  in part because of lower selling prices and costs  associated
with the transition to mandated chlorofluorocarbon (CFC) substitutes in the U.S.
and other developed  countries.  Income from CFC substitutes  was  higher as the
Company's  proprietary  refrigerants gained acceptance among  original equipment
(OE) manufacturers.

REGARDING  ENVIRONMENTAL  MATTERS,  the  Company is subject to various  federal,
state and local 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 environ-

                                                                              21

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

                                                            1993    1994    1995
                                                            ----    ----    ----
                                                                   
Capital expenditures...................................     718      639     746
Company-funded R&D.....................................     313      318     353
                                                          -----    -----   -----
           Total.......................................   1,031      957   1,099
                                                          -----    -----   -----

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

                                                            1993    1994    1995
                                                            ----    ----    ----
                                                                   
                                                            37.9    30.4    25.6

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

                                                            1993    1994    1995
                                                            ----    ----    ----
                                                                   
                                                            30.6    28.9    26.7

mental  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  on  the
completion of feasibility  studies or the settlement of claims,  but in no event
later than the Company's commitment to a plan of action.

Remedial response and voluntary cleanup expenditures were $72 and $66 million in
1995  and  1994,  respectively,  and are  currently  estimated  to  increase  to
approximately  $90 million in 1996.  While annual  expenditures  have  generally
increased from year to year, and may continue to increase over time, the Company
expects  it will  be  able  to  fund  such  expenditures  from  cash  flow  from
operations. 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.

During 1995 the Company  charged $25 million  against pretax income for remedial
response  and  voluntary  cleanup  costs.  At  December  31,  1995 the  recorded
liability for environmental  matters was $454 million. In addition,  in 1995 the
Company incurred  operating costs for ongoing  businesses of  approximately  $85
million and capital  expenditures  of $44 million  relating to  compliance  with
environmental regulations.

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

See Note 19 of Notes to Financial  Statements  for a discussion of the Company's
commitments and contingencies, including those related to environmental matters.

REGARDING  FINANCIAL  INSTRUMENTS,  the Company,  with  operating  and financing
activities in numerous  countries and sales  throughout the world, is exposed to
fluctuations in interest rates and foreign currency  exchange rates. The Company
manages exposure to changes in interest rates through its regular  borrowing and
investing  decisions and, when deemed  appropriate,  through the use of interest
rate swap  agreements.  The  objective  of such risk  management  activity is to
minimize the cost of the Company's  debt  financing  over an extended  period of
time.  The Company  manages  exposure  to foreign  currency  exchange  rates for
transactional  items by  matching  and  offsetting  assets and  liabilities  and
thereafter  through  financial hedge  contracts with third parties.  The Company
does not use financial  instruments for trading or other  speculative  purposes.
See  Note 15 of  Notes  to  Financial  Statements  for  further  information  on
financial instruments.

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

THE  FINANCIAL  ACCOUNTING  STANDARDS  BOARD (FASB)  issued  Statement No. 121 -
"Accounting for the Impairment of Long-lived Assets to Be Disposed Of" (FASB No.
121),  effective for 1996. The Company is completing an analysis of FASB No. 121
which is not  expected  to have a material  impact on the  Company's  results of
operations or financial position.

The FASB issued  Statement No. 123 - "Accounting for  Stock-based  Compensation"
(FASB No. 123),  which is also effective for 1996. The Company plans to continue
to account for stock  compensation  in  accordance  with the  provisions  of the
Accounting  Principles  Board Opinion No. 25 -  "Accounting  for Stock Issued to
Employees",  and will provide the pro-forma disclosures required by FASB No. 123
in the notes to the 1996 financial statements.

FINANCIAL CONDITION.  Significant improvement in operating cash flows and strong
earnings  growth  resulted in continued  improvement in the Company's  financial
condition.

TOTAL ASSETS at December 31, 1995 were  $12,465  million,  an increase of $1,144
million from  December 31, 1994,  primarily due to  acquisitions.  Cash and cash
equivalents  at  year-end  1995 were $540  million,  an  increase of $32 million
compared with

22

December  31,  1994.  Cash flows from  operating  activities  increased  by $173
million,  or  17%,  because  of  improved  earnings  and  lower  trade  accounts
receivable,  partially  offset  by  higher  inventories  to meet  the  Company's
increased  sales  level.  The  current  ratio at  year-end  1995 was 1.3x,  down
slightly from 1.4x last year. The Company's  working  capital  turnover was also
down slightly to 5.2x at December 31, 1995 from 5.5x a year earlier.

THE MAXIMUM AMOUNT OF BORROWING  available under the Company's  revolving credit
agreements (Credit Agreements) was reduced by the Company in June 1995 from $900
million to $750 million  because the floating rate Employee Stock Ownership Plan
(ESOP) notes were  refinanced in 1995 and are no longer  supported by the Credit
Agreements.  The Credit  Agreements  support the issuance of  commercial  paper.
There was $58 million of commercial  paper  outstanding  at year-end 1995 and no
commercial  paper  outstanding at the end of 1994.  Commercial  paper  borrowing
reached a high of $900 million during 1995.

TOTAL DEBT at year-end 1995 of $2,010 million  increased $323 million  primarily
as a result  of  increased  short-term  borrowing  mainly  due to  acquisitions.
Long-term debt of $1,366 million was reduced by $58 million during the year. The
Company's  total debt as a percent of capital  was 33.7% at December  31,  1995,
down  from  34.1% at  year-end  1994.  Long-term  debt to  capital  was 25.6% at
year-end  1995,  down  from  30.4%  at  year-end  1994.  See Note 13 of Notes to
Financial  Statements  for details of  long-term  debt and a  discussion  of the
Credit Agreements.

THE COMPANY  REPURCHASED  5.5 MILLION SHARES OF COMMON STOCK for $239 million in
1995.  Common stock was  repurchased in 1995 to meet expected  requirements  for
shares  issued  under   employee   benefit  plans  and  a  shareowner   dividend
reinvestment  plan.  At year-end  1995 the Company  had 75.5  million  shares of
common stock held in treasury carried at $1,658 million. As of year-end 1995 the
Company was authorized to repurchase 8.1 million shares of common stock.

CAPITAL  EXPENDITURES during 1995 were $746 million, an increase of $107 million
from the $639 million  spent in 1994,  mainly due to capacity  expansions in the
Engineered Materials segment.  Spending by the segments and Corporate since 1993
is shown  in Note 23 of  Notes to  Financial  Statements.  The  Company's  total
capital  expenditures  in 1996 are  currently  projected at about $765  million.
These  expenditures  are expected to be financed by internally  generated funds.
Approximately  67% of the projected 1996  expenditures are planned for expansion
and cost reduction, 27% for replacement and maintenance and 6% for environmental
projects.

1994 COMPARED WITH 1993

IN 1994  THE  COMPANY  DEVELOPED  NEW  INITIATIVES  TO  IMPROVE  EFFICIENCY  AND
ELIMINATE WASTE,  SHARPEN ITS FOCUS ON CUSTOMER  SATISFACTION AND TARGET FOREIGN
GROWTH  OPPORTUNITIES.  PRODUCTIVITY  PROGRAMS  STARTED SINCE 1991  CONTINUED TO
ENHANCE AND GROW THE BUSINESS.  One new  initiative -  Operational  Excellence -
will enhance productivity  programs by redesigning the Company's basic processes
to remove variations and improve manufacturing yields as well as by implementing
measurement  tools to  monitor  our  progress.  Another  initiative  -  Customer
Partnerships  - involves  customers in designing the Company's  products,  while
reducing cycle times in  engineering,  manufacturing  and product  support.  The
Company will start training  employees in 1995 in Total Quality Leadership Phase
II to provide  natural work teams with  analytical  tools for achieving  process
improvements.

DURING 1994 THE COMPANY LAID THE FOUNDATION FOR GROWTH IN 1995 AND BEYOND:

Aerospace acquired Lycoming Engine in October 1994. This acquisition extends the
Engines group's product offerings in the robust regional aircraft market as well
as into helicopter and other  commercial and military  applications  for turbine
engines. To reduce costs and improve  competitiveness in its core product lines,
Aerospace  consolidated 12 businesses into four integrated  units and merged its
sales and service  organizations into a single group.  During the year Aerospace
introduced new high-technology products to enhance flight safety and also agreed
to form a number of strategic  alliances  in Japan and China to better  position
itself as a global supplier and to secure a share of the fast-growing markets in
the Asia/Pacific region.

Globalization is also a key factor in Automotive's growth strategy.  The Company
acquired Ford's spark plug plant in the U.K.,  which had 1993 sales of about $20
million,  and a seat belt manufacturer in Italy,  owned by the Fiat Group, which
had annual sales of approximately $34 million.  Automotive began construction of
a $27 million  turbocharger plant in Shanghai,  China and has entered into joint
venture  agreements  to  produce  air bag  inflators  in  Italy,  to  distribute
aftermarket  products  throughout Europe and to supply brake boosters from Spain
for vehicles  built in Europe by Japanese  manufacturers.  In November  1994 the
Company  acquired  the seat belt  business  of  General  Safety  Corporation,  a
supplier to General Motors  Corporation and Ford.  General Safety had 1994 sales
of about $95 million.

Engineered Materials began manufacturing  environmentally-safer  alternatives to
CFCs at a new $70 million facility in Geismar,  Louisiana and acquired the small
CFC business of Akzo N.V. in the  Netherlands.  A joint venture  agreement  with
General Motors to produce coated automotive  catalytic converter  substrates was
signed  in  November   1994.   The  venture   strengthens   the  technology  and
manufacturing capacity of both companies.

RESULTS OF  OPERATIONS.  The  Company's  sales and  earnings  expanded to record
levels in 1994.  The Company  grew through new product  introductions  and niche
acquisitions  and by gaining  market  share in an expanding  worldwide  economy.
Internal   restructuring   and   productivity    improvements   drove   earnings
significantly higher.

NET SALES in 1994 were $12,817 million, an increase of 8% over last year. Of the
$990 million increase, $880 million was the result of strong volume gains by the
Automotive  and  Engineered   Materials  segments  and  $442  million  from  the
consolidation of recent acquisitions, offset in part by a $163 million reduction
for  disposed  businesses,  $131  million  due to  lower  prices  mainly  in the
Automotive  segment  and  $38  million  due  to  unfavorable   foreign  exchange
fluctuations.

INCOME FROM  OPERATIONS of $1,152  million in 1994 improved by $198 million,  or
21%.  Excluding the nonrecurring items in 1993 (see Note 3 of Notes to Financial
Statements for information), income from operations improved by $214 million, or
23%.  Aerospace's income increased 12%; Automotive was 17% higher and Engineered
Materials had a 30% gain.  Operating margins increased from 7.9% in 1993 to 9.0%
in 1994 and  productivity  increased by 6.2% over last year reflecting  business
consoli-

                                                                              23

dations, cycle time reductions,  materials management initiatives and unit sales
increases.  See the detailed  discussion of net income below for  information by
industry segment.

OTHER INCOME (EXPENSE),  a $27 million loss,  compares with a loss of $9 million
in 1993 reflecting higher minority interest as a result of the formation in late
1993 of a venture  with a  subsidiary  of  Knorr-Bremse  in the U.S. and reduced
interest  income from  investments  in short-term  securities.  Reduced  foreign
exchange costs on forward contracts had a favorable impact.

INTEREST AND OTHER FINANCIAL  CHARGES of $143 million  decreased by $14 million,
or 9%, from 1993 because of refunding a number of debt issues at lower  interest
rates and a reduced level of outstanding debt. Higher interest rates on floating
rate borrowings partially offset such savings.

THE  EFFECTIVE TAX RATE in 1994 was 31.7%  compared with 27.9% in 1993.  The 3.8
percentage  point increase in 1994 was due to a higher level of earnings subject
to the U.S. statutory rate, additional  non-deductible  expenses in 1994 and the
absence   of  the   favorable   impact   of  a  rate   increase   on  the   1993
beginning-of-the-year deferred tax balances as a result of the 1993 Tax Act. See
Note 6 of Notes to Financial Statements for further information.

INCOME BEFORE THE  CUMULATIVE  EFFECT OF A CHANGE IN AN ACCOUNTING  PRINCIPLE of
$759 million,  or $2.68 a share,  in 1994 increased by $103 million,  or $0.37 a
share, compared with $656 million, or $2.31 a share, last year.

NET  INCOME  in 1994 was $759  million,  or $2.68 a share,  compared  with  $411
million,  or  $1.45 a  share,  for  1993.  However,  1993  was  impacted  by the
cumulative effect of adopting an accounting  change of $245 million,  or $0.86 a
share.  The  higher  income  in  1994  was  the  result  of a  strong  operating
performance by all segments.

A DISCUSSION OF THE OPERATIONS OF THE BUSINESS  SEGMENTS,  before the cumulative
impact of an  accounting  change on net  income,  follows.  Adjusted  net income
excludes the impact of the 1993 nonrecurring items. (Dollars in millions)

                                                                        ADJUSTED
Aerospace                     NET SALES         NET INCOME            NET INCOME
- --------------------------------------------------------------------------------
                                                               
1994                            $ 4,623              $ 260                 $ 260
- --------------------------------------------------------------------------------
1993                              4,530                225                   229
- --------------------------------------------------------------------------------
Increase                        $    93              $  35                 $  31
- --------------------------------------------------------------------------------

Aerospace's  sales increased 2% over last year. The acquisitions of the Lycoming
Engine and Sundstrand Data Control operations and contract  settlements with the
U.S.  Air Force  contributed  significantly  to the higher  sales.  The regional
airline  market  continued  to grow,  but a reduction  in military  spending and
weakness in the commercial  aircraft  market  continued to restrict  sales.  The
Engines group had lower sales of spares and repair and overhaul  services to the
aftermarket. Government Electronic Systems had lower sales of avionics equipment
to the military.  Equipment  Systems had reduced  commercial and military sales,
but sales from aircraft  landing  systems'  repair and overhaul  operations were
higher, in part reflecting new business.  Commercial  Avionics Systems had lower
sales  mainly of TCAS II,  reflecting  the  completion  of the airline  industry
retrofit  program.  Sales were reduced by the mid-year 1994  dispositions of the
actuation and hangar businesses.

Overall,  the  Company's  1994  sales  to the  DoD,  as a prime  contractor  and
subcontractor,  declined by 7%  compared  with 1993  because of reduced  defense
spending.  Sales to the commercial and foreign  government  markets increased by
5%, while sales to NASA and other U.S.  government  agencies increased by 13% in
1994. Sales to the DoD accounted for 28% of Aerospace's  total sales, a decrease
of 3 percentage points compared with 1993.

Although  sales were up only  slightly,  Aerospace's  net income  increased  14%
compared  with last year's  adjusted  net income.  Cost  savings  from  business
consolidations, materials management and other productivity programs, especially
in the Engines group,  contributed to significantly  higher income.  The Engines
group also had lower  engineering  expense on certain  major  programs that were
winding down.  Government  Electronic Systems had favorable contract settlements
and Equipment  Systems had higher income from  commercial  aftermarket  sales of
aircraft landing systems. The benefits from the productivity programs offset the
continued  contraction  of military  spending  and  softness  in the  commercial
aircraft market.

At December  31,  1994 and 1993 the  Company  had firm orders for its  aerospace
products  from the U.S. and foreign  governments  of $1,803 and $1,861  million,
respectively.  Total backlog,  including commercial contracts,  at year-end 1994
and 1993 was $4,730 and $4,773 million, respectively.

                                                                        ADJUSTED
Automotive                    NET SALES         NET INCOME            NET INCOME
- --------------------------------------------------------------------------------
                                                               
1994                            $ 4,922              $ 215                 $ 215
- --------------------------------------------------------------------------------
1993                              4,506                228                   186
- --------------------------------------------------------------------------------
Increase/(Decrease)             $   416              $ (13)                $  29
- --------------------------------------------------------------------------------

Automotive's  sales  were up 9%  compared  with 1993.  Demand was  substantially
higher for  braking  systems,  turbochargers  and safety  restraints.  Strong OE
markets and new product  introductions  increased  sales for North  American and
European  brakes and air bags.  Sales of ABS increased in 1994,  reflecting  new
business with Ford and Chrysler due in part to the introduction of the Company's
advanced   traction   control  system.   Hybrid  inflator   technology   spurred
significantly  higher  sales of air bag  systems.  Strong  diesel truck sales in
North  America  and  greater  demand  for  diesel-powered  cars in Europe led to
significantly  higher  turbocharger  sales.   Turbocharger  plants  operated  at
capacity to satisfy the heavy demand. North American truck brake systems,  which
benefited  from strong OE medium and heavy truck demand,  had  increased  sales.
Sales of European truck brake systems are no longer consolidated,  following the
1993 venture with Knorr-Bremse.

Automotive's  adjusted  net income  increased  16%  reflecting  higher sales for
turbochargers,  braking  systems,  truck brakes and air bags. OE sales were very
strong in the North American market, and European businesses strengthened due to
the economic turnaround  occurring mainly in France and Spain. Income growth was
limited  by  temporary  capacity  constraints  in  the  turbocharger   business.
Productivity  improvements,   plant  rationalization  and  materials  management
throughout the segment also contributed to the significantly higher earnings.

                                                                        ADJUSTED
Engineered Materials          NET SALES         NET INCOME            NET INCOME
- --------------------------------------------------------------------------------
                                                                
1994                            $ 3,272              $ 330                 $ 330
- --------------------------------------------------------------------------------
1993                              2,791                273                   276
- --------------------------------------------------------------------------------
Increase                        $   481              $  57                 $  54
- --------------------------------------------------------------------------------

Engineered Materials' sales increased 17% because of strong automotive, housing,
industrial and electronics markets. Higher

24

sales volumes of industrial  and carpet fibers also reflect  shipments  from the
new polyester  facility in France and the acquisition of a carpet nylon business
in Europe.  Laminates grew  significantly  through  continued  globalization and
market   share    gains.    Fluorine    products    had   improved    sales   of
environmentally-safer  CFC  substitutes as additional  capacity was added during
the year and as a result of recent  acquisitions.  Environmental  catalysts  had
strong  sales to the OE  automotive  industry.  Plastics had higher sales to the
automotive,  packaging and distributor markets.  Amorphous metals expanded sales
to the article surveillance and transformer markets.

Adjusted net income for Engineered  Materials was up 20% reflecting higher sales
volumes for all  businesses  as well as  operating  efficiencies.  The  laminate
systems  business had strong earnings on  substantially  higher sales.  Fluorine
products had higher income reflecting increased CFC substitute capacity and cost
reductions,  although pricing  pressures  limited gains.  The amorphous  metals,
performance  chemicals and uranium hexafluoride  businesses had increased income
on higher sales. Carpet and industrial fibers had substantially  higher earnings
on increased  sales  volumes and prices,  but these gains were mostly  offset by
higher raw material  costs and by start-up  costs at the  Longlaville  facility.
Higher profit contributions were also realized from Engineered  Materials' joint
ventures - Paxon and UOP.

REGARDING  ENVIRONMENTAL  MATTERS,   remedial  response  and  voluntary  cleanup
expenditures were $66 and $65 million in 1994 and 1993, respectively.

During 1994 the Company  charged $37 million  against pretax income for remedial
response  and  voluntary  cleanup  costs.  At  December  31,  1994 the  recorded
liability for environmental  matters was $494 million. In addition,  the Company
incurred operating costs for ongoing businesses of approximately $80 million and
capital  expenditures of $43 million  relating to compliance with  environmental
regulations.

FINANCIAL CONDITION. Cash flow from operating activities exceeded $1 billion for
the third consecutive  year,  allowing the Company to continue to invest heavily
in its growth initiatives - particularly acquisitions and increases in capacity.
Additional  working capital  investment  required to support the Company's sales
growth  during 1994  impacted  further  cash flow  improvements.  High levels of
operating  cash flow,  together  with major debt  repayments  and  increases  in
retained  earnings have resulted in a significant  improvement  in the Company's
financial position in recent years.

TOTAL  ASSETS at December  31, 1994 were  $11,321  million,  an increase of $492
million from December 31, 1993. Cash and cash  equivalents at year-end 1994 were
$508 million, a decrease of $384 million compared with December 31, 1993, mainly
reflecting the  acquisitions of Lycoming  Engine and General Safety.  Cash flows
from operating  activities  decreased by $137 million because of higher accounts
receivable  reflecting the Company's increased sales level. The current ratio at
year-end  1994 was 1.4x,  compared with 1.3x last year.  The  Company's  working
capital turnover improved to 5.5x at December 31, 1994 from 4.8x a year earlier.

THE MAXIMUM AMOUNT OF BORROWING  available under the Company's Credit Agreements
was $900 million. The Credit Agreements support the issuance of commercial paper
as well as outstanding  floating rate ESOP notes.  There was no commercial paper
outstanding  at year-end  1994 and $164  million at the end of 1993.  Commercial
paper  borrowing  reached a high of $516 million during 1994.  Outstanding  ESOP
notes, at favorable  floating  interest rates,  totaled $217 and $259 million at
December 31, 1994 and 1993, respectively.

TOTAL DEBT at year-end  1994 was $1,687  million,  a decrease  of $273  million,
primarily  as a result of paying down  commercial  paper and a  redemption  of a
deutsche  mark bond  issue.  Long-term  debt was  reduced by $178  million.  The
Company's  total debt as a percent of capital  was 34.1% at December  31,  1994,
down  from  42.7% at  year-end  1993.  Long-term  debt to  capital  was 30.4% at
year-end  1994,  down  from  37.9%  at  year-end  1993.  See Note 13 of Notes to
Financial  Statements  for details of  long-term  debt and a  discussion  of the
Credit Agreements.

THE COMPANY  REPURCHASED  2.9 MILLION SHARES OF COMMON STOCK for $103 million in
1994.  Common stock was  repurchased in 1994 to meet expected  requirements  for
shares  issued  under   employee   benefit  plans  and  a  shareowner   dividend
reinvestment  plan.  At year-end the Company had 75.1  million  shares of common
stock held in treasury carried at $1,505 million.

CAPITAL  EXPENDITURES  during 1994 were $639 million,  a decrease of $79 million
from the $718 million  spent in 1993.  Spending by the  segments  and  Corporate
since 1993 is shown in Note 23 of Notes to Financial Statements.
- --------------------------------------------------------------------------------
SAFE HARBOR  STATEMENT  under the Private  Securities  Litigation  Reform Act of
1995:  Except for the  historical  information  contained  herein,  the  matters
discussed in this annual  report are  forward-looking  statements  which involve
risks and  uncertainties,  including  but not limited to economic,  competitive,
governmental  and  technological  factors  affecting the  Company's  operations,
markets,  products,  services  and prices,  and other  factors  discussed in the
Company's filings with the Securities and Exchange Commission.

                                                                              25

Consolidated Statement of Income     AlliedSignal Inc.

Years ended December 31      (dollars in millions except per share amounts)                 1995              1994             1993
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                               
Net sales                                                                               $ 14,346          $ 12,817        $ 11,827
- -----------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold                                                                        11,539            10,299           9,551
Selling, general and administrative expenses                                               1,503             1,366           1,338
Nonrecurring items                                                                            44                --             (16)
- -----------------------------------------------------------------------------------------------------------------------------------
Total costs and expenses                                                                  13,086            11,665          10,873
- -----------------------------------------------------------------------------------------------------------------------------------
Income from operations                                                                     1,260             1,152             954
Equity in income of affiliated companies                                                     191               129             122
Other income (expense)                                                                       (22)              (27)            (9)
Interest and other financial charges                                                        (168)             (143)           (157)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before taxes on income                                                              1,261             1,111             910
Taxes on income                                                                              386               352             254
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting principle                            875               759             656
Cumulative effect of change in accounting principle                                           --                --            (245)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                              $    875          $    759        $    411
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per share of common stock: (a)
Before cumulative effect of change in accounting principle                              $   3.09          $   2.68        $   2.31
Cumulative effect of change in accounting principle                                           --                --            (.86)
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings                                                                            $   3.09          $   2.68        $   1.45
- -----------------------------------------------------------------------------------------------------------------------------------

(a)  Earnings per share of common  stock are based upon the  following  weighted
average number of shares: 1995, 283,437,773 shares; 1994, 283,446,399 shares and
1993,  283,233,078  shares.  No dilution results from  outstanding  common stock
equivalents.

Consolidated Statement of Retained Earnings

Years ended December 31     (dollars in millions except per share amounts)                  1995             1994             1993
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                               
Balance at beginning of year                                                            $  1,613         $  1,023         $    747
Net income                                                                                   875              759              411
Other                                                                                         44               11               27
Common stock dividends
   (1995--$.78 per share; 1994--$.6475 per share; 1993--$.58 per share)                     (217)            (180)            (162)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year                                                                   $ 2,315         $  1,613         $  1,023
- -----------------------------------------------------------------------------------------------------------------------------------

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

26

Consolidated Balance Sheet  AlliedSignal Inc.

December 31 (dollars in millions)                                                                              1995            1994
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                   
ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents                                                                                  $    540       $    508
Accounts and notes receivable                                                                                 1,751          1,697
Inventories                                                                                                   1,991          1,743
Other current assets                                                                                            608            637
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets                                                                                          4,890          4,585

Investments and long-term receivables                                                                           479            475
Property, plant and equipment--net                                                                            4,742          4,260
Cost in excess of net assets of acquired companies--net                                                       1,572          1,349
Other assets                                                                                                    782            652
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets                                                                                               $ 12,465       $ 11,321
- -----------------------------------------------------------------------------------------------------------------------------------

LIABILITIES
- -----------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable                                                                                           $  1,385       $  1,296
Short-term borrowings                                                                                           397            133
Commercial paper                                                                                                 58             --
Current maturities of long-term debt                                                                            189            130
Accrued liabilities                                                                                           1,775          1,832
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                                                     3,804          3,391

Long-term debt                                                                                                1,366          1,424
Deferred income taxes                                                                                           551            406
Postretirement benefit obligations other than pensions                                                        1,864          1,790
Other liabilities                                                                                             1,288          1,328

SHAREOWNERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Capital--common stock--Authorized 500,000,000 shares
   (par value $1 per share); issued: 358,228,742 shares                                                         358            358
   --additional paid-in capital                                                                               2,489          2,458
Common stock held in treasury, at cost:
   1995--75,459,178 shares; 1994--75,096,896 shares                                                          (1,658)        (1,505)
Cumulative foreign exchange translation adjustment                                                               61             18
Unrealized holding gain on equity securities                                                                     27             40
Retained earnings                                                                                             2,315          1,613
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareowners' equity                                                                                     3,592          2,982
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareowners' equity                                                                  $ 12,465       $ 11,321
- -----------------------------------------------------------------------------------------------------------------------------------

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

                                                                              27

Consolidated Statement of Cash Flows  AlliedSignal Inc.

Years ended December 31 (dollars in millions)                                                    1995        1994        1993
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                            
CASH FLOWS FROM OPERATING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------------------------------
Net income                                                                                    $   875      $  759      $  411
 Adjustments to reconcile net income to net cash flows from operating activities:
 Cumulative effect of change in accounting principle                                               --          --         245
 Nonrecurring items                                                                                39          --         (59)
 Streamlining and restructuring                                                                    --        (180)       (217)
 Depreciation and amortization (includes goodwill)                                                612         560         547
 Undistributed earnings of equity affiliates                                                      (59)        (10)        (34)
 Deferred taxes                                                                                   198         180         110
 Decrease (increase) in accounts and notes receivable                                             134        (195)         91
 Decrease (increase) in inventories                                                              (141)        134         123
 Decrease (increase) in other current assets                                                       35         (65)         14
 Increase in accounts payable                                                                      16         113          20
 Increase (decrease) in accrued liabilities                                                      (245)        (56)        151
 Other                                                                                           (248)       (197)       (222)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash flow provided by operating activities                                                  1,216       1,043       1,180
- -----------------------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------------------------------
Expenditures for property, plant and equipment                                                   (746)       (639)       (718)
Proceeds from disposals of property, plant and equipment                                           46          54          37
Decrease in investments and long-term receivables                                                  27          32          48
(Increase) in other investments                                                                    (4)         (8)        (31)
Cash paid for acquisitions                                                                       (499)       (531)       (244)
Proceeds from sales of businesses                                                                  72         130         129
Decrease (increase) in marketable securities                                                       --          90         (40)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash flow (used for) investing activities                                                  (1,104)       (872)       (819)
- -----------------------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in commercial paper                                                        58        (164)        160
Net increase (decrease) in short-term borrowings                                                  253          64         (88)
Proceeds from issuance of common stock                                                            104          43         143
Proceeds from issuance of long-term debt                                                          108           7         131
Payments of long-term debt                                                                       (147)       (215)       (355)
Repurchases of common stock                                                                      (239)       (103)       (229)
Cash dividends on common stock                                                                   (217)       (180)       (162)
Redemption of common stock purchase rights                                                         --          (7)         --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash flow (used for) financing activities                                                     (80)       (555)       (400)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                               32        (384)        (39)
Cash and cash equivalents at beginning of year                                                    508         892         931
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                                      $   540      $  508      $  892
- -----------------------------------------------------------------------------------------------------------------------------------

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

28

Notes to Financial Statements   AlliedSignal Inc.

(dollars in millions except per share amounts)

Note 1
- --------------------------------------------------------------------------------
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ALLIEDSIGNAL INC. is a global,  advanced  technology and manufacturing  company.
The  Company's  principal  lines  of  business  are  aerospace,  automotive  and
engineered materials (chemicals,  fibers, plastics and advanced materials).  The
principal markets for aerospace  products are the U.S. and foreign  governments,
aircraft  manufacturers,  commercial  airlines and dealers and  distributors  of
general   aviation   products.   Automotive   products  are  sold  to  worldwide
manufacturers  of passenger  cars,  light,  medium and heavy  trucks,  buses and
off-highway  vehicles and the  independent  aftermarket and passenger  car/truck
dealers.   Engineered   materials  have  applications  for  numerous  industries
including  automotive,  carpeting,  refrigeration,   construction,  electronics,
computer and utilities, among others.

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

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 other inventories.

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

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

COST IN EXCESS OF NET  ASSETS OF  ACQUIRED  COMPANIES  is being  amortized  on a
straight-line  basis over  appropriate  periods ranging from 20 to 40 years. The
cumulative  amount of goodwill  amortized  at December 31, 1995 and 1994 is $407
and $358 million, respectively.

POSTEMPLOYMENT  BENEFITS for former or inactive employees,  excluding retirement
benefits,  are  accounted  for  under the  provisions  of  Financial  Accounting
Standards   Board  (FASB)   Statement  No.   112--"Employers'   Accounting   for
Postemployment Benefits" (FASB No. 112), effective January 1, 1993. FASB No. 112
requires  the  Company  to  accrue  the  cost  of  certain  benefits,  including
severance,  workers'  compensation and health care coverage,  over an employee's
service life. A one-time charge for the adoption of FASB No. 112 of $396 million
(after-tax  $245 million,  or $0.86 a share) was  recognized  as the  cumulative
effect of a change in accounting principle in 1993. The 1993 ongoing expense was
$18 million  (after-tax  $11  million,  or $0.04 a share).  The Company uses the
services of an enrolled actuary to calculate  postemployment  costs. The Company
previously  expensed  the  cost of such  benefits  on a  pay-as-you-go  basis or
recognized the impact at the time of a specific event.

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

ENVIRONMENTAL  expenditures  that relate to current  operations  are expensed or
capitalized as appropriate.  Expenditures  that relate to an existing  condition
caused by past  operations,  and which do not  contribute  to  current or future
revenue  generation,  are expensed.  Liabilities are recorded when environmental
assessments  are made or  remedial  efforts  are  probable  and the costs can be
reasonably  estimated.  The  timing  of  these  accruals  is  generally  on  the
completion of feasibility  studies or the settlement of claims,  but in no event
later than the Company's  commitment to a plan of action.  The  liabilities  for
environmental  costs recorded in Accrued  Liabilities  and Other  Liabilities at
December 31, 1995 and 1994 were $90 and $364  million and $78 and $416  million,
respectively.

INTEREST  RATE AND FOREIGN  CURRENCY  FORWARD,  OPTION AND SWAP  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  agreements  used to hedge  assets and
  liabilities,  or net  investments in foreign  subsidiaries,  are recognized in
  Other Income (Expense) or Cumulative Foreign Exchange Translation  Adjustment,
  respectively.

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

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

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

INCOME  TAXES  are  based on the  asset and  liability  approach.  Deferred  tax
liabilities  or assets  reflect  the  impact of  temporary  differences  between
amounts of assets and liabilities for financial and tax reporting.  Such amounts
are  subsequently  adjusted,  as  appropriate,  to reflect  changes in tax rates
expected to be in effect when the temporary  differences  reverse.   A valuation
allowance is established for any deferred tax asset for which realization is not
likely.  Deferred  income  taxes have not been  provided on  approximately  $278
million of  undistributed  earnings of foreign  affiliated  companies  which are
considered
                                                                              29

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 2
- --------------------------------------------------------------------------------
ACQUISITIONS

In 1995 the Company  acquired The Budd  Company's  Wheel & Brake  Division (Budd
Wheel & Brake)  for  approximately  $160  million  in cash.  Budd  Wheel & Brake
manufactures  rotors,  hubs, drums and related assemblies for passenger cars and
light trucks; steel disc wheels for heavy trucks;  demountable rims; and hub and
drum  assemblies for medium- and heavy-duty  vehicles and had 1994 sales of over
$300 million.  In addition,  the Company  acquired a 95.8% interest in Riedel-de
Haen AG from  Hoechst  AG for  $245  million  in  cash.  Riedel-de  Haen AG is a
specialty chemicals manufacturer located in Germany. The business had 1994 sales
of approximately $250 million.

In 1994 the Company  acquired the Lycoming  Turbine  Engine  Division of Textron
Inc.  (Lycoming  Engine) for $375 million in cash and the  assumption of certain
liabilities. During 1995 the Company received $28 million in final settlement of
the purchase price. The business had 1994 sales of $550 million. Lycoming Engine
manufactures  turbofan  engines for regional  airlines,  helicopter  engines for
commercial,  military  and utility  aircraft,  military  tank engines and marine
propulsion engines.

In 1993 the Company acquired the data control business of Sundstrand Corporation
(Data Controls) for $195 million in cash. The business had sales of $194 million
in 1992.  Data  Controls  manufactures  a wide range of avionics  such as ground
proximity warning systems, reactive windshear detection systems, flight data and
voice recorders, general aviation in-flight phone systems and aircraft condition
monitoring systems.

The Company also made a number of smaller acquisitions in 1995, 1994 and 1993.

Note 3
- --------------------------------------------------------------------------------
NONRECURRING ITEMS

The 1995  nonrecurring  items consist of a provision of $115 million  (after-tax
$71 million,  or $0.25 a share)  relating to  management's  decision to exit the
anti-lock  braking  systems  (ABS) business.   The  provision  consists  of  the
revaluation  of the  Company's ABS assets to their fair market value and certain
other  closure  costs.  Also  included is a gain of $71 million  (after-tax  $71
million,  or $0.25 a share)  from the  transfer  of the assets of the  Company's
high-density  polyethylene (HDPE) business joint venture, Paxon Polymer Company,
L.P. (Paxon), to Exxon Chemical Company (Exxon).

The 1993  nonrecurring  items  consist of a gain of $89 million  (after-tax  $50
million,  or $0.17 a share) from the  formation of an alliance of the  Company's
air-brake control and related product  operations for heavy trucks with those of
Knorr-Bremse  AG, partly offset by a provision  totaling $73 million  (after-tax
$49 million, or $0.17 a share) covering  transaction and other costs,  including
formation costs, relating to Knorr-Bremse and other business ventures as well as
the cost of several legal actions.

Note 4
- --------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)

Years ended December 31                                  1995        1994        1993
- -------------------------------------------------------------------------------------
                                                                     
Interest income and other                             $    35      $   29      $   41
Minority interests                                        (36)        (30)         (7)
Foreign exchange (loss) (1)                               (21)        (26)        (43)
- -------------------------------------------------------------------------------------
                                                      $   (22)     $  (27)     $   (9)
- -------------------------------------------------------------------------------------

(1) Includes the  amortization of premiums for foreign currency forward exchange
contracts of $(3), $(12) and $(38) million,  in each of the respective years. In
part, the contracts,  in conjunction with domestic borrowings,  were utilized to
finance  certain  foreign  operations  and  contributed  to lower expense on the
"Interest and Other Financial Charges" line.

Note 5
- --------------------------------------------------------------------------------
INTEREST AND OTHER FINANCIAL CHARGES

Years ended December 31                                  1995        1994        1993
- -------------------------------------------------------------------------------------
                                                                   
Total interest and other
 financial charges                                    $   189      $  166      $  186
Less--Capitalized interest                                (21)        (23)        (29)
- -------------------------------------------------------------------------------------
                                                      $   168      $  143      $  157
- -------------------------------------------------------------------------------------

Note 6
- --------------------------------------------------------------------------------
TAXES ON INCOME

Years ended December 31                                  1995        1994       1993
- ------------------------------------------------------------------------------------

INCOME BEFORE TAXES
ON INCOME
- ------------------------------------------------------------------------------------
United States                                         $ 1,101     $   973      $ 799
Foreign                                                   160         138        111
- ------------------------------------------------------------------------------------
                                                      $ 1,261     $ 1,111      $ 910
- ------------------------------------------------------------------------------------

Years ended December 31                                  1995        1994       1993
- ------------------------------------------------------------------------------------
                                                                   
TAXES ON INCOME
- ------------------------------------------------------------------------------------
United States                                         $   347     $   297      $ 244
Foreign                                                    39          55         10
- ------------------------------------------------------------------------------------
                                                      $   386     $   352      $ 254
- ------------------------------------------------------------------------------------

Years ended December 31                                  1995        1994       1993
- ------------------------------------------------------------------------------------
                                                                   
Taxes on income consist of:
Current:
 United States                                        $   118     $    98      $  95
 State                                                     25          34         25
 Foreign                                                   44          40         24
- ------------------------------------------------------------------------------------
                                                          187         172        144
- ------------------------------------------------------------------------------------
Deferred:
 United States                                            192         129         99
 State                                                     12          36         25
 Foreign                                                   (5)         15        (14)
- ------------------------------------------------------------------------------------
                                                          199         180        110
- ------------------------------------------------------------------------------------
                                                      $   386     $   352      $ 254
- ------------------------------------------------------------------------------------

30

Years ended December 31                                                                         1995            1994          1993
- ----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                      
The principal items accounting for the difference in taxes on income computed at
 the U.S. statutory rate and as recorded on an overall basis are as follows:
  Statutory U.S. federal income tax rate                                                        35.0%           35.0%         35.0%
  Taxes on foreign earnings (under) U.S. tax rate                                               (1.7)            (.6)         (2.4)
  Asset basis differences                                                                       (2.0)           (3.3)         (1.7)
  Nondeductible amortization                                                                     1.1             1.0           1.2
  State income taxes                                                                             1.6             3.9           3.3
  Tax benefits of Foreign Sales Corporation                                                     (1.5)           (1.4)         (1.9)
  Dividends received deduction                                                                   (.1)            (.1)          (.2)
  ESOP dividend tax benefit                                                                      (.8)            (.9)          (.9)
  Impact of rate change on beginning-of-the-year deferred tax balances                            --              --          (1.5)
  All other items--net                                                                          (1.0)           (1.9)         (3.0)
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                30.6%           31.7%         27.9%
- -----------------------------------------------------------------------------------------------------------------------------------

December 31                                                                      1995         1994
- --------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES
- --------------------------------------------------------------------------------------------------
                                                                                    
Included in the following balance sheet accounts:
Other current assets                                                              $  431    $  483
Other assets                                                                         180       124
Accrued liabilities                                                                  (16)       --
Deferred income taxes                                                               (551)     (406)
- ---------------------------------------------------------------------------------------------------
                                                                                  $   44    $  201
- ---------------------------------------------------------------------------------------------------

December 31                                                                         1995      1994
- --------------------------------------------------------------------------------------------------

DEFERRED TAX ASSETS/(LIABILITIES)
- --------------------------------------------------------------------------------------------------
                                                                                       
The temporary  differences  and  carryforwards  which give rise to  deferred
  tax assets and liabilities are as follows:
Property, plant and equipment basis differences                                   $ (844)   $ (793)
Postretirement benefits other than pensions                                          750       741
Postemployment benefits                                                               76       106
Investment and other asset basis differences                                        (496)     (515)
Nonrecurring items                                                                   252       265
Other accrued items                                                                  389       423
Other tax credits                                                                    --         31
Alternative minimum tax credit                                                       --         12
Foreign net operating losses                                                         241       181
U.S. capital loss                                                                     16        22
All other items--net                                                                (285)     (199)
- ---------------------------------------------------------------------------------------------------
                                                                                      99       274
Valuation allowance                                                                  (55)      (73)
- ---------------------------------------------------------------------------------------------------
                                                                                  $   44    $  201
- ----------------------------------------------------------------------------------------------------

The foreign net operating  losses relate to several  countries.  Such losses are
available  to reduce  income  tax  payments  in the  future,  subject to varying
expiration  rules.  The U.S.  capital  loss is  available  to offset  income tax
payments on capital gains through 1997.

Note 7
- --------------------------------------------------------------------------------
ACCOUNTS AND NOTES RECEIVABLE

December 31                                                                         1995      1994
- --------------------------------------------------------------------------------------------------
                                                                                        
Trade                                                                             $1,477    $1,526
Other                                                                                308       204
- --------------------------------------------------------------------------------------------------
                                                                                   1,785     1,730
Less--Allowance for doubtful accounts
   and refunds                                                                       (34)      (33)
- --------------------------------------------------------------------------------------------------
                                                                                  $1,751    $1,697
- --------------------------------------------------------------------------------------------------

The Company is a party to agreements under which it can sell undivided interests
in designated  pools of trade  accounts  receivable up to $500 million  (average
outstanding  was $500 million during 1995 and 1994).  New  receivables  are sold
under the agreements as previously sold  receivables are collected.  During 1995
this  represented  an average  collection  period of 47 days or a replacement of
receivables  of  approximately  eight times.  At both December 31, 1995 and 1994
customer accounts receivable on the Consolidated Balance Sheet have been reduced
by $500  million  reflecting  such sales.  The Company  acts as an agent for the
purchasers in the collection and administration of the receivables.

Note 8
- --------------------------------------------------------------------------------
INVENTORIES

December 31                                                  1995         1994
- -------------------------------------------------------------------------------
                                                                
Raw materials                                             $   650      $   488
Work in process                                               769          761
Finished products                                             747          711
Supplies and containers                                        98           70
- --------------------------------------------------------------------------------
                                                            2,264        2,030
Less--
Progress payments                                            (145)        (160)
Reduction to LIFO cost basis                                 (128)        (127)
- --------------------------------------------------------------------------------
                                                          $ 1,991      $ 1,743
- --------------------------------------------------------------------------------

Inventories  valued at LIFO  amounted to $286  million at December  31, 1995 and
$267  million  at  December  31,  1994,   which  amounts  were  below  estimated
replacement cost by $128 and $127 million, respectively.

Note 9
- --------------------------------------------------------------------------------
OTHER CURRENT ASSETS

December 31                                                  1995          1994
- --------------------------------------------------------------------------------
                                                                
Current-deferred taxes                                    $   431      $   483
Other                                                         177          154
- --------------------------------------------------------------------------------
                                                          $   608      $   637
- --------------------------------------------------------------------------------

Note 10
- --------------------------------------------------------------------------------
INVESTMENTS AND LONG-TERM RECEIVABLES

December 31                                                  1995         1994
- --------------------------------------------------------------------------------
                                                                
Affiliates (1)                                            $   382      $   416
Long-term receivables                                          97           59
- --------------------------------------------------------------------------------
                                                          $   479      $   475
- --------------------------------------------------------------------------------

(1)  Includes  unrealized  holding  gains of $44 and $66 million at December 31,
1995 and 1994,  respectively,  on equity  securities in accordance with FASB No.
115. The cost basis of the equity securities was $25 and $44 million at December
31, 1995 and 1994, respectively.
                                                                              31

At  December  31,  1995  the  Company  had a  partnership  interest  in  UOP,  a
significant  joint  venture  accounted for under the equity  method.  UOP, a 50%
joint  venture,  is in the process  technology and catalyst  business.  Prior to
December 28, 1995 the Company also had a 50%  partnership  interest in Paxon,  a
significant  joint  venture  accounted  for  under  the  equity  method.   Paxon
manufactures and sells  high-density  polyethylene  resins.  On that date, Paxon
transferred  the   HDPE  business  to  Exxon.

Combined  selected  financial  data for these two  entities  are  summarized  as
follows (Paxon amounts are not included in the 1995 balance sheet below):

Years ended December 31                         1995          1994          1993
- --------------------------------------------------------------------------------
                                                                  
Net sales                                     $1,516        $1,251        $1,238
Income from operations                           265           165           151
Income before cumulative effect
 of changes in accounting
 principles (1)                                  219           147           149
Net income (1) (2)                               219           132            90
- --------------------------------------------------------------------------------

December 31                                                   1995          1994
- --------------------------------------------------------------------------------
                                                                     
Current assets                                              $  419        $  854
Total assets                                                   986         1,523
Current liabilities                                            373           304
Noncurrent liabilities                                         325           351
Equity                                                         288           868
- --------------------------------------------------------------------------------

(1) No U.S. taxes have been provided by the entities on partnership  income,  as
the individual  partners  are responsible for their  proportionate share of U.S.
taxes  payable.
(2) Reflects in 1994 the adoption of FASB No. 106 ($15 million) and in 1993  the
adoptions  of FASB No. 106 ($37  million) and FASB No. 112 ($22 million).

Note 11
- --------------------------------------------------------------------------------
PROPERTY, PLANT & EQUIPMENT

December 31                                                   1995          1994
- --------------------------------------------------------------------------------
                                                                      
Land and land improvements                                  $  370        $  333
Machinery and equipment                                      6,528         5,862
Buildings                                                    1,545         1,371
Office furniture and equipment                                 781           702
Transportation equipment                                       173           145
Construction in progress                                       388           379
- --------------------------------------------------------------------------------
                                                             9,785         8,792
Less--Accumulated depreciation
   and amortization                                         (5,043)       (4,532)
- --------------------------------------------------------------------------------
                                                            $4,742        $4,260
- --------------------------------------------------------------------------------

Note 12
- --------------------------------------------------------------------------------
ACCRUED LIABILITIES

December 31                                                   1995          1994
- --------------------------------------------------------------------------------
                                                                 
Customer advance payments/deposits                          $  182        $  235
Insurance                                                      113           132
Postretirement benefits
   other than pensions                                         122           128
Wages                                                          267           304
Other                                                        1,091         1,033
- --------------------------------------------------------------------------------
                                                            $1,775        $1,832
- --------------------------------------------------------------------------------

Note 13
- --------------------------------------------------------------------------------
LONG-TERM DEBT AND CREDIT AGREEMENTS

December 31                                                     1995      1994
- --------------------------------------------------------------------------------
                                                                
Employee stock ownership plan
   refunding notes, 6.957% and 7.016%,
   due 1996-1997                                             $    44   $   120
Employee stock ownership plan
   floating rate notes, 4.82%-5.32%,
   due 1996-1999                                                 203       212
6.75% notes, due August 15, 2000                                 100        --
9 7/8% debentures due June 1, 2002                               250       250
9.20% debentures due February 15, 2003                           100       100
Medium term notes, 8.93%-9.28%,
   due 1997-2001                                                 129       129
Zero coupon bonds and money
   multiplier notes, 13.0%-14.26%,
   due 1996-2009                                                 214       278
9 1/2% debentures due June 1, 2016                               100       100
Industrial development bond
   obligations, 4.1%-6.75%, maturing
   at various dates through 2026                                 105       105
Other (including capitalized leases),
   2.0%-15.3%, maturing at various
   dates through 2016                                            122       131
- --------------------------------------------------------------------------------
                                                               1,367     1,425
Less--Unamortized discount                                        (1)       (1)
- --------------------------------------------------------------------------------
                                                             $ 1,366   $ 1,424
- --------------------------------------------------------------------------------

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

                                                                     LONG-TERM
At December 31, 1995                                                   DEBT(1)
- --------------------------------------------------------------------------------
                                                                    
1996                                                                   $   189
1997                                                                       119
1998                                                                       214
1999                                                                       165
2000                                                                       160
Thereafter                                                                 708
- --------------------------------------------------------------------------------
                                                                         1,555
Less--Current portion                                                     (189)
- --------------------------------------------------------------------------------
                                                                       $ 1,366
- --------------------------------------------------------------------------------

(1) Amounts are net of repurchases.

The Company has two credit  agreements  (Credit  Agreements)  with a group of 21
banks (Five-Year and 364-Day Credit  Agreements)  with  commitments  aggregating
$750 million.  The funds available  under the Credit  Agreements may be used for
any corporate  purpose.  Loans under the $375 million Five-Year Credit Agreement
are required to be repaid no later than June 30, 2000. Annually, the Company may
request  that the  maturity of the  Five-Year  Credit  Agreement  be extended by
another year.  The Company  intends to request an extension of this agreement in
1996.  The banks'  commitments  to lend under the $375  million  364-Day  Credit
Agreement  terminate on June 28, 1996. The Company  intends to renegotiate  this
agreement  in 1996.  The Company has agreed to pay  facility  fees of 0.095% per
annum and 0.065% per annum on the  aggregate  commitments  for the Five-Year and
364-Day Credit Agreements,  respectively, subject to increase or decrease on the
Five-Year  Agreement  in the event of changes in the  Company's  long-term  debt
ratings.  The Credit  Agreements  do not restrict the  Company's  ability to pay
dividends or require the Company to maintain a specific net worth. However, they
do contain other customary conditions and events of default, the failure to com-

32

ply with, or occurrence of, which would prevent any further borrowings and would
generally  require the  repayment  of any  outstanding  borrowings  under either
Credit  Agreement.  Such conditions  include the absence of any material adverse
change in the ability of the Company to pay its indebtedness  when due, and such
events of default include (a) non-payment of Credit  Agreement debt and interest
thereon,  (b) non-compliance with the terms of the 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).

Interest on borrowings under the Credit  Agreements 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) a spread  (equal to 15.5 and 18.5 basis
points for the Five-Year and 364-Day Credit Agreements,  respectively), over the
average  Eurocurrency  rate of  three  reference  banks.  The  spread  over  the
Eurocurrency rate on the Five-Year  Agreement is subject to increase or decrease
if the  Company's  long-term  debt  ratings  change.  The Company had no balance
outstanding  under the  Credit  Agreements  at  December  31,  1995.  The Credit
Agreements presently serve as support for the issuance of commercial paper.

Note 14
- --------------------------------------------------------------------------------
LEASE COMMITMENTS

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

                                                                          LEASE
At December 31, 1995                                                   PAYMENTS
- --------------------------------------------------------------------------------
                                                                          
1996                                                                       $  79
1997                                                                          62
1998                                                                          54
1999                                                                          45
2000                                                                          39
Thereafter                                                                   164
- --------------------------------------------------------------------------------
Total                                                                      $ 443
- --------------------------------------------------------------------------------

Rent  expense of $121,  $135 and $128 million was included in costs and expenses
for 1995, 1994 and 1993, respectively.

Note 15
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS

The Company,  as a result of its global operating and financing  activities,  is
exposed to changes in interest rates and foreign  currency  exchange rates which
may adversely  affect its results of  operations  and  financial  condition.  In
seeking to minimize the risks and/or costs associated with such activities,  the
Company  manages  exposure  to changes in interest  rates and  foreign  currency
exchange rates through its regular operating and financing  activities and, when
deemed appropriate,  through the use of derivative  financial  instruments.  The
instruments  utilized include forward,  option and swap agreements.  The Company
does not use financial  instruments for trading or other  speculative  purposes.
The Company had no leveraged financial instruments at December 31, 1995.

At December 31, 1995 the Company held  interest  rate swap  agreements  maturing
through  the year 2000.  At  December  31, 1995  interest  rate swap  agreements
effectively  changed $300 million of  fixed-rate  debt  (average  9.53%) to U.S.
commercial paper based floating rate debt (average 8.24%). Based on their terms,
these agreements will be terminated by the  counterparty if short-term  interest
rates  drop  below  a  predetermined  level.   Additional  interest  rate  swaps
effectively  changed $74 million of London  Interbank  Offer Rate (LIBOR)  based
floating  rate debt  (average  5.26%) to fixed  rate debt  (average  6.92%).  At
December 31, 1994 interest rate swap agreements  effectively changed $82 million
of LIBOR based  floating rate debt  (average  5.21%) to fixed rate debt (average
7.12%).

The Company's exposure to changes in foreign currency exchange rates arises from
intercompany  loans  utilized  to  finance  foreign  subsidiaries,  receivables,
payables and firm  commitments  arising  from  international  transactions.  The
Company  attempts to have all such  transaction  exposures  hedged with internal
natural  offsets to the fullest  extent  possible and, once these  opportunities
have been exhausted, through derivative financial instruments with third parties
using forward or option  agreements.  The Company currently also uses derivative
financial  instruments  to hedge the  Company's  exposure  to changes in foreign
currency  exchange rates for the translated  U.S. dollar value of the net income
of a number of foreign subsidiaries. Forward and option agreements used to hedge
net income are reflected at fair value. The Company's principal foreign currency
exposures  relate to the French franc,  the German  deutsche  mark,  the British
pound and the U.S. dollar.  At December 31, 1995 the Company held or had written
foreign currency forward agreements maturing through 1997. The Company uses some
of these agreements to reduce exposures to changes in foreign currency  exchange
rates  and to reduce  the risk that such  changes  would  adversely  affect  its
results  of  operations  or  financial  condition.  In  addition,  some of these
instruments  are  hedges  of  firmly   committed   transactions  and  forecasted
transactions that will or are expected to occur through 1996.

Financial  instruments  expose  the  Company  to  counterparty  credit  risk for
nonperformance  and to market risk for changes in interest and  currency  rates.
The Company  manages  exposure to  counterparty  credit  risk  through  specific
minimum credit standards,  diversification  of counterparties  and procedures to
monitor  the  amount of credit  exposure.  The  Company's  financial  instrument
counterparties  are substantial  investment or commercial banks with significant
experience with such instruments. The Company also has procedures to monitor the
impact of market risk on the fair value and costs of its  financial  instruments
considering  reasonably  possible  changes in interest and currency  rates.  The
Company  manages  market risk by  restricting  the use of  derivative  financial
instruments  to  hedging  activities  and by  limiting  potential  interest  and
currency  rate  exposures  to amounts  that are not  material  to the  Company's
consolidated  results  of  operations  and  cash  flows.  Because  of the  above
practices and  procedures,  management  believes  that the Company's  credit and
market risk exposures from financial instruments are not significant at December
31, 1995.

                                                                              33

The values of the Company's  outstanding  derivative  financial  instruments  at
December 31, 1995 and 1994 are as follows:

                                                 NOTIONAL
                                                PRINCIPAL       FAIR    CARRYING
December 31, 1995                                  AMOUNT      VALUE       VALUE
- --------------------------------------------------------------------------------
                                                            
Interest rate swap agreements held              $    374   $     (4)   $     --
Foreign currency forward
 agreements held                                     630         (4)         (4)
Foreign currency forward
 agreements written                                1,311        (11)        (13)
- --------------------------------------------------------------------------------

December 31, 1994
- --------------------------------------------------------------------------------
Interest rate swap agreements held              $     82   $      6    $      1
Foreign currency forward
 agreements held                                     953         21          18
Foreign currency forward
 agreements written                                1,130        (24)        (28)
Foreign currency options held                        276          2           2
- --------------------------------------------------------------------------------

The only  other  material  financial  instruments  that are not  carried  on the
Consolidated  Balance Sheet at amounts which approximate fair values are certain
debt  instruments.  The carrying   values of long-term debt and related  current
maturities (excluding capitalized leases of $43 and $47 million at year-end 1995
and 1994,  respectively)  are $1,512 and $1,507  million and the fair values are
$1,733 and $1,590 million at December 31, 1995 and 1994, 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 16
- --------------------------------------------------------------------------------
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  500,000,000  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.  The Company has
remaining  authority to repurchase from time to time up to 8.1 million shares of
common stock.

                                                                                                           COMMON
                                                                                         SHARES            STOCK/
                                                                                    OUTSTANDING           PAID-IN          TREASURY
                                                                                   (IN MILLIONS)          CAPITAL             STOCK
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                
Balance December 31, 1992                                                             283.8             $ 2,782          $ (1,336)
Purchased under repurchase
   programs                                                                            (6.7)                 --              (220)
Used for Dividend Reinvestment
   Plan                                                                                  .1                  --                 3
Used for employee benefit plans
   (including related tax benefits)                                                     6.6                  29               116
- ---------------------------------------------------------------------------------------------------------------------------------

Balance December 31, 1993                                                             283.8               2,811            (1,437)
Purchased under repurchase
   programs                                                                            (2.9)                 --              (103)
Used for Dividend Reinvestment
   Plan                                                                                  .2                  --                 3
Used for employee benefit plans
   (including related tax benefits)                                                     2.0                  12                32
Redemption of common stock
   purchase rights                                                                       --                  (7)               --
- ---------------------------------------------------------------------------------------------------------------------------------

Balance December 31, 1994                                                             283.1               2,816            (1,505)
Purchased under repurchase
   programs                                                                            (5.5)                 --              (239)
Used for Dividend Reinvestment
   Plan                                                                                  .2                  --                 3
Used for employee benefit plans
   (including related tax benefits)                                                     5.0                  31                83
- ---------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995                                                             282.8             $ 2,847          $ (1,658)
- ---------------------------------------------------------------------------------------------------------------------------------

Note 17
- --------------------------------------------------------------------------------
STOCK OPTIONS AND AWARDS

The  Company  has a 1993 Stock Plan and a 1985  Stock  Plan  available  to grant
options and other related  benefits to employees.  Under both plans, the Company
may grant incentive and non-qualified  stock options,  stock appreciation rights
(SARs),  restricted  shares and  restricted  units (Units) to officers and other
employees.  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.  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) on 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.
Units have been  granted  to  certain  employees,  which  entitle  the holder to
receive shares of common stock.  At December 31, 1995 there were 1,261,688 Units
outstanding,  including 304,500 Units granted in 1995, the restrictions on which
generally  lapse  over  periods  not  exceeding  ten  years  from date of grant.
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.
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.

34

Stock Options                                                  NUMBER OF SHARES
- --------------------------------------------------------------------------------
                                                                  
Outstanding at December 31, 1992                                      18,830,264
Granted at $29.13 - $36.94 per share                                   5,949,990
Less --
Exercised at $10.34 - $34.35 per share                                 4,986,618
Lapsed or canceled                                                       145,190
Surrendered upon exercise of SARs                                         30,000
- --------------------------------------------------------------------------------
Outstanding at December 31, 1993                                      19,618,446
Granted at $33.57 - $39.07 per share                                   6,809,010
Less --
Exercised at $13.75 - $35.91 per share                                 1,693,567
Lapsed or canceled                                                       344,720
Surrendered upon exercise of SARs                                         17,450
- --------------------------------------------------------------------------------
Outstanding at December 31, 1994                                      24,371,719
Granted at $35.57 -$48.63 per share                                    5,944,090
Less --
Exercised at $13.75 - $39.07 per share                                 4,199,415
Lapsed or canceled                                                       358,567
- --------------------------------------------------------------------------------
Outstanding at December 31, 1995,
   $14.35 - $48.63 per share                                          25,757,827
- --------------------------------------------------------------------------------
Exercisable at December 31, 1995                                      14,052,739
- --------------------------------------------------------------------------------
Available for grant at December 31, 1994                               4,739,240
- --------------------------------------------------------------------------------
Available for grant at December 31, 1995                               4,052,748
- --------------------------------------------------------------------------------

The Company also has a Stock Plan for Non-Employee  Directors  (Directors) under
which restricted shares and options are granted. New Directors receive grants of
1,500 shares of common stock, subject to certain restrictions. In addition, each
Director will be granted an option to purchase 1,000 shares of common stock each
year on the date of the annual meeting of shareowners. The Company has set aside
225,000 shares for issuance under the Directors plan.  Options  generally become
exercisable  over a three-year  period and have a term of ten years. 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 retained earnings.

Note 18
- --------------------------------------------------------------------------------
CUMULATIVE FOREIGN EXCHANGE TRANSLATION
ADJUSTMENT

December 31                                           1995       1994      1993
- --------------------------------------------------------------------------------
                                                                 
Balance at beginning of year                         $  18      $  (7)   $   58
Translation adjustment and
   impact of hedges and
   intercompany balances                                43         25       (65)
- --------------------------------------------------------------------------------
                                                     $  61      $  18    $   (7)
- --------------------------------------------------------------------------------

Note 19
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES

The Company is subject to a number of lawsuits,  investigations and claims (some
of  which  involve  substantial  amounts)  arising  out  of the  conduct  of its
business,  including  those  relating  to  commercial  transactions,  government
contracts,  product liability and environmental,  safety and health matters. One
such lawsuit was brought by the B.F.  Goodrich  Company  (Goodrich)  in the U.S.
District Court for Delaware alleging  infringement by the Company of two patents
relating  to aircraft  brakes and seeking  injunctive  relief and  damages.  The
allegation  against the Company related only to brakes for the Boeing 777, which
was  introduced in 1995,  and not to any other brake program of the Company.  At
trial,  Goodrich claimed damages of approximately  $350 million before trebling.
On November 10, 1994, after a full trial on the merits, the District Court ruled
the Goodrich patents were invalid,  turned down Goodrich's claim for damages and
denied its  request for an  injunction.  On January 4, 1996,  the United  States
Court of Appeals for the Federal Circuit affirmed the District Court's ruling.

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

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

Note 20
- --------------------------------------------------------------------------------
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 1995,  1994 and 1993 included  interest of $183, $121
and $180 million and income taxes of $185, $164 and $130 million, respectively.

In  November  1994 the Company and  General  Motors  Corporation  formed a joint
venture to manufacture coated substrates for catalytic  converters.  The Company
contributed its environmental  catalysts business and General Motors contributed
other assets and a long-term sales contract to the venture.  The transaction had
the following non-cash impact on the Company's 1994 balance sheet:

                                                                          AMOUNT
- --------------------------------------------------------------------------------
                                                                         
Current assets                                                            $ (24)
Property, plant and equipment -- net                                        (20)
Investments and long-term receivables                                       (23)
Other noncurrent assets                                                      (3)
Current liabilities                                                         102
Noncurrent liabilities                                                      (32)
- --------------------------------------------------------------------------------

                                                                              35

- --------------------------------------------------------------------------------
In October 1993 the Company and Knorr-Bremse AG formed an alliance to which both
companies  contributed  their  European  operations,   which  provide  air-brake
controls and related  products to the heavy truck industry.  The Company owns 35
percent of the  venture  while  Knorr-Bremse  owns the  balance  and manages the
operations.  The transaction had the following  non-cash impact on the Company's
1993 balance sheet:

                                                                          AMOUNT
- --------------------------------------------------------------------------------
                                                                         
Current assets                                                            $ (49)
Property, plant and equipment -- net                                        (28)
Investments and long-term receivables                                        51
Other noncurrent assets                                                     (13)
Current liabilities                                                          29
Noncurrent liabilities                                                       10
- --------------------------------------------------------------------------------

The weighted average interest rate on short-term borrowings and commercial paper
outstanding at December 31, 1995 and 1994 was approximately 7%.

Note 21
- -------------------------------------------------------------------------------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The Company's U.S.  retiree  medical  programs  cover  employees who retire with
pension  eligibility  for  hospital,  professional  and other  medical  services
(programs).  Most  of  the  programs  require  deductibles  and  copayments  and
virtually all are integrated with Medicare.  Retiree contributions are generally
required based on coverage type, plan and Medicare eligibility. The Company also
sponsors retiree life insurance  programs which generally provide a flat benefit
of at least two  thousand  dollars or a benefit as a percent of pay. The retiree
medical and life insurance programs are not funded. Claims and expenses are paid
from the general assets of the Company.

For most  non-union  employees  retiring  after  July 1,  1992 the  Company  has
implemented  an  approach  which  bases the  Company's  contribution  to retiree
medical  premiums on years of service  and also  establishes  a maximum  Company
contribution in the future at approximately  twice the current level at the date
of implementation.

In 1995,  1994 and 1993 the Company's  cost for providing  other  postretirement
benefits aggregated $142, $150 and $153 million,  respectively. The Company uses
the services of an enrolled actuary to calculate postretirement benefit costs.

For measurement purposes, the assumed annual rates of increase in the per capita
cost of  covered  health care benefits  for 1995  were 7% to 10%  for  indemnity
programs and 6% for managed care programs which reduce to 6% for all programs in
the year 2000 and remain  at that level  thereafter.  The health care cost trend
rate assumption has a significant effect on the amounts reported. To illustrate,
increasing  the assumed  health care cost trend rates by 1  percentage  point in
each year would increase the accumulated postretirement benefit obligation as of
December 31, 1995 by $170 million and the  aggregate of the service and interest
cost  component  of net periodic  postretirement  benefit cost for the year then
ended by $16 million. The weighted-average discount rate used in determining the
accumulated  postretirement  benefit  obligation was 7.25% and 8.75% at December
31, 1995 and 1994, respectively.

Net periodic  postretirement  benefit cost for 1995,  1994 and 1993 included the
following components:

Years ended December 31                              1995        1994      1993
- --------------------------------------------------------------------------------
                                                                 
Service cost-benefits attributed to
 service during the period                          $  20       $  27     $  23
Interest cost on accumulated
 postretirement benefit obligation                    133         133       137
Net amortization                                      (12)        (10)       (7)
- --------------------------------------------------------------------------------
                                                      141         150       153
Foreign plans                                           1          --        --
- --------------------------------------------------------------------------------
Net periodic postretirement benefit
 cost                                               $ 142       $ 150     $ 153
- --------------------------------------------------------------------------------

Presented  below are the plans'  status and amounts  recognized in the Company's
Consolidated Balance Sheet at December 31, 1995 and 1994:

December 31                                                      1995      1994
- --------------------------------------------------------------------------------
                                                                
Accumulated postretirement benefit obligation:
   Retirees                                                   $ 1,310   $ 1,120
   Fully eligible active plan participants                        184       172
   Other active plan participants                                 455       393
- --------------------------------------------------------------------------------
                                                                1,949     1,685
Unrecognized prior service cost                                   161       139
Unrecognized net gain (loss)                                     (124)       94
- --------------------------------------------------------------------------------
Accrued postretirement benefit cost                           $ 1,986   $ 1,918
- --------------------------------------------------------------------------------

Note 22
- --------------------------------------------------------------------------------
PENSIONS

The Company's  pension plans, most of which are defined benefit plans and almost
all of which are  noncontributory,  cover substantially all employees.  Benefits
under  the  plans  are  generally  based  on  years of  service  and  employees'
compensation  during the last years of employment  or as a flat dollar  benefit.
Benefits are generally paid from funds previously  provided to trustees.  In the
Company's  principal U.S. plans, funds are contributed to a trustee as necessary
to provide for current service and for any unfunded projected benefit obligation
over a  reasonable  period.  To the  extent  that these  requirements  are fully
covered  by  assets  on hand  for a plan,  a  contribution  may not be made in a
particular  year.  As of year-end 1995  approximately  59% of the assets of U.S.
plans  were held in  equity  securities,  with the  balance  primarily  in fixed
income-type securities.

Pension  expense  in  1995,  1994  and 1993  was  $115,  $109 and $104  million,
respectively.  The Company uses the services of an enrolled actuary to calculate
the amount of pension  expense  and  contributions  to  trustees  of the various
pension plans.

Net  periodic  pension  cost for  1995,  1994 and 1993  included  the  following
components:

Years ended December 31                               1995       1994      1993
- --------------------------------------------------------------------------------
                                                               
Service cost-benefits earned
   during the period                             $     107    $   132    $  115
Interest cost on projected
   benefit obligation                                  395        363       369
Actual return on plan assets                        (1,019)       (65)     (663)
Net amortization and deferral                          616       (338)      269
- --------------------------------------------------------------------------------
Net periodic pension cost for
   defined benefit plans                                99         92        90
Foreign plans and other                                 16         17        14
- --------------------------------------------------------------------------------
Net periodic pension cost                        $     115    $   109    $  104
- --------------------------------------------------------------------------------

36

The assumed rate of return for the Company's U.S.  defined benefit pension plans
was 9% in 1995, 1994 and 1993. The assumed discount rate used in calculating the
projected  benefit  obligations  at December 31, 1995,  1994 and 1993 was 7.25%,
8.75% and 7.25%,  respectively.  In  addition,  the assumed  annual  increase in
compensation  over employees'  estimated  remaining working lives was 5% in 1995
and 1994 and 5.5% in 1993.

Presented  below are the plans'  funded  status and  amounts  recognized  in the
Company's  Consolidated  Balance  Sheet at  December  31,  1995 and 1994 for its
significant defined benefit pension plans:

                                                                                 1995                           1994
- ------------------------------------------------------------------------------------------------------------------------------------

                                                                   ASSETS EXCEED     ACCUMULATED    ASSETS EXCEED      ACCUMULATED
                                                                     ACCUMULATED        BENEFITS      ACCUMULATED         BENEFITS
December 31                                                             BENEFITS   EXCEED ASSETS         BENEFITS    EXCEED ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                
Actuarial present value of benefit obligation:
     Vested                                                              $ 3,813           $ 805          $ 3,252            $ 678
     Nonvested                                                               244             113              228               82
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation                                           $ 4,057           $ 918          $ 3,480            $ 760
- ------------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation                                             $ 4,703           $ 953          $ 3,911            $ 802
Less--Fair value of assets                                                 4,694             699            4,127              617
- ------------------------------------------------------------------------------------------------------------------------------------
Over (under) funded plans                                                     (9)           (254)(a)          216             (185)
Unrecognized transition (asset) liability                                     --             (34)               8              (45)
Unrecognized net (gain) loss                                                  85              26              (79)             (13)
Unrecognized prior service cost                                              (11)             86              (16)              93
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost                                           $    65           $(176)         $   129            $(150)
- ------------------------------------------------------------------------------------------------------------------------------------

(a) Includes $191 million for unfunded foreign and supplemental domestic
    pension plans.

Note 23
- --------------------------------------------------------------------------------
SEGMENT FINANCIAL DATA

                                                                                                           CORPORATE
                                                                                          ENGINEERED             AND
                                                             AEROSPACE    AUTOMOTIVE       MATERIALS  UNALLOCATED(1)        TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                       
Net sales (2)                                      1995        $ 5,084        $ 5,549        $3,713          $    --      $14,346
                                                   1994          4,623          4,922         3,272               --       12,817
                                                   1993          4,530          4,506         2,791               --       11,827
- -----------------------------------------------------------------------------------------------------------------------------------
Research and development expense                   1995            154             80           109               10          353
                                                   1994            126             73           110                9          318
                                                   1993            127             63           113               10          313
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization                      1995            186            164           185               28          563
                                                   1994            183            148           171               21          523
                                                   1993            184            156           153               21          514
- -----------------------------------------------------------------------------------------------------------------------------------
Income from operations (3)                         1995            551            292           563             (146)       1,260
                                                   1994            458            411           409             (126)       1,152
                                                   1993            402            432           309             (189)         954
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of                 1995            303            146           473              (47)         875
change in accounting principle (3,4)               1994            260            215           330              (46)         759
                                                   1993            225            228           273              (70)         656
- -----------------------------------------------------------------------------------------------------------------------------------
Capital expenditures                               1995            131            214           334               67          746
                                                   1994            148            245           232               14          639
                                                   1993            139            205           354               20          718
- -----------------------------------------------------------------------------------------------------------------------------------
Identifiable assets                                1995          5,079          3,813         3,302              271       12,465
                                                   1994          5,104          3,276         2,562              379       11,321
                                                   1993          4,502          2,838         2,502              987       10,829
- -----------------------------------------------------------------------------------------------------------------------------------

Intersegment sales approximate market and are not significant.
(1) The "Corporate and Unallocated"  column includes amounts for businesses sold
and Corporate items.
(2) Sales to the U.S.  Government  and its  agencies,  mainly for the  Aerospace
segment,  were  $1,107,  $1,089 and $1,096  million  for each of the  respective
years.
(3) Includes  in  1995  pre-  and  after-tax  impact  of nonrecurring  items for
Automotive of a charge of $115 and $71 million and a gain of $71 and $71 million
for  Engineered  Materials,  respectively.  Includes in 1993 pre- and  after-tax
impact of nonrecurring  items for Aerospace of a charge of $6 and $4 million,  a
net gain of $81 and $42  million for  Automotive,  a charge of $5 and $3 million
for  Engineered  Materials and a charge of $54 and $34 million for Corporate and
Unallocated, respectively.
(4) An interest charge is made by Corporate Office to the segments on the  basis
of relative investment.  Taxes on income are generally included in the  segments
which gave rise to the tax effects and equity in income of  affiliated companies
is included in the  segments in which these  companies operate.

                                                                              37

Note 24
- --------------------------------------------------------------------------------
GEOGRAPHIC AREAS--FINANCIAL DATA

                                                                                                          ADJUSTMENTS
                                                        UNITED                                  OTHER             AND
                                                      STATES(1)     CANADA     EUROPE   INTERNATIONAL    ELIMINATIONS        TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                                                      
Net sales (2)                                 1995     $10,734       $ 230     $2,740          $  642       $  --          $14,346
                                              1994       9,739         202      2,283             593          --           12,817
                                              1993       9,220         225      1,897             485          --           11,827
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative                      1995         734          31         58              52          --              875
effect of change in acccounting               1994         654          23         65              17          --              759
principle (3)                                 1993         570          26         55               5          --              656
- -----------------------------------------------------------------------------------------------------------------------------------
Assets                                        1995       9,378         219      2,964             588            (684)      12,465
                                              1994       8,977         205      2,295             543            (699)      11,321
                                              1993       8,517         199      1,967             548            (402)      10,829
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities                                   1995       7,623         106      1,535             293            (684)       8,873
                                              1994       7,290          87      1,319             342            (699)       8,339
                                              1993       7,175          98      1,235             333            (402)       8,439
- -----------------------------------------------------------------------------------------------------------------------------------

Sales between geographic areas approximate market and are not significant.
(1) Corporate  Office income,  expenses,  assets and liabilities are included in
the "United States" column.
(2) Included in United  States net sales are export sales of $2,119,  $1,818 and
$1,699 million for each of the respective years.
(3)  Includes  in 1995  after-tax  nonrecurring  items of a gain for the  United
States of $42  million  and a loss for Europe of $42  million.  Includes in 1993
after-tax  nonrecurring items of a gain for the United States of $13 million and
a loss for Europe of $12 million.

Note 25
- --------------------------------------------------------------------------------
UNAUDITED QUARTERLY FINANCIAL INFORMATION

                                                         1995                                           1994
- -------------------------------------------------------------------------------------------------------------------------------
                                     MAR. 31  JUNE 30  SEPT. 30  DEC. 31     YEAR   MAR. 31 JUNE 30  SEPT. 30  DEC. 31     YEAR
- -------------------------------------------------------------------------------------------------------------------------------
                                                                                        
Net sales                            $ 3,419   $ 3,630  $ 3,499  $ 3,798  $14,346   $ 2,986  $ 3,187  $ 3,110   $3,534  $12,817
Gross profit                             672       728      699      708    2,807       584      646      607      681    2,518
Net income                               198       227      217      233      875       169      196      189      205      759
Per share                                .70       .80      .77      .83     3.09       .60      .69      .67      .73     2.68
Dividends paid                          .195      .195     .195     .195      .78      .145    .1675    .1675    .1675    .6475
Market price (a)
High                                   39.88     44.50    47.13    49.88    49.88     40.75    37.63    38.75    36.00    40.75
Low                                    33.38     38.38    43.13    41.13    33.38     34.25    33.13    33.63    30.38    30.38
- -------------------------------------------------------------------------------------------------------------------------------

(a) From composite tape--stock is primarily traded on the New York Stock
    Exchange.

Report of Independent Accountants

PRICE WATERHOUSE LLP  [LOGO]

February 1, 1996

To the Shareowners and Directors of AlliedSignal Inc.

In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated  statements  of  income,  of  retained  earnings  and of cash flows
present fairly, in all material respects, the financial position of AlliedSignal
Inc.  and its  subsidiaries  at December  31, 1995 and 1994,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1995,  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.

As  discussed in Note 1 to the  financial  statements,  the Company  changed its
method of accounting for postemployment benefits in 1993.

PRICE WATERHOUSE LLP
Morristown, NJ

38

Selected Financial Data         AlliedSignal Inc.

Years ended December 31                1995      1994      1993       1992      1991      1990      1989       1988      1987
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in millions except per share amounts)
                                                                                            
FOR THE YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales                            $ 14,346  $ 12,817  $ 11,827  $ 12,042   $ 11,831   $  12,343  $ 11,942 $  11,909  $ 11,116
Income (loss) from continuing
   operations                             875       759       656       535 (a)   (273)(a)     462       528       463(a)    515(a)
Net income (loss)                         875       759       411(b)   (712)(b)   (273)        462       528       463       656
Per share of common stock:
Earnings (loss) from continuing
   operations                            3.09      2.68      2.31      1.90      (1.00)       1.67      1.78      1.55      1.53
Net earnings (loss)                      3.09      2.68      1.45     (2.52)     (1.00)       1.67      1.78      1.55      1.95
Dividends                                 .78     .6475       .58       .50        .80         .90       .90       .90       .90

AT YEAR-END
- -----------------------------------------------------------------------------------------------------------------------------------
Net working capital                  $  1,086  $  1,194  $  1,078  $  1,414   $    526   $     892  $  1,065 $   1,040  $    722
Property, plant and equipment-net       4,742     4,260     4,094     3,897      3,638       3,584     3,321     3,214     3,330
Total assets                           12,465    11,321    10,829    10,756     10,382      10,456    10,342    10,069    10,321
Long-term debt                          1,366     1,424     1,602     1,777      1,914       2,051     1,903     2,044     2,017
Shareowners' equity                     3,592     2,982     2,390     2,251      2,983       3,380     3,412     3,268     3,129
Book value per share of common stock    12.70     10.53      8.42      7.93      10.79       12.55     11.77     11.05     10.44
Average investment  (c)                 5,598     4,848     4,506     4,939      6,771       6,723     6,520     6,629     6,859
Common shares outstanding (in millions) 282.8     283.1     283.8     283.8      276.3       269.4     290.0     295.9     299.9
Common shareowners of record           79,046    82,095    84,248    84,254     91,492      97,210   102,042   111,402   109,322
Employees (d)                          88,500    87,500    86,400    89,300     98,300     105,800   107,100   109,550   115,300

FINANCIAL STATISTICS (e)
- -----------------------------------------------------------------------------------------------------------------------------------
Return on sales (income from
   operations)                            8.8       9.0       8.1       3.4       (2.5)       5.9        8.0       5.7       6.8
Return on sales (after-tax)               6.1       5.9       5.5       4.4       (2.3)       3.7        4.4       3.9       4.6
Return on average investment (after-tax) 17.4      17.5      16.6      13.8       (1.3)       9.6       11.0      10.3      10.1
Return on average shareowners' 
  equity (after-tax)                     26.7      28.9      30.6      26.4       (8.4)      13.9       15.6      14.5      14.5
Interest coverage ratio                   6.5       6.8       5.1       3.3        (.9)       2.6        3.0       2.8       3.6
Long-term debt as a percent of 
   total capital                         25.6      30.4      37.9      40.5       34.9       33.6       30.8      33.2      33.9
Total debt as a percent of total capital 33.7      34.1      42.7      44.7       43.9       40.4       35.7      35.9      39.0

FINANCIAL STATISTICS (e)(f)
- -----------------------------------------------------------------------------------------------------------------------------------
Return on sales (income from operations)  9.1       9.0       7.9       6.5        4.7        5.9        8.0       7.4       6.8
Return on sales (after-tax)               6.1       5.9       5.5       4.5        2.9        3.7        4.4       4.3       3.9
Return on average investment 
   (after-tax)                           17.4      17.5      16.6      13.9        7.8        9.6       11.0      10.9       8.9
Return on average shareowners'
   equity (after-tax)                    26.7      28.9      30.5      26.7       10.5       13.9       15.6      15.9      12.2
Interest coverage ratio                   6.8       6.8       5.0       3.3        2.1        2.6        3.0       2.9       3.2
Long-term debt as a percent of
   total capital                         25.6      30.4      37.9      40.5       34.9       33.6       30.8      33.2      33.9
Total debt as a percent of total capital 33.7      34.1      42.7      44.7       43.9       40.4       35.7      35.9      39.0
- -----------------------------------------------------------------------------------------------------------------------------------

(a)  Includes  in  1992  the  effect  of  a  provision  for   Streamlining   and
Restructuring  charges  as well as a gain on the sale of  common  stock of Union
Texas Petroleum  Holdings,  Inc. (Union Texas)  resulting in a net charge of $11
million (after-tax $6 million,  or $0.02 a share). In 1991,  includes the effect
of a provision for  Streamlining and  Restructuring  charges as well as gains on
asset sales by Union Texas resulting in a net charge of $838 million  (after-tax
$615 million,  or $2.25 a share).  In 1988,  includes an after-tax  provision of
$125 million, or $0.42 a share, to cover Streamlining and Restructuring charges,
an  after-tax  gain of $36  million,  or  $0.12 a  share,  from  the sale of the
Company's  investment  in Akebono Brake  Industry  Company Ltd. and an after-tax
gain of $81 million, or $0.27 a share, from nonrecurring items. Includes in 1987
the effect of the sale of common  stock by Union  Texas  which  resulted  in the
Company  recording a gain of $108 million  (after-tax  $82  million,  or $0.24 a
share),  reflecting  the Company's  share of an increase in Union Texas' equity.
(b) Includes in 1993 the cumulative after-tax provision for the adoption of FASB
No.  112 of $245  million,  or $0.86 a share.  Includes  in 1992 the  cumulative
after-tax provision for the adoption of FASB Nos. 106 and 109 of $1,247 million,
or  $4.42 a  share.
(c)  Investment  is  defined  as  shareowners'  equity  and noncurrent  deferred
taxes-net  plus total  debt.
(d) Includes employees at facilities operated for the U.S. Department of Energy.
(e) The returns and interest coverage ratio exclude the impact of the cumulative
effect of changes in accounting  principles on income.
(f) The returns and interest coverage ratio exclude the impact  of  nonrecurring
items in 1995 and 1993,  provisions  for Streamlining and  Restructuring charges
in  1992,  1991 and 1988, gain on sale of common  stock of Union  Texas in 1992,
gains on asset  sales by Union  Texas in 1991,  nonrecurring  income in 1988 and
Union Texas' equity transaction in 1987.

                                                                              39

                                                                      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
EM Sector Holdings Inc...........................................    Delaware        Common Stock      100
AlliedSignal Avionics Inc........................................    Kansas          Common Stock      100
AlliedSignal Technologies Inc....................................    Arizona         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,  33-51031,  33-51455, 33-55410,  33-58345,  33-58347, 33-60261,
33-62963, 33-64295  and 33-65792),  on Forms  S-3 (Nos.  33-13211, 33-14071  and
33-55425)  and on Form S-8 (filed as  an amendment to Form S-14, No. 2-99416-01)
of our report  dated February 1,  1996 appearing on  page 38 of the 1995  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, 1995.
 
PRICE WATERHOUSE LLP

PRICE WATERHOUSE LLP
 
Morristown, New Jersey
February 27, 1996

                                                                      EXHIBIT 24

                                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, G. Peter D'Aloia and
Nancy A. Garvey, each with power to act without the other and with power of
substitution and resubstitution, as my attorney-in-fact and agent for me and in
my name, place and stead, in any and all capacities,

                  (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995,

                  (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.

                                                        LAWRENCE A. BOSSIDY
                                                  -----------------------------
                                                        Lawrence A. Bossidy

Dated:   February 1, 1996

                                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, G. Peter D'Aloia and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

                  (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995,

                  (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.

                                                         HANS W. BECHERER
                                                  -----------------------------
                                                         Hans W. Becherer

Dated:   February 1, 1996

                                POWER OF ATTORNEY

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

                  (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995,

                  (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.

                                                         EUGENE E. COVERT
                                                  -----------------------------
                                                         Eugene E. Covert

Dated:   February 1, 1996

                                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, G. Peter D'Aloia and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

                  (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995,

                  (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.

                                                           ANN M. FUDGE
                                                  -----------------------------
                                                           Ann M. Fudge

Dated:     February 1, 1996

                                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, G. Peter D'Aloia and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

                  (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995,

                  (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.

                                                          PAUL X. KELLEY
                                                  -----------------------------
                                                          Paul X. Kelley

Dated:     February 1, 1996

                                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, G. Peter D'Aloia and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

                  (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995,

                  (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.

                                                          ROBERT P. LUCIANO
                                                  -----------------------------
                                                          Robert P. Luciano

Dated:     February 1, 1996

                                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, G. Peter D'Aloia and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

                  (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995,

                  (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.

                                                         ROBERT B. PALMER
                                                  -----------------------------
                                                         Robert B. Palmer

Dated:     February 1, 1996

                                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, G. Peter D'Aloia and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

                  (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995,

                  (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.

                                                         RUSSELL E. PALMER
                                                  -----------------------------
                                                         Russell E. Palmer

Dated:     February 1, 1996

                                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, G. Peter D'Aloia and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

                  (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995,

                  (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.

                                                        IVAN G. SEIDENBERG
                                                  -----------------------------
                                                        Ivan G. Seidenberg

Dated:     February 1, 1996

                                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, G. Peter D'Aloia and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

                  (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995,

                  (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.

                                                         ANDREW C. SIGLER
                                                  -----------------------------
                                                         Andrew C. Sigler

Dated:     February 1, 1996

                                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, G. Peter D'Aloia and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

                  (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995,

                  (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.

                                                         JOHN R. STAFFORD
                                                  -----------------------------
                                                         John R. Stafford

Dated:     February 1, 1996

                                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, G. Peter D'Aloia and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

                  (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995,

                  (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.

                                                        THOMAS P. STAFFORD
                                                  -----------------------------
                                                        Thomas P. Stafford

Dated:     February 1, 1996

                                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, G. Peter D'Aloia and Nancy A. Garvey, each with
power to act without the other and with power of substitution and
resubstitution, as my attorney-in-fact and agent for me and in my name, place
and stead, in any and all capacities,

                  (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995,

                  (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.

                                                          ROBERT C. WINTERS
                                                  -----------------------------
                                                          Robert C. Winters

Dated:     February 1, 1996

  

 5

     This schedule  contains summary  financial  information  extracted from the
consolidated  balance sheet at December 31, 1995 and the consolidated  statement
of income for the year ended  December 31, 1995 and is qualified in its entirety
by reference to such financial statements.

                                1,000,000

                               YEAR
                           DEC-31-1995
                                DEC-31-1995
                                      540
                                0
                               1,477
                                   34
                                 1,991
                            4,890
                                      9,785
                              5,043
                             12,465
                       3,804
                                     1,366
                                      358
                           0
                                     0
                                  3,234
               12,465
                                    14,346
                           14,346
                                      11,539
                              11,539
                                0
                                0
                            168
                             1,261
                                  386
                           875
                                  0
                                 0
                                       0
                                  875
                                3.09
                                   0