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

                                   FORM 10-K
 
               [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                  For the fiscal year ended December 31, 1996
                                       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 1998-2000                 New York Stock Exchange
9 7/8% Debentures due June 1, 2002                   New York Stock Exchange
9.20% Debentures due February 15, 2003               New York Stock Exchange
Zero Coupon Serial Bonds due 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 [x]
The  aggregate market  value of  the voting stock  held by  nonaffiliates of the
Registrant was approximately $18.9 billion at December 31, 1996.
There were 282,814,625 shares of Common Stock outstanding at December 31, 1996.
 
                      Documents Incorporated by Reference
         Part I and II: Annual Report to Shareowners for the Year Ended December
31, 1996.
        Part III: Proxy Statement for Annual Meeting of Shareowners to be held
April 28, 1997.
 
________________________________________________________________________________
________________________________________________________________________________

                               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, 1996                       Report
- ----------------------------------  ------------------------------------------------------------    ------------

 1. Business                        Note 25. Segment Financial Data ............................         37
                                    Note 26. Geographic Areas -- Financial Data ................         38
                                    Management's Discussion and Analysis .......................         19
 3. Legal Proceedings               Note 21. Commitments and Contingencies .....................         35
 5. Market for the Regis-           Note 27. 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 28, 1997                       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,
   1996.
 
                                       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......................................................................................    13
           3  Legal Proceedings...............................................................................    14
           4  Submission of Matters to a Vote of Security Holders.............................................    14
           Executive Officers of the Registrant...............................................................    14
 
Part II.   5  Market for the Registrant's Common Equity and Related Stockholder Matters.......................    16
           6  Selected Financial Data.........................................................................    16
           7  Management's Discussion and Analysis of Financial Condition and Results of Operations...........    16
           8  Financial Statements and Supplementary Data.....................................................    16
           9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............    16
 
Part III.  10  Directors and Executive Officers of the Registrant.............................................    16(a)
           11  Executive Compensation.........................................................................    17(a)
           12  Security Ownership of Certain Beneficial Owners and Management.................................    17(a)
           13  Certain Relationships and Related Transactions.................................................    17
 
Part IV.   14  Exhibits, Financial Statement Schedules and Reports on Form 8-K................................    17
 
Signatures....................................................................................................    18

- ------------
 
 (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,  1996. Certain  other information  relating to  the  Executive
     Officers of the Registrant appears at pages 14 and 15 of this Report.
 
                                       3

                                    PART I.
 
ITEM 1. BUSINESS
 
     AlliedSignal  Inc. (with its consolidated  subsidiaries referred to in this
Report as the  Company) was  organized in  the State  of Delaware  in 1985.  The
Company is the successor to Allied Corporation, which was organized in the State
of New York in 1920.
 
     AlliedSignal  is an  advanced technology and  manufacturing company serving
customers worldwide with aerospace  and automotive products, chemicals,  fibers,
plastics  and advanced materials.  The Company's operations  are conducted under
three business segments: Aerospace, Automotive and Engineered Materials.
 
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.
 
     Following is a description of the major Aerospace businesses:

  MAJOR BUSINESSES         PRODUCT CLASSES         MAJOR PRODUCTS/SERVICES         MAJOR MARKETS           COMPETITORS
- -------------------- ---------------------------  -------------------------  --------------------------  ----------------
                                                                                             
Engines              Turbine propulsion           TFE731 turbofan            Business, regional          Pratt & Whitney
                     engines                      TPE331 turboprop             and military trainer        Canada
                                                  TFE1042 turbofan             aircraft                  Rolls-
                                                  LF507 turbofan             Commercial and military       Royce/Allison
                                                  CFE738 turbofan              helicopters                 Engine Company
                                                  T53, T55                   Military vehicles           Turbomeca
                                                  LT101 turboshaft           Commercial and military
                                                  T800 turboshaft              marine craft
                                                  AGT1500 turboshaft
                                                  TF40 turboshaft
                     ----------------------------------------------------------------------------------------------------
                     Auxiliary power units        Airborne auxiliary         Commercial and              Pratt & Whitney
                     (APUs)                         power units                military aircraft           Canada
                                                  Jet fuel starters          Ground power                Sundstrand
                                                  Secondary power
                                                    systems
                                                  Ground power units
                     ----------------------------------------------------------------------------------------------------
                     Repair and overhaul          Engine and APU             Commercial and military     Airlines
                                                    repair, overhaul and       aircraft, marine and      Independent
                                                    spare part sales           land propulsion             service
                                                                               vehicles.                   providers
- -------------------------------------------------------------------------------------------------------------------------
Aerospace            Environmental control        Air conditioning           Commercial, business        Hamilton
Equipment            systems(ECS)                   systems                    and general                 Standard
Systems                                           Bleed air control            aviation aircraft         Intertechnique
                                                    systems                  Military aircraft           Liebherr
                                                  Cabin pressure systems     Spacecraft                  Nord Micro
                                                  Environmental and                                      Parker Hannifin
                                                    thermal control for                                  Sundstrand
                                                    spacecraft
                                                  Smoke detection
                                                    systems
                                                  ECS and component repair,
                                                    overhaul and spare part
                                                    sales
                     ----------------------------------------------------------------------------------------------------
                     Engine systems and           Electronic,                Commercial, military,       ABG Semca
                     accessories                    hydromechanical and        regional and general      Chandler-Evans
                                                    pneumatic gas turbine      aviation aircraft         Hamilton
                                                    engine controls            engines                     Standard
                                                  Digital electronic         Spacecraft                  Lockheed Martin
                                                    engine controls for      Military battle tanks       Lucas
                                                    military battle tanks
                                                  Fuel flow metering
                                                    components
                                                  Pressure transducers
                                                  Engine controls and
                                                    accessories repair,
                                                    overhaul and parts
                                                    sales
                     ----------------------------------------------------------------------------------------------------

                                       4

 

  MAJOR BUSINESSES         PRODUCT CLASSES         MAJOR PRODUCTS/SERVICES         MAJOR MARKETS           COMPETITORS
- -------------------- ---------------------------  -------------------------  --------------------------  ----------------

                     Power management and         Electric, hydraulic and    Commercial and              Auxilec
                     generation systems             pneumatic power            military aircraft         Lucas
                                                    generation systems       Ground vehicles             Parker Bertea
                                                  Power distribution and                                 Smiths
                                                    power management                                     Sundstrand
                                                    systems
                                                  Pumps, starters,
                                                    converters, controls,
                                                    electrical actuation
                                                    for flight surfaces
                                                  Pumps, starters,
                                                    converters, generators
                                                    and actuators repair,
                                                    overhaul and parts
                                                    sales
                     ----------------------------------------------------------------------------------------------------
                     Landing systems              Wheels and brakes          Commercial and              Aircraft Braking
                                                  Friction products            military aircraft           Systems
                                                  Brake control systems                                  Dunlop
                                                  Wheel and brake                                        B.F. Goodrich
                                                    overhaul services                                    Messier-Bugatti
- -------------------------------------------------------------------------------------------------------------------------
Commercial Avionics  Avionics systems             Flight safety systems:     Commercial, business        Garmin
Systems                                             Enhanced Ground            and general aviation      Honeywell
                                                      Proximity Warning      Government aviation         Narco
                                                      Systems (EGPWS)                                    Rockwell/Collins
                                                    Traffic Alert and                                    Sextant
                                                      Collision Avoidance                                Trimble
                                                      Systems (TCAS)
                                                    Windshear detection
                                                      and weather radar
                                                      systems
                                                    Flight data and cockpit
                                                      voice recorders
                                                  Communication and
                                                    navigation systems
                                                  Flight controls
                                                  Flight management systems
                                                  Data management and
                                                    aircraft performance
                                                    monitoring systems
                                                  Air-to-ground telephones
                                                  Cockpit displays
                                                  Global positioning
                                                    systems
- -------------------------------------------------------------------------------------------------------------------------
Electronic Systems   Avionics systems             Automatic flight control   Military aviation           Honeywell
                                                    systems                  Launch vehicles             Kaiser
                                                  Cockpit display systems    Space subsystems            Lear Astronics
                                                  Navigation systems                                     Lockheed Martin
                                                  Identification systems                                 Rockwell/Collins
                                                  Integrated systems                                     Smiths
                                                  Vehicle management
                                                    systems
                     ----------------------------------------------------------------------------------------------------
                     Automatic test systems       Computer-controlled        U.S. Government and         GDE Systems
                                                    automatic test systems     international logistics   Honeywell
                                                  Functional testers and       centers                   Litton
                                                    ancillaries              Military aviation           Lockheed Martin
                                                                                                         Northrop Grumman
                     ----------------------------------------------------------------------------------------------------
                     Guidance systems             Inertial sensors/systems   Military and                Astronautics-
                                                    and star sensors/          commercial vehicles         Kearfott
                                                    systems for guidance,    Commercial spacecraft       Ball
                                                    stabilization,             and launch vehicles       Honeywell
                                                    navigation and control   Energy                      Litton
                                                                             Transportation              Rockwell/Collins
                                                                             Missiles
                                                                             Munitions
                                                                             Underwater
                     ----------------------------------------------------------------------------------------------------

                                       5

 

  MAJOR BUSINESSES         PRODUCT CLASSES         MAJOR PRODUCTS/SERVICES         MAJOR MARKETS           COMPETITORS
- -------------------- ---------------------------  -------------------------  --------------------------  ----------------

                     Tactical command,            Combat identification      Military aviation           GM Hughes/
                     control, communications,       systems                  Military communications       Magnavox
                     computers and                  ('Identification Friend  Civil communications        Harris
                     intelligence                   or Foe' (IFF))           Commercial information      Litton
                                                  Commercial information       security                  Lockheed Martin
                                                    security equipment                                   Motorola
                                                  Satellite communication                                Raytheon/
                                                    terminals (SATCOM)                                     E-Systems
                                                  Secured communication                                  Rockwell/Collins
                                                    equipment (INFOSEC)                                  Thomson-CSF/
                                                                                                           Hazeltine
                     ----------------------------------------------------------------------------------------------------
                     Radar systems                Aircraft precision         Global and U.S. airspace    GM Hughes
                                                    landing                    agencies                  Motorola
                                                  Ground surveillance        Military aviation           Raytheon
                                                  Target detection devices   Military missiles           Rockwell
                                                                                                         Thomson-CSF
                     ----------------------------------------------------------------------------------------------------
                     Underwater detection         Acoustic towed arrays      Military aviation           GM Hughes
                     systems                      Dipping sonars             Submarines and surface      Lockheed Martin
                                                  Mine countermeasures         ships                     Northrop Grumman
                                                  Mine warfare systems                                   Raytheon
                                                                                                         STN/Atlas
                                                                                                         Thomson-CSF
- -------------------------------------------------------------------------------------------------------------------------
Government           Management and technical     Maintenance/operation of   U.S. and foreign            Computer
Services             services                       space systems and          government space and        Sciences
                                                    facilities                 communications            Dyncorp
                                                  Systems engineering,         facilities                Lockheed Martin
                                                    integration and                                      Raytheon
                                                    training                                             SAIC
                                                    services
                                                  Management of data
                                                    processing facilities
- -------------------------------------------------------------------------------------------------------------------------

     The Aerospace segment serves key military and commercial components 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, business aircraft and wide-bodied 'jumbos' flown by the world's
commercial  airlines, to trainers, transports, bombers, fighters and helicopters
used by the U.S. 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,  Aero  International (Regional),
Raytheon, Israeli  Aircraft  Industries, Northrop  Grumman,  British  Aerospace,
Cessna,    Fairchild/Dornier,   Dassault,   Gulfstream,   Bombardier,   Rockwell
International, Pratt & Whitney, General Electric and Rolls-Royce, as well as the
world's leading airlines  and business  aircraft and  general aviation  aircraft
operators,  and  dealers  and  distributors of  general  aviation  products. The
Company  also  provides  field  engineering  management  and  technical  support
services  to Boeing, the  National Aeronautics and  Space Administration (NASA),
the U.S.  Department of  Defense (DoD),  the U.S.  Department of  Energy,  other
federal  civilian  agencies as  well as  state and  local governments  and other
commercial entities.
 
     The Company is affected by  U.S. Government budget constraints for  defense
and  space programs as well  as the level of  production of commercial, business
and general aviation aircraft  which are impacted by  business cycles and  world
economic  conditions. Growth in the  Company's commercial business for aerospace
products is expected,  over the long  term, to help  mitigate the reductions  in
U.S.  defense spending. Moreover,  aerospace sales are not  dependent on any one
key defense program or commercial customer. However, contract awards by aircraft
manufacturers can  be canceled  or  reduced if  aircraft  orders are  cut  back.
Aerospace's  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.
 
     In  1996, world defense spending flattened  after declining in prior years.
The Company  believes that  the cyclical  downturn for  the commercial  aircraft
industry  reached bottom in  1995. A slight  improvement was seen  in the second
half of 1996 and  this growth is expected  to significantly accelerate in  1997.
Most  major U.S.  and international airlines  operated in  an improving economic
 
                                       6

environment. The modest turnaround  for the airline industry  that began in  the
second  half of 1993,  continued in 1994 and  strengthened significantly in 1995
and 1996.  The  regional airlines  experienced  strong traffic  growth  and  new
regional  aircraft orders  were higher in  1996. The  high-end business aviation
market showed moderate  growth and  the commercial aftermarket  spare parts  and
repair and overhaul business showed strong growth during 1996.
 
     Sales  to the U.S.  Government, acting through  its various departments and
agencies and through prime contractors, amounted to $1,833 million for 1996  and
$1,806  million for 1995, which  includes sales to the  DoD of $1,237 million in
1996 and $1,205 million in 1995. Approximately 55% and 54% of sales to the  U.S.
Government in 1996 and 1995, respectively, were made under fixed-price contracts
in  which the Company agrees to perform a contract for a fixed price and retains
for itself  any  benefits of  cost  savings or  must  bear the  burden  of  cost
overruns.
 
     Government   contracts  and,   in  general,   subcontracts  thereunder  are
terminable, in  whole  or  in  part,  for default  or  for  convenience  by  the
government or the higher level contractor if deemed in their best interest. Upon
termination   for   convenience,  the   contractor   is  normally   entitled  to
reimbursement for allowable costs  and to an allowance  for profit. However,  if
the  contract is terminated because of  the contractor's default, the contractor
may not recover all of its costs and may be liable for any excess costs incurred
by the government in procuring undelivered items from another source.
 
     In addition  to  the  right  of the  government  to  terminate,  government
contracts  are  conditioned upon  the  continuing availability  of Congressional
appropriations. Congress usually appropriates funds on a fiscal-year basis  even
though  contract performance  may extend over  many years.  Consequently, at the
outset of  a  program,  the  prime contract  is  usually  partially  funded  and
additional  funds are normally only appropriated  to the contract by Congress in
future years.  Fixed-price  subcontracts  are normally  fully  funded,  but  are
subject to convenience termination if the prime contract is not funded.
 
     The  Company, as are other government contractors, is subject to government
investigations of business practices and compliance with government  procurement
regulations.  Although  such  regulations  provide  that  a  contractor  may  be
suspended or debarred from government contracts under certain circumstances, and
the outcome  of  pending  government investigations  cannot  be  predicted  with
certainty,  management is not currently aware of any such investigations that it
expects will have  a material adverse  effect on the  Company. In addition,  the
Company  carries out proactive compliance programs focused on areas of potential
exposure.
 
     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 $4,514 million at December 31, 1996
and $4,523 million  at December 31,  1995 of which  U.S. and foreign  government
orders  were $1,906  million and  $1,871 million  for the  respective years. The
Company anticipates that approximately $3,562 million of the total 1996  backlog
will be filled during 1997.
 
     The  Aerospace  segment's  international  operations  consist  primarily of
exporting U.S. manufactured products and  systems, performance of services  that
include  operating  aircraft  repair  and  overhaul  facilities,  and  licensing
activities. The  principal manufacturing  facility  outside of  the U.S.  is  in
Canada.
 
AUTOMOTIVE
 
     The  Automotive  segment designs,  engineers, manufactures  and distributes
systems and  components  for  worldwide vehicle  manufacturers  and  aftermarket
customers.
 
     Following is a description of the major Automotive businesses:

    MAJOR BUSINESSES              PRODUCT CLASSES            MAJOR PRODUCTS            MAJOR MARKETS                COMPETITORS
- -------------------------    -------------------------    ---------------------  --------------------------    ---------------------
                                                                                                   
Automotive Aftermarket       Filters                      Oil, air, fuel,        Automotive and heavy          AC/Delphi/GM
                                                            transmission and       vehicle aftermarket         Knecht
                                                            coolant filters        channels                    Labinal
                                                          PCV valves                                           Mann & Hummel
                                                                                                               Purolator/Mark IV
                                                                                                               Wix/Dana
                             -------------------------------------------------------------------------------------------------------

                                       7

 

    MAJOR BUSINESSES              PRODUCT CLASSES            MAJOR PRODUCTS            MAJOR MARKETS                COMPETITORS
- -------------------------    -------------------------    ---------------------  --------------------------    ---------------------

                             Electronic components        Spark plugs            Automotive aftermarket        AC/Delphi/GM
                                                          Glow plugs               channels                    Belden/Cooper
                                                          Wire and cable                                       Bosch
                                                          Oxygen sensors                                       Champion/Cooper
                                                                                                               Rockwell/Collins
                                                                                                               Eyquem
                                                                                                               NGK
                             -------------------------------------------------------------------------------------------------------
                             Brake components             Disc pads and brake    Automotive and heavy          Abex/Cooper
                                                            linings                vehicle aftermarket         EIS/Standard Motor
                                                          Disc and drum brakes     channels and original       Ferodo/T&N
                                                          Brake hydraulic          equipment service (OES)     Girling/Lucas
                                                            components                                         Lockheed/AP
                                                          Brake fluid                                          Mintex, Textar/BBA
                                                          Brake components                                     Raybestos/Echlin
                                                                                                               Teves/ITT
                             -------------------------------------------------------------------------------------------------------
                             Steering components          Ball-joints            Automotive and heavy          Quinton
                                                          Rack & pinions           vehicle aftermarket           Hazel/Echlin
                                                          Power-steering pumps     channels and OES            ZF
                                                          Power-steering
                                                            components
- ------------------------------------------------------------------------------------------------------------------------------------
Safety Restraint             Seat belt systems            Seat belt assemblies   Automotive and heavy          Autoliv
Systems                                                   Pretensioners            vehicle original            Takata
                                                          Seat-integrated belts    equipment manufacturers     TRW
                                                                                   (OEMs)
                             -------------------------------------------------------------------------------------------------------
                             Air bag systems              Air bag modules:       Automotive and heavy          Morton International
                                                            Driver                 vehicle OEMs                Takata
                                                            Passenger                                          TRW
                                                          Inflators
                                                          Cushions
- ------------------------------------------------------------------------------------------------------------------------------------
Turbocharging Systems        Charge-air systems           Turbochargers          Automotive and heavy          Behr/McCord
                                                          Charge-air coolers       vehicle OEMs                Holset
                                                          Aluminum cooling       Engine manufacturers          IHI
                                                            modules              Aftermarket distributors      KKK
                                                          Superchargers            and dealers                 Mitsubishi/MHI
                                                          Remanufactured                                       Modine
                                                            components                                         Schwitzerc
                                                                                                               Valeo
- ------------------------------------------------------------------------------------------------------------------------------------
Friction Materials           Brake friction               Disc brake pads        Automotive and heavy          Abex/Cooper
                             materials                    Drum brake linings       vehicle OEMs, OES and       Akebono
                                                          Brake blocks             aftermarket channels        BBA Group
                                                                                 Railway and commercial/       Delphi/GM
                                                                                   military aircraft OEMs      Echlin
                                                                                   and brake manufacturers     Ferodo/T&N
                                                                                                               JBI
                                                                                                               Nisshinbo
                                                                                                               Sumitomo
                                                                                                               Teves/ITT
- ------------------------------------------------------------------------------------------------------------------------------------
Truck Brake Systems          Air brake systems            Anti-lock braking      On-highway medium and         Cummins/Holset
(joint venture)                                             systems (ABS)          heavy truck,                Echlin/Midland-Grau
                                                          Air compressors          bus and trailer OEMs        Rockwell WABCO
                                                          Air valves             Off-highway equipment
                                                          Air dryers               OEMs
                                                          Actuators              Aftermarket distributors
                                                          Truck electronics        and dealers/OES
                                                          Competitive
                                                            remanufactured
                                                            products
- ------------------------------------------------------------------------------------------------------------------------------------
Filters & Spark Plugs        Filters                      Oil, air,              Automotive and heavy          AC/Delphi/GM
                                                            transmission           vehicle OEMs and OES        Champion Labs/U.I.S.
                                                            and fuel filters       channels                    Purolator/Mark IV
                                                                                                               Wix/Dana
                             -------------------------------------------------------------------------------------------------------
                             Spark plugs                  Spark plugs            Automotive and heavy          AC/Delphi/GM
                                                                                   vehicle OEMs, OES and       Bosch
                                                                                   aftermarket channels        Champion/Cooper
                                                                                                               NGK
                                                                                                               Nippondenso
- ------------------------------------------------------------------------------------------------------------------------------------

     On  April 12,  1996, the Company sold  a major  component of its  worldwide
braking business to Robert Bosch Gmbh, a privately held German company, for $1.5
billion in cash, subject to certain post-closing  adjustments.  Included in  the
sale were the worldwide light-vehicle and medium-heavy
 
                                       8

truck hydraulic  braking and ABS businesses.  These businesses had 1995 sales of
approximately  $2.0  billion.  Excluded from  the  sale were  the brake friction
materials  business, brake-related sales  to the independent aftermarket and the
truck  brake systems business which is part of a joint venture with Knorr-Bremse
AG of Germany.
 
     In February 1997, the Company and  Knorr-Bremse AG, agreed in principle  to
purchase the heavy-truck air brake systems business of Echlin Inc. in the United
States  and Europe, as  well as Echlin's  U.S.-based commercial vehicle friction
materials and aftermarket brake shoe  relining operations. The businesses to  be
acquired  have sales of about $320  million. The proposed acquisition is subject
to review by government agencies in the U.S. and Europe.
 
     Automotive operations are located in  the U.S., Australia, Brazil,  Canada,
China,  France, Germany, India,  Ireland, Italy, Japan,  Malaysia, Mexico, South
Korea, Spain and the United Kingdom. Distribution and marketing are conducted in
these and numerous other countries as well. 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.
Internationally, products are marketed under the Bendix, Fram, Autolite, Garrett
and Jurid trademarks.
 
     Excluding  the impact  of the  divested braking  business from  both years,
worldwide passenger car and truck OE  sales accounted for approximately 50%  and
48% in 1996 and 1995, respectively, of the total sales of the Automotive segment
with aftermarket sales, including OES sales, accounting for the balance. In 1996
and 1995, Automotive operations outside the U.S. accounted for $1,583 and $1,531
million,  respectively, or 43%  in both years, of  total Automotive sales. Total
worldwide sales  for 1996  and 1995  to the  Company's five  largest  automotive
manufacturing  customers amounted to $1,099 and  $1,016 million, or 30% and 28%,
respectively, of total Automotive sales.
 
     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.
 
ENGINEERED MATERIALS
 
     The Engineered Materials segment  manufactures chemicals, fibers,  plastics
and  advanced  materials with  applications  for numerous  industries, including
automotive, carpeting, refrigeration,  construction, electronics, computers  and
utilities.
 
     Following is a description of the major Engineered Materials businesses:

  MAJOR BUSINESSES            PRODUCT CLASSES           MAJOR PRODUCTS/SERVICES           MAJOR MARKETS             COMPETITORS
- ---------------------    ----------------------       ---------------------------   --------------------------    ----------------
                                                                                                      
Polymers                 Carpet fiber                  Nylon filament and staple     Residential, commercial      BASF
                                                         yarns                         and various specialty      Beaulieu
                                                                                       markets                    Du Pont
                                                                                                                  Monsanto
                                                                                                                  Novalis
                         ----------------------------------------------------------------------------------------------------------
                         Industrial fiber              Industrial nylon and          Passenger car and truck      Akzo
                                                         polyester yarns               tires                      Du Pont
                                                                                     Auto and light truck         Hoechst/Celanese
                                                                                       seatbelts and airbags      Kolon
                                                                                     Broad woven fabrics          Rhone-Poulenc
                                                                                     Ropes and mechanical         Tong Yang
                                                                                       rubber goods
                                                                                     Luggage
                         ----------------------------------------------------------------------------------------------------------

 
                                       9

  MAJOR BUSINESSES  PRODUCT CLASSES     MAJOR PRODUCTS/SERVICES       MAJOR MARKETS         COMPETITORS
- ------------------  ---------------     -----------------------       -------------         ------------- 

                  Chemical              Caprolactam                   Nylon for fibers,            BASF
                  intermediates         Phenol                          engineered resins and      DSM
                                        Acetone                         film                       Du Pont
                                        Ammonium sulfate              Methyl methacrylate          Enichem
                                        Hydroxylamine                   (MMA)                      Monsanto
                                        Alphamethyl styrene           Phenol resins                Phenol Chemie
                                        Cyclohexanol                  Fertilizer ingredients       Rhone-Poulenc
                                        Cyclohexanone                 Specialty chemicals          Ube
                                        Adipic acid                   Vitamins
                                                                      Carbonization
                  --------------------------------------------------------------------------------------------------

                  Engineering           Thermoplastic nylon           Food and                     BASF
                  plastics               resins                        pharmaceutical              Bayer
                                        Thermoplastic resin            packaging                   Du Pont
                                         alloys and blends            Engine housings              General Electric
                                        Post-consumer                  (e.g., electric             Hoechst/Celanese
                                         recycled PET resins           hand tools, chain           Monsanto
                                        Recycled nylon                 saws)                       
                                         resins                       Automotive body              
                                                                        components                 
                                                                       Office furniture            
                                                                       Electrical and              
                                                                        electronics                
                  -------------------------------------------------------------------------------------------------
                  Textile nylon         Fine denier nylon             Hosiery                      BASF
                                         yarns                        Lingerie                     Du Pont/Akra
                                                                      Active wear                  FCFC
                                                                      Recreational                 Fibra
                                                                       equipment                   Nylstar
                                                                      Luggage                      
                  -------------------------------------------------------------------------------------------------
                  Spectra performance   Spectra'r' (extended          Cordage for                  Akzo
                  materials              chain polyethylene)           commercial,                 DSM
                                        Spectra Shield'r'              fishing and                 Du Pont
                                         (polyethylene)                recreational                OCF
                                        Shield composites              use                         
                                        Spectra Fusion'r'             Sports equipment             
                                         (fishing line)                composites                  
                                        Gold Shield'r'                Bullet resistant             
                                         (Aramid)                      vests,                      
                                                                       helmets and heavy           
                                                                       armor                       
                                                                      Cut resistant                
                                                                       industrial                  
                                                                       gloves                      
                                                                      Sailcloth                    
- -------------------------------------------------------------------------------------------------------------------
Electronic        Multilayer circuitry  Laminates                     Military                     ADI/Isola
 Materials        materials             Prepregs                      Telecommunications           Nanya
                                        Copper foil                   Automotive                   Nelco
                                                                      Computers                    Polyclad
                                                                      Consumer electronics         
                  -------------------------------------------------------------------------------------------------
                  Copper-clad rigid     Laminates                     Military                     ADI/Isola
                  laminates for                                       Telecommunications           General Electric
                  circuitry                                           Automotive                   Nanya
                                                                      Computers                    Nelco
                                                                      Consumer electronics         Polyclad
                  -------------------------------------------------------------------------------------------------
                  Advanced              Materials for                 Semiconductors               Tokyo-Ohka
                  microelectronic        computer chip                Microelectronics             
                  materials              manufacturing                                             
                  -------------------------------------------------------------------------------------------------
                  Amorphous metals      Amorphous metal               Electrical                   Allegheny-Ludlum
                                         ribbons and                   distribution                 Steel
                                         components                    transformers                Armco Steel
                                                                      High frequency               Kawasaki Steel
                                                                       electronics                 Nippon Steel
                                                                      Metal joining                Toshiba
                                                                      Theft deterrent              Vacuum Smelze
- -------------------------------------------------------------------------------------------------------------------
Specialty         Performance           Low-molecular weight          Textiles                     BASF
 Chemicals         additives             polyethylene                 Plastics                     Eastman Chemical
                                        Polymer additives             Adhesives                    Hoechst/Celanese
                                                                      Polish                       Mitsui
                                                                      Coatings                     
                                                                      Inks                         
                                                                      Cosmetics                    
                  -------------------------------------------------------------------------------------------------
                  Performance           Custom chemicals              Agricultural and             BASF
                   chemicals            Specialty silanes              pharmaceutical              DSM
                                        Crosslinking agents            intermediates               
                                        Fine organic and              Metal, glass,                
                                         inorganic chemicals           plastic processing          
                                        Technical                     Coatings, adhesives          
                                         preservatives                 and sealants                
                                        Pigments and dyes             Photographics,               
                                        Electronic and                 graphics and                
                                         laboratory                    security printing           
                                         chemicals                    Other industrial             
                                                                       applications                
                  -------------------------------------------------------------------------------------------------

                                       10

MAJOR BUSINESSES    PRODUCT CLASSES     MAJOR PRODUCTS/SERVICES       MAJOR MARKETS        COMPETITORS
- ----------------  --------------------  -----------------------     ------------------    -----------

                                                                              

                  Hydrofluoric acid     Anhydrous and               Fluorocarbons         Du Pont
                   (HF)                  aqueous                    Steel                 Norfluor
                                         hydrofluoric acid          Oil refining          Quimaco Fluor
                                        Ultra-high purity           Chemical
                                         hydrofluoric acid           intermediates
                                                                    Electronics
                  ----------------------------------------------------------------------------------------

                  Fluorocarbons         Genetron'r'                 Refrigeration         Atochem
                                         refrigerants,              Air conditioning      Du Pont
                                         aerosol and                Polyurethane foam     ICI
                                         insulation foam            Rigid-board
                                         blowing                     insulation
                                         agents                     Electronics
                                        Genesolv'r' solvents        Optical
                                        Oxyfume sterilant           Metalworking
                                         gases                      Hospitals
                                                                    Medical equipment
                                                                     manufacturers
                  ------------------------------------------------------------------------------------
                  Fluorine specialties  Sulfur hexafluoride         Resins                Air Products
                                         (SF6)                      Lubricants            Asahi Glass
                                        Boron trifluoride           Fibers catalysts      Atochem
                                         (BF3)                                            Ausimont
                                        Iodine pentafluoride                              Kanto Denka
                                         (IF5)                                             Kogyo
                                        Antimony                                          Solvay Fluor
                                         pentafluoride
                                         (SbF5)
                  ---------------------------------------------------------------------------------------
                  Nuclear services      UF6 conversion              Nuclear fuel          British Nuclear
                                         services                   Electric utilities     Fuels
                                                                                          Cameco (Canada)
                                                                                          Cogema (France)
                                                                                          Tennex (Russia)
                  ---------------------------------------------------------------------------------------
                  UOP (joint venture):  Processes                   Petroleum,            ABB Lummus
                  Process technology    Catalysts                    petrochemical, gas    Global
                  Refining products     Molecular sieves             processing and       Criterion
                  Gas processing        Adsorbents                   chemical industries  IFP (France)
                  processes and         Design of process                                 Procatalyse
                  equipment              plants and                                        (France)
                                         equipment                                        Stone & Webster
                                                                                          Zeochem
- ----------------------------------------------------------------------------------------------------------

     Engineered  Materials' three  major businesses are  aligned around markets,
customers and  common technologies.  Brand identity,  service to  customers  and
quality   are  important  competitive  factors  in   the  market  and  there  is
considerable price competition.
 
     The Montreal Protocol (Protocol),  which was 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. The Company completed  its
efforts  to  develop  environmentally safer  fluorocarbon  products and replaced
its CFC product line. The Company has commercialized key CFC substitute products
in various applications, including automotive air conditioning and  residential,
commercial  and industrial refrigeration. 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.
 
     Engineered  Materials operations are mainly located in the U.S., France and
Germany. Polymers  and Specialty  Chemicals  manufacturing facilities  are  also
located  in  the  Netherlands;  Electronic  Materials  maintains  facilities  in
Southeast  Asia,  including  Taiwan,   Singapore,  Thailand  and  South   Korea.
Engineered Materials also has significant exports worldwide.
 
     The   Engineered  Materials  segment  also  includes  the  following  other
businesses: carbon materials, environmental  catalysts and specialty films.  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.  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 formed a  joint venture to produce coated  automotive
catalytic  converter substrates. Major products  in the specialty films business
include cast nylon (Capran'r'), biaxially oriented nylon film (Capran Emblem'r')
and  fluoropolymer  film  (Aclar'r').  Specialty  film  markets  include   food,
pharmaceutical, and other packaging and industrial applications.

                                       11

SEGMENT FINANCIAL DATA
 
     Note  25 (Segment Financial  Data) of Notes to  Financial Statements in the
Company's 1996 Annual Report to shareowners is incorporated herein by reference.

DOMESTIC AND FOREIGN FINANCIAL DATA
 
     Note 26  (Geographic  Areas  --  Financial  Data)  of  Notes  to  Financial
Statements  in the Company's  1996 Annual Report  to shareowners is incorporated
herein by reference.
 
OTHER RECENT DEVELOPMENTS
 
     The Company  has  undertaken  certain repositioning  actions  that  require
employee  and asset relocation, plant  integration and capital improvements. The
repositioning actions are generally expected to be completed by 1998.
 
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 actions by local governments
and changes in foreign currency exchange rates.
 
     The Company's principal foreign manufacturing operations are in  Australia,
Brazil,  Canada, France, Germany, Ireland, Italy, Japan, Mexico, 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
 
     The principal  raw  materials  used  by  the  Company's  segments  include:
Aerospace  -- carbon fiber;  electronic, optical and  mechanical component parts
and assemblies; electronic and electromechanical devices and metallic  products;
Automotive  --  castings,  forgings,  steel  and  bar  stock,  copper, aluminum,
platinum and titanium and Engineered  Materials -- 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.  The principal  raw materials  used in  the Company's
operations are  generally readily  available. The  Company is  dependent on  its
suppliers  and subcontractors in order to meet commitments to its customers, and
many major components and product equipment items are procured or  subcontracted
with  a  number  of domestic  and  foreign  companies. The  Company  maintains a
qualification and performance  surveillance process to  control risk  associated
with such reliance on third parties. The Company believes that sources of supply
for raw materials and components are generally adequate.
 
PATENTS AND TRADEMARKS
 
     The Company owns approximately 9,500 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 patent license  agreement or group of  them related to a specific
process or product is of material importance in relation to the Company's  total
business.
 
     The  Company also has  registered trademarks for a  number of its products.
Some of the  more significant  trademarks include:  AiResearch, Anso,  Autolite,
Bendix,  Bendix/King, Capron, Fram,  Garrett, Genetron, Jurid,  King and Norplex
Oak.

                                       12

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 $345,  $353 and  $318 million in
1996, 1995  and 1994,  respectively.  Customer-sponsored (principally  the  U.S.
Government)  research and development activities amounted to an additional $536,
$536 and $486 million in 1996, 1995 and 1994, respectively.
 
ENVIRONMENT
 
     The Company is  subject to  various federal, state  and local  requirements
regulating the discharge of materials into the environment or otherwise relating
to  the protection of the environment. It is the Company's policy to comply with
these requirements  and the  Company believes  that, as  a general  matter,  its
policies, practices and procedures are properly designed to prevent unreasonable
risk   of  environmental  damage,  and  of  resulting  financial  liability,  in
connection with its  business. Some  risk of environmental  damage is,  however,
inherent  in certain operations and products of the Company, as it is with other
companies engaged in similar businesses.  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  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 $43 million in 1996. The  Company estimates that during each of
the years 1997  and 1998 such  capital expenditures will  be in the  $55 to  $60
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  1996 Annual Report to  shareowners, incorporated herein by reference,
for further information regarding environmental matters.
 
EMPLOYEES
 
     The Company had  an aggregate of  76,600 salaried and  hourly employees  at
December  31, 1996. Approximately 53,200 were located in the United States, and,
of these employees, about  25% were unionized  employees represented by  various
local or national unions.
 
ITEM 2.   PROPERTIES
 
     The  Company has 339 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
 
                                       13

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)
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
Fostoria, OH
Greenville, OH
Jackson, TN
Maryville, TN
Conde, France
Thaon-Les-Vosges, France
Colleferro, 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
 
ITEM 3.   LEGAL PROCEEDINGS
 
     The first and second paragraphs of Note 21 (Commitments and  Contingencies)
of  Notes to Financial Statements at page 35 of the Company's 1996 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), 61      Chairman  of the  Board since January  1992. Chief Executive  Officer of the
              1991                 Company since July 1991.
John W. Barter, 50               Executive  Vice  President  and  President,  AlliedSignal  Automotive  since
              1985                 October  1994. Senior Vice President and Chief Financial Officer from July
                                   1988 to September 1994.
Daniel P. Burnham, 50            Executive Vice President and President, AlliedSignal Aerospace since January
              1991                 1992.
Frederic M. Poses, 54            Executive Vice President  and President,  AlliedSignal Engineered  Materials
              1988                 since April 1988.

- ------------
 (a) Also a director.
 
                                                  (table continued on next page)
 
                                       14

(table continued from previous page)

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

Peter M. Kreindler, 51           Senior  Vice President, General  Counsel and Secretary  since December 1994.
              1992                 Senior Vice  President and  General Counsel  from March  1992 to  November
                                   1994. Senior Vice President and General Counsel-Elect from January 1992 to
                                   February 1992.
Donald J. Redlinger, 52          Senior  Vice President -- Human  Resources and Communications since February
              1991                 1995. Senior  Vice  President --  Human  Resources from  January  1991  to
                                   January 1995.
Paul R. Schindler, 55            Senior  Vice  President  --  International since  August  1993.  Chairman of
              1993                 Imperial Chemical  Industries  Asia/Pacific (chemical  manufacturer)  from
                                   April 1991 to July 1993.
James E. Sierk, 58               Senior Vice President -- Quality and Productivity since January 1991.
              1991
Richard F. Wallman, 45           Senior  Vice President  and Chief Financial  Officer since  March 1995. Vice
              1995                 President and Controller  of International Business  Machines Corp.  (IBM)
                                   (manufacturer of information-handling systems) from April 1994 to February
                                   1995. General Assistant Controller of IBM from October 1993 to March 1994.
                                   Assistant   Controller  --  Sales  &  Marketing  of  Chrysler  Corporation
                                   (automobile manufacturer) from April 1989 to September 1993.
Kenneth W. Cole, 49              Vice President -- Government Relations since January 1989.
              1989
Catharine M. deLacy, 39          Vice President,  Health,  Safety and  Environmental  since July  1995.  Vice
              1995                 President  --  Health, Safety  and  Environmental of  Occidental Petroleum
                                   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.
Robert F. Friel, 41              Vice President and  Treasurer since September  1996. Vice President  Finance
              1996                 and  Administration, AlliedSignal Engines  from June 1992  to August 1996.
                                   Assistant Treasurer from March 1989 to May 1992.
Nancy A. Garvey, 47              Vice President  and  Controller since  September  1996. Vice  President  and
              1994                 Treasurer    from   February    1994   to   August    1996.   Staff   Vice
                                   President -- Investor Relations from November 1989 to January 1994.
Larry E. Kittelberger, 48        Vice President and  Chief Information Officer  since August 1995  (Executive
              1996                 Officer  since February  1996). Corporate Chairman  -- Information Officer
                                   Leadership Committee of Tenneco Inc. (diversified industrial concern) from
                                   June 1989 to July 1995.
Frederick H. McClintock, 60      Vice  President   --  Materials   Management  since   February  1996.   Vice
              1996                 President  -- Materials Management AlliedSignal  Aerospace from March 1992
                                   to January 1996. Owner and operator of Global Supply Institute (consulting
                                   business) from June 1990 to February 1992.

 
                                       15

                                    PART II.
 
ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS
 
     Market and  dividend  information  for the  Registrant's  common  stock  is
contained  in Note  27 (Unaudited Quarterly  Financial Information)  of Notes to
Financial Statements  at  page  38  of  the  Company's  1996  Annual  Report  to
shareowners, and such information is incorporated herein by reference.
 
     The  number of record holders of the Registrant's common stock is contained
in the statement  'Selected Financial  Data' at page  39 of  the Company's  1996
Annual  Report to  shareowners, and such  information is  incorporated herein by
reference.

     On July 10, 1996, the Company acquired Electron Vision Inc. in exchange for
148,941 shares of  common stock. Because  the fairness of  this transaction  had
been  approved by the California Department of Corporations, the transaction was
exempt from registration pursuant to Section  3(a)(10) of the Securities Act  of
1933, as amended (the 'Act').
 
     On October 3, 1996, in exchange for 143,355 shares of its common stock, the
Company acquired the assets of Lori, Inc. from The Nordam Group Inc. ('Nordam').
Because  Nordam is an 'accredited investor' within the meaning of Rule 501(a)(3)
under the Act, the common  shares of the Company  transferred to Nordam in  this
transaction were not registered under the Act, in reliance on Rule 506 under the
Act.
 
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
1996 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 1996 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  January 31, 1997  appearing on pages  26
through  38 of the Company's 1996 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 1996
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,
1996,  and such information  is incorporated herein  by reference. Certain other
information relating to Executive Officers of the Registrant appears at pages 14
and 15 of this Form 10-K Annual Report.

                                       16

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.

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 1996 Annual Report to shareowners:
          Report of Independent Accountants....................................................          38
          Consolidated  Statement of  Income for  the years ended  December 31,  1996, 1995 and
           1994................................................................................          26
          Consolidated Statement of Retained  Earnings for the years  ended December 31,  1996,
           1995 and 1994.......................................................................          26
          Consolidated Balance Sheet at December 31, 1996 and 1995.............................          27
          Consolidated  Statement of Cash Flows for the years ended December 31, 1996, 1995 and
           1994................................................................................          28
          Notes to Financial Statements........................................................          29

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

EXHIBIT NO.                                          DESCRIPTION
- -----------   -----------------------------------------------------------------------------------------
           
   10.2       Deferred Compensation Plan for Non-Employee Directors of
                AlliedSignal Inc., as amended
   10.3       Retirement Plan for Non-Employee Directors of AlliedSignal Inc.,
                as amended
   13         Pages  19  through  39  (except  for the  data  included  under  the  captions 'Financial
                Statistics' on page 39) of the Company's 1996 Annual Report to shareowners
   21         Subsidiaries of the Registrant
   23         Consent of Independent Accountants
   24         Powers of Attorney
   27         Financial Data Schedule

     The exhibits  identified  in the  Exhibit  Index with  an  asterisk(*)  are
management contracts or compensatory plans or arrangements.
 
(b) Reports on Form 8-K
 
     During  the three months ended December 31,  1996, reports on Form 8-K were
filed on November  26 and December  16, in  each case reporting,  under Item  9,
unregistered  sales of  the Company's Common  Stock in reliance  on Regulation S
under the Act.
 
                                       17

                                   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  28, 1997                            By:     /s/ NANCY A. GARVEY
                                              ----------------------------------
                                                       Nancy A. Garvey
                                                Vice President and Controller
 
     Pursuant  to the requirements of the  Securities Exchange Act of 1934, this
annual report has been signed  below by the following  persons on behalf of  the
Registrant and in the capacities and on the date indicated:

                    Name                                          Name
- -----------------------------------------  ------------------------------------

                    *                                       *                  
- ----------------------------------------- -------------------------------------
           Lawrence A. Bossidy                      Ivan G. Seidenberg        
Chairman of the Board and Chief Executive                Director             
          Officer and Director                                                

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

                    *                                        *                 
- ----------------------------------------- -------------------------------------
              Ann M. Fudge                           John R. Stafford          
                Director                                 Director              

                    *                                        *                 
- ----------------------------------------- -------------------------------------
             Paul X. Kelley                         Thomas P. Stafford         
                Director                                 Director              

                    *                                        *                 
- ----------------------------------------- -------------------------------------
            Robert P. Luciano                        Robert C. Winters         
                Director                                 Director              

                    *                                        *                 
- ----------------------------------------- -------------------------------------
            Robert B. Palmer                           Henry T. Yang           
                Director                                 Director              

                    *                                                          
- -----------------------------------------                                      
            Russell E. Palmer                                                  
                Director                                                       
                                                                               
         /s/ RICHARD F. WALLMAN                     /s/ NANCY A. GARVEY        
- ----------------------------------------- -------------------------------------
           Richard F. Wallman                         Nancy A. Garvey          
        Senior Vice President and              Vice President and Controller
         Chief Financial Officer                 (Chief Accounting Officer)

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

February 28, 1997
 
                                       18

                                 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 (filed herewith)
  10.3*       Retirement Plan for Non-Employee Directors of AlliedSignal Inc., as amended (filed herewith)
  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 as amended by and between AlliedSignal
                Inc., a Delaware corporation, the banks, financial institutions and other institutional
                lenders listed on the signature pages thereof (the 'Lenders'), Citibank, N.A., as agent,
                and ABN Amro Bank N.V. and Morgan Guaranty Trust Company of New York, as co-agents, for the
                Lenders (incorporated by reference to Exhibit 10.1 to the Company's Forms 10-Qs for the
                quarters ended June 30, 1995 and June 30, 1996)
  10.14       364-Day Credit Agreement dated as of June 30, 1995 as amended by and between AlliedSignal
                Inc., a Delaware corporation, the banks, financial institutions and other institutional
                lenders listed on the signature pages thereof (the 'Lenders'), Citibank, N.A., as agent,
                and ABN Amro Bank N.V. and Morgan Guaranty Trust Company of New York, as co-agents, for the
                Lenders (incorporated by reference to Exhibit 10.2 to the Company's Forms 10-Qs for the
                quarters ended June 30, 1995 and June 30, 1996)
  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 1996 Annual Report to shareowners (filed herewith)
  16          Omitted (Inapplicable)
  18          Omitted (Inapplicable)
  21          Subsidiaries of the Registrant (filed herewith)
  22          Omitted (Inapplicable)
  23          Consent of Independent Accountants (filed herewith)
  24          Powers of Attorney (filed herewith)
  27          Financial Data Schedule (filed herewith)
  28          Omitted (Inapplicable)
  99          Omitted (Inapplicable)
 
- ------------

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

                            STATEMENT OF DIFFERENCES
                            ------------------------

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

                                                                    EXHIBIT 10.2

              Deferred Compensation Plan for Non-Employee Directors
                              of AlliedSignal Inc.
              -----------------------------------------------------
                     (As Amended Effective January 1, 1997)

1.  ELIGIBILITY

        Each member of the Board of Directors (the "Board") of AlliedSignal Inc.
(the "Corporation") who is not an employee of the Corporation or any of its
subsidiaries (a "Director") is eligible to participate in the Deferred
Compensation Plan for Non-Employee Directors of AlliedSignal Inc. (the "Plan").

2.  DEFINITIONS

        (a) Committee. The Nominating and Board Affairs Committee of the Board
or any successor.

        (b) Common Stock. The publicly traded common stock of the Corporation or
any successor.

        (c) Compensation. All amounts payable for services as a Director,
including amounts payable for services as a member or chairman of a committee of
the Board.

        (d) Elective Deferrals. Compensation deferred by a Director under the
Plan after December 31, 1996 (other than Non-Elective Deferrals and Lump-Sum
Compensation, as defined below).

        (e) Lump-Sum Compensation.  A one-time lump-sum amount for each Director
serving on  December  31, 1996 who elected  such amount in  satisfaction  of any
benefits under the Retirement  Plan for  Non-Employee  Directors of AlliedSignal
Inc. (the "Retirement Plan"),  which amount is automatically  deferred under the
Plan.

        (f) Non-Elective Deferrals. Effective January 1 of each year after 1996,
$15,000 of annual  Compensation  for  Directors not eligible for a benefit under
the Retirement Plan, which amount is automatically deferred under the Plan.

        (g) Pre-1997  Elective  Deferrals.  Compensation  deferred by a Director
under the Plan prior to January 1, 1997.

                                      - 2 -

        (h) Retirement. As used in the Plan, the term "retirement" or "retire"
shall include any termination of a Director's Board service except, in the case
of Lump-Sum Compensation, any termination which the Board determines to have
resulted from gross cause. "Gross cause" means fraud, misappropriation or
intentional misconduct damaging to the property or business of the Corporation
or any of its subsidiaries, or commission of a crime.

        (i) Secretary. The Secretary of the Corporation.

3.  INVESTMENT OPTIONS

        Amounts deferred under the Plan shall be invested as described below.

        (a) Pre-1997 Elective Deferrals. These amounts have been credited to a
deferred compensation account (the "Director's account") either (i) in cash with
interest as described in paragraphs 5(b) and (c) below or (ii) in shares of
Common Stock, as elected by the Director, and will remain in the form elected
until paid out.

        (b) Elective Deferrals. A Director may elect to have these amounts
credited to the Director's account in cash (i) with interest as described in
paragraph 5(c) below or (ii) which is valued as if invested in one or more of
the funds available for investments by participants in the AlliedSignal Savings
Plan as described in paragraph 5(g) below. All such amounts will be paid out in
cash.

        (c) Non-Elective Deferrals. These amounts will be credited to the
Director's account on January 1 of each year in the form of equivalent shares of
Common Stock, calculated based on the mean between the highest and lowest sales
prices of the Common Stock as reported on the New York Stock Exchange Composite
Tape for the immediately preceding December 31 (or, if there were no sales on
such day, for the last preceding day on which there were sales) and valued as
described in paragraph 5(f) below. For any person who becomes a Director after
January 1, a pro rata portion of the annual amount based on the number of days
remaining in the calendar year will be credited to the Director's account on the
Director's first day of service in the form of equivalent shares of Common
Stock, calculated based on such mean for the first day of service (or, if there
were no sales on such day, for the last preceding day on which there were
sales). All such amounts will be paid out in cash after retirement from the
Board.

        (d) Lump-Sum Compensation. This amount will be credited to the
Director's account, effective January 1, 1997, either (i) 100% in the form of
equivalent shares of Common Stock, calculated based on the mean between the
highest and lowest sales prices of the Common Stock as reported on the New York
Stock Exchange Composite Tape for

                                      - 3 -

December 31, 1996 and valued as described in paragraph 5(f) below, or (ii) 50%
in the form of equivalent shares of Common Stock, calculated and valued as
described in (i), and 50% in cash with interest at the rate of 10% per annum, as
elected by the Director prior to January 1, 1997. All such amounts will be paid
out in cash after retirement from the Board.

4.  PARTICIPATION

        (a)  Elective Deferrals.

                (i) Time of Election. Prior to the beginning of any calendar
        year, each Director who is not then participating in the Plan (other
        than by virtue of Non-Elective Deferrals and/or Lump-Sum Compensation)
        may elect to participate in the Plan by directing that all or any part
        of the Director's Compensation which otherwise would have been payable
        currently for services as a Director during such calendar year shall be
        credited to the Director's account as Elective Deferrals. Any person who
        shall become a Director during any calendar year may elect, before the
        Director's term begins, to defer payment of all or any part of the
        Director's Compensation for the remainder of such calendar year.

                (ii) Form and Duration of Election. An election to make Elective
        Deferrals shall be made by written notice executed by the Director and
        filed with the Secretary. Such election shall continue in effect for
        succeeding calendar years unless the Director terminates such election
        by written notice filed with the Secretary. Any such termination shall
        become effective as of the end of the calendar year in which such notice
        is given and only with respect to Compensation payable for services as a
        Director thereafter. Amounts credited to the Director's account prior to
        the effective date of termination shall not be affected by such
        termination and shall be distributed only in accordance with the terms
        of the Plan.

                (iii) Adjustment of Future Deferrals. Prior to the beginning of
        any calendar year, a Director participating in the Plan may file another
        written notice with the Secretary electing to change the amount of
        Elective Deferrals to be credited to the Director's account for services
        as a Director commencing with such calendar year. Amounts credited to
        the Director's account prior to the effective date of such change shall
        not be affected by such change and shall be distributed only in
        accordance with the terms of the Plan,

                (iv) Adjustment of Investment Options. A Director may elect to
        change the investment options with respect to those portions of the
        Director's account applicable to Elective Deferrals which are valued as
        if invested in one or more of

                                      - 4 -

        the funds available for investments by participants in the AlliedSignal
        Savings Plan. Any such election to reallocate amounts among the
        investment funds shall be made by written notice executed by the
        Director and filed with the Secretary, may be made no more often than
        once each calendar quarter during the 30-day period beginning on the
        third business day following an earnings release by the Corporation, and
        shall be effective on the first business day following receipt by the
        Secretary.

        (b) Non-Elective Deferrals. No participation election is required for
Non-Elective Deferrals since the crediting of such amounts to the Director's
account will be automatic.

        (c) Lump-Sum Compensation. No participation election is required for
Lump-Sum Compensation since the crediting of such amounts to the Director's
account, in accordance with the irrevocable investment option elected by the
Director prior to January 1, 1997, will be automatic.

5.  THE DIRECTOR'S ACCOUNT

        (a) All Compensation which a Director has elected to defer under the
Plan shall be credited to the Director's account consistent with the Director's
investment options, as described in paragraph 3. All credits shall be made as
unfunded book entries and the Director shall not have any interest in any
amounts credited to the Director's account until distributed in accordance with
the Plan.

        (b) Amounts credited to the Director's account in cash for services as a
Director during 1993 or any prior calendar year shall accrue amounts equivalent
to interest commencing on the date such amounts would otherwise have been paid,
at a rate per annum for each calendar quarter fixed by the Treasurer of the
Corporation at the commencement of such calendar quarter based upon the sum of
(i) the average quoted rate for three-month U.S. Treasury Bills for the last
full week of the preceding calendar quarter, and (ii) a rate per annum of three
percent.

        (c) Amounts credited to the Director's account in cash for services as a
Director during 1994 or any subsequent calendar year, other than cash amounts
referred to in Paragraph 5(g), Lump-Sum Compensation and Non-Elective Deferrals,
shall accrue amounts equivalent to interest commencing on the date such amounts
would otherwise have been paid, at the same rates per annum as those fixed for
deferrals with respect to the relevant calendar years under the AlliedSignal
Inc. Incentive Compensation Plan for Executive Employees, as amended from time
to time.

                                      - 5 -

        (d) Amounts credited to the Director's account in cash as a result of
the conversion of shares or equivalent shares to cash pursuant to paragraph 7(a)
shall accrue amounts equivalent to interest commencing on the date of such
conversion, at the higher of the two rates provided under paragraphs 5(b) and
(c), regardless of the calendar year or years to which the underlying deferral
of shares or equivalent shares relates. The determination of which rate is
higher shall be made each calendar quarter and, for purposes of such
determination, the rate provided under paragraph 5(c) for cash amounts deferred
with respect to the then current calendar year shall be compared to the rate
provided under paragraph 5(b) for the then current calendar quarter.

        (e) Amounts determined pursuant to this paragraph 5 shall be compounded
at the end of each calendar quarter and credited to the Director's account.
Amounts credited to the Director's account in cash shall continue to accrue
amounts equivalent to interest in accordance with paragraphs 5(b), (c) or (d)
until distributed in accordance with the Plan.

        (f) Amounts credited to the Director's account in shares or equivalent
shares of Common Stock shall accrue amounts equivalent to cash or stock
dividends as declared by the Board. For Pre-1997 Elective Deferrals, such
equivalent amounts shall continue to accrue amounts equivalent to interest or
dividends. For Non-Elective Deferrals and Lump-Sum Compensation, such equivalent
amounts shall be credited to the Director's account as if reinvested in Common
Stock. Amounts credited to the Director's account in equivalent shares of Common
Stock shall be valued on the same basis as investments by participants in the
AlliedSignal Common Stock Fund under the AlliedSignal Savings Plan, as indicated
in paragraph 5(g).

        (g) Amounts credited to the Director's account in cash but which are
valued as if invested in one or more of the funds available for investment by
participants in the AlliedSignal Savings Plan shall be valued on the same basis
as investments by participants in such funds (excluding any charge for expenses
and, with respect to the AlliedSignal Common Stock Fund, excluding any liquidity
reserves and assuming reinvestment of dividend equivalents).

6.  DISTRIBUTION FROM ACCOUNTS

        (a)  Form of Election.

                (i) Pre-1997 Elective Deferrals. The aggregate amount of
        Pre-1997 Elective Deferrals credited to a Director's account shall be
        distributed in accordance with the Director's distribution election in
        effect at the time such amounts were credited to the Director's account,
        as modified effective January 1, 1997 by a Director's special one-time
        election to take advantage of the Federal

                                     - 6 -

        Source Tax Law (4 U.S.C. ss.114). If no distribution election was in
        effect, such amounts shall be paid on the first business day of the
        calendar year immediately following the year in which the Director
        ceases to be a Director.

                (ii) Elective Deferrals. At the time a Director makes a
        participation election pursuant to paragraph 4(a), the Director shall
        also file with the Secretary a written election with respect to the
        distribution of the aggregate amount credited to the Director's account
        pursuant to such participation election. A Director may elect to receive
        such amount in one lump-sum payment or in a number of approximately
        equal installments (provided the payout period does not exceed 10
        years). The Director may also elect to have the lump-sum payment or the
        first installment paid (A) on the first business day of the calendar
        year immediately following the year in which the Director ceases to be a
        Director, (B) on the first business day of such calendar year as the
        Director may elect, or (C) as soon as practicable following the
        Director's death. Except in the case of the Director's death, in which
        event paragraph 8 shall govern, subsequent installments shall be paid on
        the first business day of each succeeding installment period until the
        entire amount credited to the Director's account shall have been paid.
        Absent such an election, except in the case of death, the amount of
        Elective Deferrals in the Director's account shall be paid on the first
        business day of the calendar year immediately following the year in
        which the Director ceases to be a Director.

                (iii) Lump-Sum Compensation. The aggregate amount credited to a
        Director's account as Lump-Sum Compensation shall be distributed in
        accordance with the distribution election filed by the Director with the
        Secretary prior to January 1, 1997. Such distribution election shall
        have included an election to receive such amount in one lump-sum payment
        or in a number of approximately equal installments (provided the payout
        period does not exceed 10 years), and an election to have the lump-sum
        payment or the first installment paid (A) on the first business day of
        the calendar year immediately following the year in which the Director
        ceases to be a Director, (B) on the first business day of a calendar
        year which is such number of years following retirement as the Director
        may elect, or (C) as soon as practicable following the Director's death.
        Except in the case of the Director's death, in which event paragraph 8
        shall govern, subsequent installments shall be paid on the first
        business day of each succeeding installment period until the entire
        amount credited to the Director's account shall have been paid. Absent
        such an election, except in the case of death, the amount of Lump-Sum
        Compensation in the Director's account shall be paid on the first
        business day of the calendar year immediately following the year in
        which the Director ceases to be a Director.

                                     - 7 -

                (iv) Non-Elective Deferrals. Although no participation election
        is required for Non-Elective Deferrals, each Director prior to the
        beginning of any calendar year may file with the Secretary a written
        election with respect to the distribution of the aggregate amount of
        Non-Elective Deferrals credited to the Director's account for the next
        calendar year. Any person who shall become a Director during any
        calendar year may file with the Secretary before the Director's term
        begins a written election with respect to the distribution of the
        aggregate amount of Non-Elective Deferrals credited to the Director's
        account for the remainder of such calendar year. Any such election shall
        continue in effect for Non-Elective Deferrals credited to the Director's
        account in succeeding calendar years, unless the Director files a new
        written election prior to the beginning of any calendar year. A Director
        may elect to receive such amount in one lump-sum payment or in a number
        of approximately equal installments (provided the payout period does not
        exceed 10 years). The Director may also elect to have the lump-sum
        payment or the first installment paid (A) on the first business day of
        the calendar year immediately following the year in which the Director
        ceases to be a Director of the Corporation, (B) on the first business
        day of a calendar year which is such number of years following
        retirement as the Director may elect, or (C) as soon as practicable
        following the Director's death. Except in the case of the Director's
        death, in which event paragraph 8 shall govern, subsequent installments
        shall be paid on the first business day of each succeeding installment
        period until the entire amount credited to the Director's account shall
        have been paid. Absent such an election, except in the case of death,
        the amount of Non-Elective Deferrals credited to the Director's account
        shall be paid on the first business day of the calendar year immediately
        following the year in which the Director ceases to be a Director.

        (b) Adjustment of Method of Distribution of Future Deferrals. Whether or
not a Director has filed a notice pursuant to paragraph 4(a)(iii) electing to
change the amount of Elective Deferrals to be credited to the Director's
account, a Director participating in the Plan may, prior to the beginning of any
calendar year, file another written notice with the Secretary electing to change
the method of distribution of the aggregate amount of Elective Deferrals
credited to the Director's account for services as a Director commencing with
such calendar year. Amounts credited to the Director's account prior to the
effective date of such change shall not be affected by such change and shall be
distributed only in accordance with the election in effect at the time such
amounts were credited to the Director's account.

        (c) Aggregate Amounts. References to the aggregate amounts credited to
the Director's account include accrued amounts equivalent to interest and
dividends.

                                     - 8 -

7.  CHANGE IN CONTROL

        (a) Conversion of Shares. Notwithstanding anything to the contrary in
the Plan, shares of Common Stock and equivalent shares of Common Stock credited
to a Director's account shall be converted to cash, as soon as practicable
following a Change in Control but in no event later than 90 days after the
Change in Control, in an amount equal to the total number of shares or
equivalent shares of Common Stock, and fractional interests thereof, credited to
the Director's account, multiplied by the Multiplication Factor. "Multiplication
Factor" shall mean (A) in the case of an acquisition of Common Stock described
in paragraph 7(d)(i), the Acquisition Price per Share, (B) in the event of the
occurrence of an Offer as defined in paragraph 7(d)(ii), the Offer Price per
Share, (C) in the case of an event described in paragraph 7(d)(iii), the Merger
Price per Share, or (D) in the case of a change in the composition of the Board
as described in paragraph 7(d)(iv), the highest Fair Market Value per Share of
the Common Stock for any day during (i) the ninety-day period ending on or
within 89 days following the date of the Change in Control which the Committee,
in its sole discretion, shall select prior to the Change in Control, or (ii) if
the Committee shall not have selected a ninety-day period pursuant to clause (i)
of this sentence prior to the Change in Control, the ninety-day period ending on
the 45th day following the date of the Change in Control. "Acquisition Price per
Share" shall mean the greater of (A) the highest price per share stated on the
Schedule 13D or any amendment thereto filed by the holder of 30% or more of the
Corporation's voting power which gives rise to the Change in Control, and (B)
the highest Fair Market Value per Share of Common Stock during the ninety-day
period ending on the date the Change in Control occurs. "Offer Price per Share"
shall mean the greater of (A) the highest price per share of Common Stock paid
in any Offer, which Offer is in effect at any time during the ninety-day period
ending on the date on which the Change in Control occurs, or (B) the highest
Fair Market Value per Share of Common Stock during such ninety-day period. Any
securities or property which are part or all of the consideration paid for
shares of Common Stock in the Offer shall be valued in determining the Offer
Price per Share at the higher of (A) the valuation placed on such securities or
property by the corporation, person or other entity making such Offer or (B) the
valuation placed on such securities or property by the Committee. "Merger Price
per Share" shall mean the greater of (A) the fixed or formula price for the
acquisition of shares of Common Stock occurring pursuant to such event described
in paragraph 7(d)(iii) if such fixed or formula price is determinable on the
date on which the Change in Control occurs, and (B) the highest Fair Market
Value per Share of Common Stock during the ninety-day period ending on the date
on which the Change in Control occurs. Any securities or property which are part
or all of the consideration paid for shares of Common Stock pursuant to such
event shall be valued in determining the Merger Price per Share at the higher of
(A) the valuation placed on such securities or property by the corporation,
person or other entity which is a party with the Corporation to an event
described in paragraph 7(d)(iii), or (B) the valuation

                                     - 9 -

placed on such securities or property by the Committee. For purposes of this
paragraph (7)(a), "Fair Market Value per Share of Common Stock" for any day
shall be the mean between the highest and lowest sales prices of Common Stock as
reported on the New York Stock Exchange Composite Tape for such day.

        (b) Interest Equivalents. Notwithstanding anything to the contrary in
the Plan, in the event of a Change in Control (i) the Plan may not be amended to
reduce the formulas contained in paragraph 5 which determine the rate at which
amounts equivalent to interest accrue with respect to cash amounts credited to a
Director's account, including cash amounts attributable to the conversion of
shares or equivalent shares in a Director's account pursuant to paragraph 7(a),
and (ii) the Plan Administrator referred to in paragraph 10(c) shall fix rates
under the formulas contained in paragraph 5 in lieu of the Treasurer of the
Corporation.

        (c) Payment on a Change in Control. In the event of a Change in Control,
the aggregate amount credited to the Director's account under the Plan shall be
paid in one lump-sum payment as soon as practicable following the Change in
Control but in no event more than 90 days after the Change in Control.
Notwithstanding the foregoing, any election with respect to Pre-1997 Elective
Deferrals in which a Director did not elect a lump-sum payment on a Change in
Control shall remain in effect.

        (d) Definition of Change in Control. For purposes of the Plan, a Change
in Control is deemed to occur at the time (i) when any entity, person or group
(other than the Corporation, any subsidiary or any savings, pension or other
benefit plan for the benefit of employees of the Corporation or its
subsidiaries) which theretofore beneficially owned less than 30% of the Common
Stock then outstanding acquires shares of Common Stock in a transaction or
series of transactions that results in such entity, person or group directly or
indirectly owning beneficially 30% or more of the outstanding Common Stock, (ii)
of the purchase of shares of Common Stock pursuant to a tender offer or exchange
offer (other than an offer by the Corporation) for all, or any part of, the
Common Stock ("Offer"), (iii) of a merger in which the Corporation will not
survive as an independent, publicly owned corporation, a consolidation, or a
sale, exchange or other disposition of all or substantially all of the
Corporation's assets, (iv) of a substantial change in the composition of the
Board during any period of two consecutive years such that individuals who at
the beginning of such period were members of the Board cease for any reason to
constitute at least a majority thereof, unless the election, or the nomination
for election by the stockholders of the Corporation, of each new director was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period, or (v) of any transaction or
other event which the Committee, in its discretion, determines to be a Change in
Control for purposes of the Plan.

                                     - 10 -

8.  DISTRIBUTION ON DEATH

        If a Director should die before all amounts credited to the Director's
account shall have been paid in accordance with the Director's prior elections,
the balance in such account (including all unpaid installments if installment
payments had been elected by the Director under paragraph 6) shall be paid as
soon as practicable following the Director's death to the beneficiary designated
in writing by the Director and filed with the Secretary of the Corporation. The
payable balance shall be paid to the estate of the Director if (a) no such
designation has been made or (b) the designated beneficiary shall have
predeceased the Director and no further designation has been made. A Director
may change the designated beneficiary at any time during the Director's lifetime
by filing a subsequent designation in writing with the Secretary of the
Corporation.

9.  PAYMENT IN THE EVENT OF HARDSHIP

        Upon receipt of a request from a Director or a Director's designated
beneficiary, delivered in writing to the Secretary, the Committee may cause the
Corporation to accelerate payment promptly of all or any part of the unpaid
balance credited to the Director's account (other than amounts credited as
Lump-Sum Compensation and Non-Elective Deferrals) if it finds in its sole
discretion that continued deferral of such amount would result in hardship to
the Director or the person otherwise entitled to receive it. For this purpose,
"hardship" means an unanticipated financial emergency that is caused by an event
beyond the control of the Director or other person entitled to receive payment
and that would result in severe financial hardship to such person if
acceleration of payment were not permitted.

10.  MISCELLANEOUS

        (a) The right of a Director to receive any amount credited to the
Director's account shall not be transferable or assignable by the Director,
except by will or by the laws of descent and distribution. To the extent that
any person acquires a right to receive any amount credited to a Director's
account hereunder, such right shall be no greater than that of an unsecured
general creditor of the Corporation. Except as expressly provided herein, any
person having an interest in any amount credited to a Director's account under
the Plan shall not be entitled to payment until the date the amount is due and
payable. No person shall be entitled to anticipate any payment by assignment,
alienation, sale, pledge, encumbrance or transfer in any form or manner prior to
actual or constructive receipt thereof.

        (b) The Corporation shall not be required to reserve or otherwise set
aside funds or shares of Common Stock for the payment of its obligations
hereunder. With

                                     - 11 -

respect to Pre-1997 Elective Deferrals, the Corporation shall make available as
and when required a sufficient number of shares of Common Stock to meet the
needs of the Plan. To the extent that registration of such shares under the
Securities Act of 1933 shall be required prior to their resale, the Corporation
undertakes to either file a registration statement relating to such shares or
include such shares in another registration statement to be filed within a
reasonable time.

        (c) Prior to a Change in Control, the Committee shall interpret the Plan
and make all determinations deemed necessary or desirable for the Plan's
implementation. The determination of the Committee shall be conclusive. The
Committee may obtain such advice or assistance as it deems appropriate from
persons not serving on the Committee. The Senior Vice President responsible for
Human Resources or other appropriate officer of the Corporation shall, prior to
any Change in Control, name as Plan Administrator any person or entity
(including, without limitation, a bank or trust company). Following a Change in
Control, the Plan Administrator shall interpret the Plan and make all
determinations deemed necessary or desirable for the Plan's implementation. The
determination of the Plan Administrator shall be conclusive. The Corporation
shall provide the Plan Administrator with such records and information as are
necessary for the proper administration of the Plan. The Plan Administrator
shall rely on such records and other information as the Plan Administrator shall
in its judgment deem necessary or appropriate in determining the eligibility of
a Director and the amount payable to a Director under the Plan.

        (d) The Board may at any time amend or terminate the Plan provided that
no amendment or termination shall impair the rights of a Director with respect
to amounts then credited to the Director's account.

        (e) Each Director participating in the Plan will receive a statement at
least quarterly indicating the amounts credited to the Director's account as of
the end of the preceding calendar quarter.

        (f) If adjustments are made to outstanding shares of Common Stock as a
result of stock dividends, split-ups, recapitalizations, mergers, consolidations
and the like, an appropriate adjustment will also be made in the number of
shares or equivalent shares of Common Stock credited to the Director's account.

                                                                    EXHIBIT 10.3

                   Retirement Plan for Non-Employee Directors
                              of AlliedSignal Inc.
                   ------------------------------------------
                     (As Amended Effective January 1, 1997)

1.      Eligibility

        Each member of the Board of Directors (the "Board") of AlliedSignal Inc.
(the "Corporation") who is not an employee of the Corporation or any of its
subsidiaries and who at the time of retirement from the Board, as defined in
paragraph 6(f), shall have served five years on the Board, the Board of
Directors of Allied Corporation (the "Allied Board"), the Board of Directors of
The Signal Companies, Inc. (the "Signal Board") or the board of directors of any
corporation acquired by the Corporation, Allied Corporation ("Allied") or The
Signal Companies, Inc. ("Signal") if the Director was a non-employee director of
the acquired corporation at the time of acquisition (an "Acquired Corporation
Board"), or any combination thereof, as a non-employee director and shall have
attained at least age 60 (an "Eligible Director") shall, unless the Eligible
Director elects otherwise pursuant to paragraph 6(g), be eligible to receive a
retirement benefit under the Retirement Plan for Non-Employee Directors of
AlliedSignal Inc. (the "Plan"). Notwithstanding the foregoing, an Eligible
Director shall not include (a) any individual who becomes a member of the Board
after December 31, 1996, or (b) any members of the Board on December 31, 1996
who waived their rights to any benefits under the Plan in exchange for the
crediting of a lump-sum amount in satisfaction thereof to their accounts under
the Deferred Compensation Plan for Non-Employee Directors of AlliedSignal Inc.,
effective January 1, 1997.

2.      Amount of Benefit

        (a) An Eligible Director who at the time of retirement from the Board
shall have attained age 70 shall be entitled to receive, for the remainder of
the Director's lifetime, a retirement benefit at an annual rate equal to the
annual Board retainer in effect for non-employee directors of the Board at the
time of such retirement.

        (b) An Eligible Director who at the time of retirement from the Board
shall have attained age 60 but not age 70 shall be entitled to receive, for a
period of time equal to the number of months such Director served as a
non-employee director on the Board, the Allied Board, the Signal Board or any
Acquired Corporation Board, or any combination thereof, a retirement benefit at
an annual rate equal to the

                                     - 2 -

annual Board retainer in effect for non-employee directors of the Board at the
time of such retirement.

3.      Time of Payment

        (a) Except as otherwise provided in paragraphs 3(b) and 3(c), the
retirement benefit determined in accordance with paragraph 2 shall be paid to an
Eligible Director commencing upon such Director's retirement from the Board (a
"Retired Director") in as nearly equal as possible quarterly installments at the
same time as quarterly installments of the annual Board retainer are paid to
non-employee directors serving on the Board at the time of the payment. If such
payments are made to current directors more frequently than quarterly, then
amounts due under the Plan shall be paid on such more frequent basis. If an
Eligible Director elects not to receive such payments or a Retired Director
elects to stop receiving such payments prior to the receipt of all payments due
under the Plan, such Director shall so advise the Corporation and may not
thereafter elect to receive or resume receipt of such payments.

        (b) Each member of the Board may irrevocably elect to receive a lump-sum
payment of the present value of the retirement benefit, as determined in
accordance with paragraphs 2 and 3(d), which remains payable, in the event the
individual becomes a Retired Director on or before the second anniversary date
of a Change in Control. Such lump-sum payment shall be made to the Retired
Director within the 90-day period following the later of the Change in Control
or such Director's retirement from the Board. Such election may be made by
filing a written notice with the Secretary of the Corporation before a Change in
Control but not after the later of September 30, 1990 or 30 days after becoming
a member of the Board.

        (c) Each Retired Director may irrevocably elect to receive a lump-sum
payment of the present value of the retirement benefit, as determined in
accordance with paragraphs 2 and 3(d), which remains payable, in the event of a
Change in Control. Such lump-sum payment shall be paid to the Retired Director
within the 90-day period following the Change in Control. A surviving spouse of
a deceased Retired Director may irrevocably elect to receive a lump-sum payment
of the amount payable to the surviving spouse pursuant to paragraph 5, in the
event of a Change in Control. Such election by a Retired Director or by the
surviving spouse of a deceased Retired Director may be made by filing a written
notice with the Secretary of the Corporation before a Change in Control but not
after September 30, 1990.

                                     - 3 -

        (d) For purposes of determining the present value of a Retired
Director's retirement benefit under paragraphs 3(b) and 3(c), and of a surviving
spouse's benefit under paragraph 5, the Pension Benefit Guaranty Corporation
immediate annuity rate and the UP 1984 mortality table in effect immediately
before the Change in Control shall be used.

        (e) For purposes of the Plan, a Change in Control is deemed to occur at
the time (i) when any entity, person or group (other than the Corporation, any
subsidiary or any savings, pension or other benefit plan for the benefit of
employees of the Corporation or its subsidiaries) which theretofore beneficially
owned less than 30% of the Corporation's Common Stock ("Common Stock") then
outstanding acquires shares of Common Stock in a transaction or series of
transactions that results in such entity, person or group directly or indirectly
owning beneficially 30% or more of the outstanding Common Stock, (ii) of the
purchase of shares of Common Stock pursuant to a tender offer or exchange offer
(other than an offer by the Corporation) for all, or any part of, the Common
Stock, (iii) of a merger in which the Corporation will not survive as an
independent, publicly owned corporation, a consolidation, or a sale, exchange or
other disposition of all or substantially all of the Corporation's assets, (iv)
of a substantial change in the composition of the Board of Directors during any
period of two consecutive years such that individuals who at the beginning of
such period were members of the Board of Directors cease for any reason to
constitute at least a majority thereof, unless the election, or the nomination
for election by the stockholders of the Corporation, of each new director was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of the period, or (v) of any transaction or
other event which the Nominating and Board Affairs Committee of the Board or any
successor thereto ("Committee"), in its discretion, determines to be a Change in
Control for purposes of the Plan.

4.      Competition

        A Retired Director who receives payment under the Plan, whether in
installments or in a lump sum, shall not engage in any activity in competition
with the Corporation's business for the applicable period with respect to which
the Retired Director receives such payment pursuant to paragraph 2.

5.      Payments on Death

        In the event of the death of a Retired Director prior to receiving
payments pursuant to paragraph 3(a) for a period equal to the lesser of (a) the
total number of

                                     - 4 -

months of such Director's service on the Board, the Allied Board, the Signal
Board or any Acquired Corporation Board, or any combination thereof, as a
non-employee director or (b) 120 months, such Retired Director's surviving
lawful spouse, if any, will be entitled to such payments for the remainder of
such lesser period or until such spouse's death, whichever occurs first. In the
event of a Change in Control, the surviving spouse of a Retired Director shall
receive a lump-sum payment of the present value of the amounts which remain
payable under the preceding sentence, provided that either (i) the surviving
spouse of a deceased Retired Director made an election pursuant to paragraph
3(c) or (ii) the Retired Director, had he survived, would have been entitled to
receive a lump-sum payment pursuant to either paragraph 3(b) or 3(c). Such
lump-sum payment shall be paid to the surviving spouse within the 90-day period
following the Change in Control. Except as set forth herein, nothing in the Plan
shall create any benefit, cause of action, right of sale, transfer, assignment,
pledge, encumbrance, or other such right in any heirs or the estate of any
Retired Director. In the event of the death of an Eligible Director prior to
such Director's retirement from the Board, no payments will be due under the
Plan.

6.      Miscellaneous

        (a) The right to receive any payment under the Plan shall not be
transferable or assignable.

        (b) The Corporation shall not be required to set aside funds for the
payment of its obligations under the Plan.

        (c) The Board may at any time amend or terminate the Plan provided that
no amendment or termination shall impair the rights of an Eligible Director to
receive upon retirement from the Board the payments which would have been made
to such Director had the Plan not been amended or terminated (based upon such
Director's service on the Board, the Allied Board, the Signal Board or any
Acquired Corporation Board, or any combination thereof, to the date of such
amendment or termination) or the rights of a Retired Director (or such
Director's surviving spouse) to receive any remaining payments due under the
Plan.

        (d) Nothing in the Plan shall be deemed to create any obligation on the
part of the Board to nominate any Director for reelection by the Corporation's
shareholders.

        (e) Prior to a Change in Control, the Committee shall interpret the Plan
and make all determinations deemed necessary or desirable for the Plan's

                                     - 5 -

implementation. The determination of the Committee shall be conclusive. The
Committee may obtain such advice or assistance as it deems appropriate from
persons not serving on the Committee. The Senior Vice President responsible for
Human Resources or other appropriate officer of the Corporation shall, prior to
any Change in Control, name as Plan Administrator any person or entity
(including, without limitation, a bank or trust company). Following a Change in
Control, the Plan Administrator shall interpret the Plan and make all
determinations deemed necessary or desirable for the Plan's implementation. The
determination of the Plan Administrator shall be conclusive. The Corporation
shall provide the Plan Administrator with such records and information as are
necessary for the proper administration of the Plan. The Plan Administrator
shall rely on such records and other information as the Plan Administrator shall
in its judgment deem necessary or appropriate in determining any Director's
eligibility for and amount of retirement benefits under the Plan.

        (f) As used in the Plan, "retirement from the Board" shall include any
termination of service (other than by death) of an Eligible Director except any
termination which the Committee or, if applicable, the Plan Administrator
determines to have resulted from gross cause. "Gross Cause" means fraud,
misappropriation of or intentional misconduct damaging to the property or
business of the Corporation or any of its subsidiaries, or commission of a
crime.

        (g) Payments in respect of an Eligible Director under the Plan shall be
in lieu of any payments based upon service as a non-employee director otherwise
provided in respect of such Eligible Director under any other retirement plan or
arrangement of Allied, Signal or any corporation acquired by the Corporation,
Allied or Signal unless the Eligible Director elects by written notice to the
Secretary of the Corporation to receive payments under such other plan or
arrangement in lieu of payments under the Plan.

MANAGEMENT'S DISCUSSION AND ANALYSIS
AlliedSignal Inc.

1996 COMPARED WITH 1995

RECORD EARNINGS IN 1996 REFLECT THE COMPANY'S  SUCCESS IN FOCUSING ITS STRATEGIC
THRUSTS  ON GROWTH  AND  PRODUCTIVITY.  Growth  was  driven by  introducing  new
products,  entering new markets,  gaining more business from existing  customers
and winning new customers. Growth was also achieved through acquisitions, mainly
in the  fourth  quarter  of 1995.  Productivity  was  greatly  improved  through
continued  initiatives for excellence in  manufacturing  and advances in product
design, engineering, outsourcing and supply base management.

IN APRIL 1996,  THE COMPANY SOLD ITS WORLDWIDE  HYDRAULIC AND ANTI-LOCK  BRAKING
SYSTEMS (ABS) BUSINESSES (BRAKING BUSINESS). The braking business had 1995 sales
and income from  operations  of  approximately  $2.0  billion and $154  million,
respectively.  The Company received  consideration  of $1.5 billion,  subject to
certain  post-closing  adjustments.  It  is  expected  that  the  proceeds  will
ultimately be used to grow the Company's higher-margin  businesses and to pursue
acquisitions  that will expand or complement the Company's  business  portfolio.
The sale of the braking business  resulted in a gain of $655 million  (after-tax
$368 million,  or $1.30 per share).  Excluded from the sale were brake  friction
materials,  brake-related  sales to the independent  aftermarket and the medium-
and  heavy-duty  truck brake systems  business  which is part of a joint venture
with Knorr-Bremse AG.

IN THE SECOND  QUARTER OF 1996,  THE  COMPANY  RECORDED A PRETAX  CHARGE OF $622
MILLION  (AFTER-TAX  $359 MILLION,  OR $1.27 PER SHARE)  RELATING TO THE COST OF
ACTIONS  TO  REPOSITION  SOME  OF ITS  MAJOR  BUSINESS  UNITS  AND TO  RECOGNIZE
ADDITIONAL  ENVIRONMENTAL  REMEDIATION LIABILITIES AS WELL AS OTHER CHARGES. The
repositioning   actions  will   enhance  the   Company's   competitiveness   and
productivity.   The  actions  include   consolidating   production   facilities,
rationalizing  manufacturing capacity and optimizing  operational  capabilities.
The components of the  repositioning  charge  include asset  write-downs of $136
million,  severance  costs of $127  million and other exit costs of $14 million.
The  repositioning  actions are  generally  expected to be completed by 1998 and
will not  materially  impact  the  Company's  liquidity.  Upon  completion,  the
repositioning  actions are expected to generate  additional  annual  income from
operations of  approximately  $200 million.  The charge to recognize  additional
environmental  liabilities  amounted  to $175  million.  See  Note 3 of Notes to
Financial Statements for additional information.

THE BOARD OF DIRECTORS APPROVED AN INCREASE OF 16% IN THE QUARTERLY COMMON STOCK
DIVIDEND,  FROM  $0.225  TO $0.26  PER  SHARE.  The  dividend  increase  will be
effective with the first quarter of 1997.  The Company had previously  increased
its regular quarterly dividend by 15% in the first quarter of 1996.

RESULTS OF  OPERATIONS.  The  Company's  net income  reached the  billion-dollar
milestone  for the  first  time as  businesses  continued  to grow and  increase
productivity.

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

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

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

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

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

                                                                              19

 

A  partial  offset  was  significantly  higher  earnings  from  the UOP  process
technology joint venture (UOP).

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

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

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

NET INCOME IN 1996 of $1,020  million,  or $3.61 per share,  was 17% higher than
last year's net income of $875 million, or $3.09 per share. Adjusted for special
items in both years, net income for 1996 was $1,011 million, or $3.58 per share,
an increase of 16% over 1995 net income.  The higher adjusted net income in 1996
was the result of a substantial  improvement in the operating performance by the
Aerospace segment and higher earnings by the Engineered  Materials segment.  The
Automotive segment had moderately lower earnings.

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

                                                                  ADJUSTED
AEROSPACE                    NET SALES        NET INCOME        NET INCOME
- -------------------------------------------------------------------------------
                                                              
1996                            $5,714            $  206            $  385
- -------------------------------------------------------------------------------
1995                             5,084               303               303
- -------------------------------------------------------------------------------
INCREASE (DECREASE)             $  630            $  (97)           $   82
===============================================================================

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

The  Company's  1996  sales  to the  Department  of  Defense  (DoD),  as a prime
contractor and subcontractor, increased 3% compared with 1995 despite reductions
in U.S.  defense  spending.  Sales to the DoD accounted  for 22% of  Aerospace's
total sales, a decrease of 2 percentage  points compared with 1995. Sales to the
commercial  and foreign  government  markets  increased  18%, while sales to the
National Aeronautics and Space  Administration  (NASA) and other U.S. Government
agencies declined 1% in 1996.

Aerospace  adjusted net income  improved to $385 million from $303  million,  an
increase of $82 million, or 27%, compared with the same period last year. Strong
sales growth and  productivity  resulted in  substantially  higher  earnings for
Engines, Equipment Systems and Electronic Systems.  Government Services also had
significant  gains, but Commercial  Avionics Systems had  substantially  reduced
earnings   due  to  lower   sales,   manufacturing   difficulties   and  certain
repositioning expenses excluded from the 1996 provision.

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  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 proficiency,  strategic
alliances and cost-effective performance.

The Company  believes  that the cyclical  downturn for the  commercial  aircraft
industry  reached  bottom in 1995. A slight  improvement  was seen in the second
half of 1996 and this growth is expected to  significantly  accelerate  in 1997.
Regional  airlines  experienced  strong traffic growth and new regional aircraft
orders were higher in 1996. The business  aviation market showed moderate growth
and the  commercial  aftermarket  spare parts and repair and  overhaul  business
showed strong growth during 1996.

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

At  December  31, 1996 and 1995,  the Company had firm orders for its  aerospace
products  from the U.S. and foreign  governments  of $1,906 and $1,871  million,
respectively.  Total backlog,  including commercial contracts,  at year-end 1996
and 1995 was $4,514 and $4,523 million,  respectively.  The Company  anticipates
that  approximately  $3,562  million  of the total 1996  backlog  will be filled
during 1997.

                                                                 ADJUSTED
AUTOMOTIVE                     NET SALES       NET INCOME      NET INCOME
- -------------------------------------------------------------------------------
                                                           
1996                            $  4,240          $   521          $  202
- -------------------------------------------------------------------------------
1995                               5,549              146             217
- -------------------------------------------------------------------------------
INCREASE (DECREASE)             $ (1,309)         $   375          $  (15)
===============================================================================

Automotive  sales of $4,240 million in 1996 were $1,309  million,  or 24%, lower
than last year.  However,  excluding the divested braking  business,  Automotive
sales  increased $85 million,  or 2%. Safety  Restraint  Systems,  primarily air
bags,  and  Turbocharging  Systems had  significantly  higher  sales  volumes in
Europe,   reflecting  strong  demand.  Growth  by  Turbochargers  reflected  the
continued  preference  by European  customers for  turbocharged,  diesel-powered
cars, although turbocharger sales were lower in Japan and North America. Filters
and Spark Plugs had significantly higher

20

 

 

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

                                            1994       1995      1996
                                            ----       ----      ----
                                                        
                                           12.8        14.3       14.0

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

                                            1994       1995      1996
                                            ----       ----      ----
                                                        
                                           759          875      1,020

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

                                            1994       1995      1996
                                            ----       ----      ----
                                                        
                                           2.68        3.09       3.61

sales in part due to new product  introductions  and higher  original  equipment
sales. Sales of Friction Materials increased slightly,  mainly in North America.
European  Aftermarket  sales  were  significantly   impacted  by  weak  economic
conditions and North American  Aftermarket sales were slightly higher.  Sales of
Truck Brake Systems in North America were lower primarily  because of decreasing
medium- and heavy-duty truck production.

Automotive  adjusted  net income  decreased  to $202 million from $217 million a
year ago, a $15 million,  or 7%, decrease.  The decrease reflects the absence of
net income from the divested braking  business.  Excluding the braking business,
Automotive income increased substantially.  Reductions in distribution costs for
the North American  Aftermarket  business as well as significant sales gains and
manufacturing  improvements  for Filters and Spark Plugs  contributed to the net
income growth.  Higher sales resulting from additional  production  capacity for
Turbochargers and Safety Restraints also resulted in significant income gains.

                                                                ADJUSTED
ENGINEERED MATERIALS          NET SALES       NET INCOME      NET INCOME
- -------------------------------------------------------------------------------
                                                                
1996                            $ 4,013           $   361         $  432
- -------------------------------------------------------------------------------
1995                              3,713               473            402
- -------------------------------------------------------------------------------
INCREASE (DECREASE)             $   300           $  (112)        $   30
===============================================================================

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

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

REGARDING  ENVIRONMENTAL  MATTERS,  the  Company is subject to various  federal,
state  and local  government  requirements  relating  to the  protection  of the
environment.  The Company  believes  that,  as a general  matter,  its policies,
practices and procedures are properly  designed to prevent  unreasonable risk of
environmental  damage and that its  handling,  manufacture,  use and disposal of
hazardous  or  toxic  substances  are in  accord  with  environmental  laws  and
regulations.  However,  mainly  because of past  operations  and  operations  of
predecessor  companies,  the Company,  like other  companies  engaged in similar
businesses, is a party to lawsuits and claims and has incurred remedial response
and voluntary cleanup costs associated with  environmental  matters.  Additional
lawsuits,  claims  and  costs  involving  environmental  matters  are  likely to
continue  to arise in the  future.  The Company  continually  conducts  studies,
individually at Company-owned  sites, and jointly as a member of industry groups
at non-owned sites, to determine the feasibility of various remedial  techniques
to  address  environmental  matters.  It  is  the  Company's  policy  to  record
appropriate liabilities for such matters when environmental assessments are made
or remedial efforts are probable and the costs can be reasonably estimated.  The
timing  of  these  accruals  is  generally  no  later  than  the  completion  of
feasibility studies.

                                                                              21

 

 

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

                                           1994       1995      1996
                                           ----       ----      ----
                                                        
Capital expenditures ..................    639         746        755
Company-funded R&D ....................    318         353        345
                                           ---        ----      -----
         Total ........................    957        1,099     1,100
                                           ---        -----     -----

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

                                           1994       1995      1996
                                           ----       ----      ----
                                                        
                                           30.4        25.6      22.2

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

                                           1994       1995      1996
                                           ----       ----      ----
                                                        
                                           28.9        26.7       26.6

Remedial response and voluntary cleanup expenditures were $87 and $72 million in
1996  and  1995,  respectively,  and are  currently  estimated  to  increase  to
approximately  $95 million in 1997.  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.

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

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

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

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

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

FINANCIAL  CONDITION.  Continued  strong operating cash flows, the proceeds from
the sale of the braking  business and additional  borrowing  capacity leaves the
Company  well  positioned  to  pursue  its  strategic  growth  and  productivity
initiatives.

TOTAL  ASSETS at December  31, 1996 were  $12,829  million,  an increase of $364
million, or 3%, from December 31, 1995. Cash and cash equivalents and short-term
investments at year-end 1996 were $1,766 million,  an increase of $1,226 million
compared with December 31, 1995, primarily reflecting the proceeds received from
the sale of the braking business. Cash flows from operating activities of $1,196
million  decreased by $20 million,  or 2%,  compared with last year. The current
ratio at  year-end  1996 was 1.6x,  up  significantly  from 1.3x last year.  The
Company's  working  capital  turnover was down  slightly to 5.0x at December 31,
1996 from 5.2x a year earlier.

THE MAXIMUM AMOUNT OF BORROWING  available under the Company's  revolving credit
agreements (Credit  Agreements) was $750 million.  The Credit Agreements support
the issuance of commercial  paper.  There was $470 and $58 million of commercial
paper  outstanding at the end of 1996 and 1995,  respectively.  Commercial paper
borrowing reached a high of $1,271 million during 1996.

TOTAL DEBT at year-end 1996 of $1,931 million  decreased $79 million.  Long-term
debt of $1,317 million was reduced by $49 million during the year. The Company's
total debt as a percent of capital was 29.5% at  December  31,  1996,  down from
33.7% at  year-end  1995.  Long-term  debt as a percent of capital  was 22.2% at
year-end  1996,  down  from  25.6%  at

22

 

 

year-end  1995.  See Note 15 of Notes to  Financial  Statements  for  details of
long-term debt and a discussion of the Credit Agreements.

THE COMPANY  REPURCHASED  7.0 MILLION SHARES OF COMMON STOCK for $409 million in
1996.  Common stock was  repurchased  to meet expected  requirements  for shares
issued under employee benefit plans and a shareowner dividend reinvestment plan.
At year-end  1996,  the Company had 75.4 million  shares of common stock held in
treasury  carried at $1,953  million.  In December  1996, the Board of Directors
voted to increase the Company's common share repurchase  authority by 50 million
shares.  As of year-end  1996,  the Company was  authorized to  repurchase  51.2
million shares of common stock.

The Board of Directors also voted to seek shareowner approval at the 1997 Annual
Meeting of an amendment to the  Company's  certificate  of  incorporation  which
would  increase the number of  authorized  common shares to one billion from 500
million.  If approved by shareowners,  the additional  shares would be available
for stock splits, acquisitions and other purposes.

CAPITAL  EXPENDITURES  during 1996 were $755 million,  an increase of $9 million
from the $746 million  spent in 1995.  Spending by the  segments  and  Corporate
since 1994 is shown in Note 25 of Notes to Financial  Statements.  The Company's
total capital expenditures in 1997 are currently projected at approximately $740
million.  These expenditures are expected to be financed by internally generated
funds.  Approximately  66% of the projected  1997  expenditures  are planned for
expansion and cost  reduction,  26% for  replacement  and maintenance and 8% for
environmental projects.

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 the Company's efforts to provide its 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 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 an enhanced ground
proximity warning system. In addition,  the Company's 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
acquired  business,  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 Europe's leading  supplier of aircraft heat exchange  equipment to
83% by purchasing an additional 34% interest.

     Automotive  decided to exit the light-vehicle  ABS business.  See Note 3 of
Notes to  Financial  Statements  for  additional  information.  In  addition,  a
reduction in the Automotive workforce was announced and largely completed in the
fourth quarter of 1995. The reduction  eliminates  approximately  3,100 salaried
and hourly  full-time-equivalent  positions.  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, 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
HDPE business. Paxon transferred the HDPE business to Exxon. See Note 4 of Notes
to Financial Statements for additional information.

RESULTS OF  OPERATIONS.  Record  sales and net income  were  achieved 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.  Favorable  foreign exchange rate  fluctuations in the
Automotive  segment increased sales by $181 million and higher selling prices in
the Engineered  Materials  segment  increased  sales by $66 million.  Automotive
sales  increased  $627  million,  or 13%,  Engineered  Materials  improved  $441
million, or 13%, and Aerospace had a $461 million, or 10%, gain.

COST OF GOODS SOLD as a percent of sales  increased  from 80.4% in 1994 to 81.2%
in 1995 as the current year includes a provision of $115 million relating to the
revaluation  of the  Company's ABS assets to their fair market value and certain
other closure costs.  Excluding this provision,  cost of goods sold as a percent
of sales was 80.4% in 1995.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES as a percent of net sales decreased
from 10.7% in 1994 to 10.5% in 1995. Expenses increased by $137 million, or 10%,
reflecting in part the impact of acquisitions.

GAIN ON SALE OF BUSINESS reflects the pretax gain of $71 million on the transfer
of the HDPE business to Exxon in December 1995.

                                                                              23

 

 

INCOME FROM  OPERATIONS of $1,260  million in 1995 improved by $108 million,  or
9%,  compared with last year.  Excluding  the impact of the 1995 special  items,
income from operations improved by $152 million,  or 13%.  Engineered  Materials
and Aerospace  income from  operations  both increased 20%;  Automotive had a 1%
decrease.  Operating  margins increased  slightly,  from 9.0% in 1994 to 9.1% in
1995, and  productivity  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,  Knorr-Bremse's  European truck brake systems
business 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 per share,  an  increase  of 15%
compared with $759 million,  or $2.68 per 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 (see tables below) for the Automotive and Engineered  Materials  segments
excludes the impact of the 1995 special items. (Dollars in millions)

AEROSPACE                              NET SALES        NET INCOME
- -------------------------------------------------------------------------------
                                                         
1995                                     $ 5,084            $  303
- -------------------------------------------------------------------------------
1994                                       4,623               260
- -------------------------------------------------------------------------------
INCREASE                                 $   461            $   43
===============================================================================

Aerospace 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 APUs.  TCAS  sales  were  particularly  strong  as U.S.  operators  of
10-to-30-seat aircraft complied with the U.S. 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 Electronic  Systems,  where comparisons were adversely
affected by one-time  contract  settlements  in 1994 and the closeout of certain
programs.

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

Aerospace 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 Electronic Systems had lower income primarily due to
earnings  related to one-time  contract  settlements  in 1994 and  manufacturing
difficulties.

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.

                                                               ADJUSTED
AUTOMOTIVE                    NET SALES       NET INCOME     NET INCOME
- -------------------------------------------------------------------------------
                                                           
1995                             $5,549            $ 146           $217
- -------------------------------------------------------------------------------
1994                              4,922              215            215
- -------------------------------------------------------------------------------
INCREASE (DECREASE)              $  627            $ (69)          $  2
===============================================================================

Automotive  sales were up 13% compared with 1994 reflecting  improvements in all
major business  units.  Automotive  sales  benefited from the acquisition of the
Budd  Company's  Wheel and Brake  Division,  as well as growing demand for brake
systems in Europe.  Although North American vehicle production volumes decreased
slightly in 1995, North American brake systems content per vehicle  increased as
a result of key  business  wins with the Ford  Motor  Company  and the  Chrysler
Corporation. 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 Restraint Systems 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
Brake Systems and  Turbocharging  Systems.  The continuation of the trend toward
producing  turbocharged,  diesel-powered cars in Europe and penetration into the
Asian market also favorably impacted  turbocharger  sales.  Turbocharger  plants
continued to operate at capacity  levels.  The segment's sales  improvement also
reflected the impact of favorable foreign exchange rate fluctuations.

Automotive  adjusted net income  improved 1% compared with 1994.  Net income was
substantially  higher for North American Safety  Restraint  Systems  principally
reflecting materials management and operational initiatives and for the European
Aftermarket  largely  due to cost  savings,  improved  distribution  and pricing
improvements.  Turbocharging  Systems and Truck Brake Systems had  significantly
higher  income  on strong  sales  growth.  In  addition,  Turbocharging  Systems
experienced  higher  operating  margins due to Operational  Excellence and other
manufacturing initiatives. Rapid growth in the European

24

 

 

turbodiesel  passenger  car market and growth  initiatives  in the  Asia/Pacific
region  strained  Automotive's  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 light-vehicle brake systems in North America.

                                                                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,  Electronic
Materials  and  Specialty  Chemicals.  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. The carpet fibers
business  experienced  price  pressure and lower volumes  throughout  the fourth
quarter of 1995 as the industry  attempted  to reduce high levels of  inventory.
Electronic  Materials  had  significantly  higher sales  volumes of laminate and
advanced  microelectronic  materials mainly in the U.S. and Asia/Pacific region.
Specialty Chemicals improved due to increased sales of performance  chemicals in
part reflecting the acquisition of Riedel-de Haen in late 1995.

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,  increased sales volumes 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.   Electronic   Materials   had  higher   income  on
significantly  higher sales.  Specialty Chemicals improved  substantially due to
increased  net  income  from  UOP and  higher  sales of  performance  chemicals.
Fluorine Products had slightly lower net income in part because of lower selling
prices and costs  associated  with the transition to mandated 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  OEMs.
Environmental  catalysts and carbon  materials also had income gains.  There was
also a substantial increase in net income from the Paxon joint venture.

REGARDING  ENVIRONMENTAL  MATTERS,   remedial  response  and  voluntary  cleanup
expenditures  were $72 and $66  million in 1995 and 1994,  respectively.  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  $65
million and capital  expenditures  of $44 million  relating to  compliance  with
environmental regulations.

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 December 31, 1994. Cash flows from operating  activities of $1,216
million  increased by $173 million,  or 17%,  compared with last year 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 Credit Agreements
was  reduced  by the  Company  in June 1995 from $900  million  to $750  million
because the floating rate Employee Stock Ownership Plan 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 borrowings  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  borrowings  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 as a percent of capital was
25.6% at year-end  1995,  down from 30.4% at year-end 1994. See Note 15 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  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.

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 1994
is shown in Note 25 of Notes to Financial Statements.

- --------------------------------------------------------------------------------
SAFE HARBOR  STATEMENT  under the Private  Securities  Litigation  Reform Act of
1995:  Except for the  historical  information  contained  herein,  the  matters
discussed in this annual  report are  forward-looking  statements  which involve
risks and  uncertainties,  including  but not limited to economic,  competitive,
governmental  and  technological  factors  affecting the  Company's  operations,
markets,  products,  services  and prices,  and other  factors  discussed in the
Company's filings with the Securities and Exchange Commission.
                                                                              25

 

 

CONSOLIDATED STATEMENT OF INCOME
AlliedSignal Inc.

YEARS ENDED DECEMBER 31
 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)         1996        1995        1994
- --------------------------------------------------------------------------------------

NET SALES ........................................    $13,971     $14,346     $12,817
- --------------------------------------------------------------------------------------
COST OF GOODS SOLD ...............................     11,606      11,654      10,299
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .....      1,511       1,503       1,366
GAIN ON SALE OF BUSINESS .........................       (655)        (71)        --
- --------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES .........................     12,462      13,086      11,665
- --------------------------------------------------------------------------------------
INCOME FROM OPERATIONS ...........................      1,509       1,260       1,152
EQUITY IN INCOME OF AFFILIATED COMPANIES .........        143         191         129
OTHER INCOME (EXPENSE) ...........................         87         (22)        (27)
INTEREST AND OTHER FINANCIAL CHARGES .............       (186)       (168)       (143)
- --------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME ....................      1,553       1,261       1,111
TAXES ON INCOME ..................................        533         386         352
- --------------------------------------------------------------------------------------
NET INCOME .......................................   $  1,020    $    875    $    759
======================================================================================
EARNINGS PER SHARE OF COMMON STOCK(1) ............   $   3.61    $   3.09    $   2.68
======================================================================================

(1)  EARNINGS PER SHARE OF COMMON STOCK ARE BASED UPON  THE  FOLLOWING  WEIGHTED
     AVERAGE  NUMBER  OF  SHARES: 1996, 282,830,064  SHARES;  1995,  283,437,773
     SHARES AND  1994, 283,446,399  SHARES. THERE IS NO MATERIAL DILUTIVE EFFECT
     ON EARNINGS PER SHARE OF COMMON STOCK DUE TO COMMON STOCK EQUIVALENTS.

CONSOLIDATED STATEMENT OF RETAINED EARNINGS

YEARS ENDED DECEMBER 31
 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)             1996       1995       1994
- ---------------------------------------------------------------------------------------

BALANCE AT BEGINNING OF YEAR ..........................   $ 2,315     $1,613    $ 1,023
NET INCOME ............................................     1,020        875        759
OTHER .................................................       141         44         11
COMMON STOCK DIVIDENDS (1996--$.90 PER SHARE;
 1995--$.78 PER SHARE; 1994--$.6475 PER SHARE) ........      (262)      (217)      (180)
- ----------------------------------------------------------------------------------------
BALANCE AT END OF YEAR ................................   $ 3,214    $ 2,315    $ 1,613
========================================================================================

THE "NOTES TO FINANCIAL STATEMENTS" ARE AN INTEGRAL PART OF THESE STATEMENTS.

26

 

 

CONSOLIDATED BALANCE SHEET
AlliedSignal Inc.

DECEMBER 31 (DOLLARS IN MILLIONS)                                                   1996      1995
- ----------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------
                                                                                          
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS .....................................................   $ 1,465   $   540
SHORT-TERM INVESTMENTS ........................................................       301       --
ACCOUNTS AND NOTES RECEIVABLE .................................................     1,661     1,751
INVENTORIES ...................................................................     1,946     1,991
OTHER CURRENT ASSETS ..........................................................       466       608
- ----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS ..........................................................     5,839     4,890
INVESTMENTS AND LONG-TERM RECEIVABLES .........................................       473       479
PROPERTY, PLANT AND EQUIPMENT -- NET ..........................................     4,219     4,742
COST IN EXCESS OF NET ASSETS OF ACQUIRED COMPANIES -- NET .....................     1,418     1,572
OTHER ASSETS ..................................................................       880       782
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS ..................................................................   $12,829   $12,465
====================================================================================================

LIABILITIES
- ----------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
ACCOUNTS PAYABLE ..............................................................   $ 1,187   $ 1,385
SHORT-TERM BORROWINGS .........................................................        32       397
COMMERCIAL PAPER ..............................................................       470        58
CURRENT MATURITIES OF LONG-TERM DEBT ..........................................       112       189
ACCRUED LIABILITIES ...........................................................     1,895     1,775
- ----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES .....................................................     3,696     3,804
LONG-TERM DEBT ................................................................     1,317     1,366
DEFERRED INCOME TAXES .........................................................       610       551
POSTRETIREMENT BENEFIT OBLIGATIONS OTHER THAN PENSIONS ........................     1,787     1,864
OTHER LIABILITIES .............................................................     1,239     1,288

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 .................................................     2,547     2,489
COMMON STOCK HELD IN TREASURY, AT COST:
 1996--75,414,117 SHARES; 1995--75,459,178 SHARES .............................    (1,953)   (1,658)
CUMULATIVE FOREIGN EXCHANGE TRANSLATION ADJUSTMENT ............................         2        61
UNREALIZED HOLDING GAIN ON MARKETABLE SECURITIES ..............................        12        27
RETAINED EARNINGS .............................................................     3,214     2,315
- ----------------------------------------------------------------------------------------------------
TOTAL SHAREOWNERS' EQUITY .....................................................     4,180     3,592
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY .....................................   $12,829   $12,465
====================================================================================================

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)                                  1996       1995            1994
- ----------------------------------------------------------------------------------------------------------------
                                                                                                  
CASH FLOWS FROM OPERATING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------
NET INCOME ..............................................................    $1,020       $875            $759
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
 OPERATING ACTIVITIES:
GAIN ON SALE OF BUSINESS ................................................      (655)       (71)             --
REPOSITIONING AND OTHER CHARGES .........................................       622        115            (180)
DEPRECIATION AND AMORTIZATION (INCLUDES GOODWILL) .......................       602        612             560
UNDISTRIBUTED EARNINGS OF EQUITY AFFILIATES .............................       (33)       (59)            (10)
DEFERRED INCOME TAXES ...................................................       213        198             180
DECREASE (INCREASE) IN ACCOUNTS AND NOTES RECEIVABLE ....................      (163)       134            (195)
DECREASE (INCREASE) IN INVENTORIES ......................................       (87)      (141)            134
DECREASE (INCREASE) IN OTHER CURRENT ASSETS .............................       134         35             (65)
INCREASE IN ACCOUNTS PAYABLE ............................................       117         16             113
(DECREASE) IN ACCRUED LIABILITIES .......................................       (77)      (245)            (56)
NET TAXES PAID ON GAIN ON SALE OF BRAKING BUSINESS ......................       (49)        --              --
OTHER ...................................................................      (448)      (253)           (197)
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...............................     1,196      1,216           1,043
- ----------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------
EXPENDITURES FOR PROPERTY, PLANT AND EQUIPMENT ..........................      (755)      (746)           (639)
PROCEEDS FROM DISPOSALS OF PROPERTY, PLANT AND EQUIPMENT ................        77         46              54
DECREASE IN INVESTMENTS AND LONG-TERM RECEIVABLES .......................        20         27              32
(INCREASE) IN OTHER INVESTMENTS .........................................       (12)        (4)             (8)
CASH PAID FOR ACQUISITIONS ..............................................      (114)      (499)           (531)
PROCEEDS FROM SALES OF BUSINESSES .......................................     1,358         72             130
(INCREASE) IN SHORT-TERM INVESTMENTS ....................................      (301)        --              --
DECREASE IN MARKETABLE SECURITIES .......................................       --          --              90
- ----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES ....................       273     (1,104)           (872)
- ----------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN COMMERCIAL PAPER .............................       412         58            (164)
NET INCREASE (DECREASE) IN SHORT-TERM BORROWINGS ........................      (356)       253              64
PROCEEDS FROM ISSUANCE OF COMMON STOCK ..................................       147        104              43
PROCEEDS FROM ISSUANCE OF LONG-TERM DEBT ................................        48        108               7
PAYMENTS OF LONG-TERM DEBT ..............................................      (124)      (147)           (215)
REPURCHASES OF COMMON STOCK .............................................      (409)      (239)           (103)
CASH DIVIDENDS ON COMMON STOCK ..........................................      (262)      (217)           (180)
REDEMPTION OF COMMON STOCK PURCHASE RIGHTS ..............................       --          --              (7)
- ----------------------------------------------------------------------------------------------------------------
NET CASH (USED FOR) FINANCING ACTIVITIES ................................      (544)       (80)           (555)
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................       925         32            (384)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..........................       540        508             892
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................................   $ 1,465    $   540         $   508
================================================================================================================

THE "NOTES TO FINANCIAL STATEMENTS" ARE AN INTEGRAL PART OF THIS STATEMENT.

28

 

 

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

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATED FINANCIAL STATEMENTS  include the accounts of AlliedSignal Inc. and
its  majority-owned  subsidiaries. The  preparation  of  consolidated  financial
statements in conformity with generally accepted accounting principles  requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent  assets  and liabilities  at
the  date of  the financial statements and the reported amounts of revenues  and
expenses during the reporting period. Actual results  could  differ  from  those
estimates. Certain reclassifications were made to  prior year amounts to conform
with the 1996 presentation.

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

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

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

COST IN  EXCESS  OF NET  ASSETS OF  ACQUIRED COMPANIES is  being amortized  on a
straight-line basis over appropriate periods ranging  from 20 to  40  years. The
cumulative  amount of  goodwill  amortized at December 31, 1996 and 1995 is $423
and $407 million, respectively.

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

ENVIRONMENTAL  expenditures  that relate to current  operations  are expensed or
capitalized as appropriate.  Expenditures  that relate to an existing  condition
caused by past  operations,  and which do not  contribute  to  current or future
revenue  generation,  are expensed.  Liabilities are recorded when environmental
assessments  are made or  remedial  efforts  are  probable  and the costs can be
reasonably  estimated.  The timing of these  accruals is generally no later than
the completion of feasibility  studies.  The liabilities for environmental costs
recorded in Accrued  Liabilities and Other  Liabilities at December 31, 1996 and
1995 were $120 and $410 million and $90 and $364 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  forward  agreements and  combination
options  (options  purchased  and  written as a unit)  used to hedge  assets and
liabilities, or net investments in foreign subsidiaries, are recognized in Other
Income (Expense) or Cumulative Foreign Exchange Translation Adjustment.

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

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

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

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

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.  Budd  Wheel & Brake  was sold in 1996 as part of the sale of the
Company's  worldwide  hydraulic and anti-lock  braking systems (ABS)  businesses
(braking  business).  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.

                                                                              29

 

 

The Company also made smaller acquisitions in 1996, 1995 and 1994.

NOTE 3 REPOSITIONING AND OTHER CHARGES

In the second  quarter of 1996,  the  Company  recorded a pretax  charge of $277
million  relating  to the  costs of  actions  to  reposition  some of its  major
business units. The repositioning  actions are intended to enhance the Company's
competitiveness   and   productivity   and  include   consolidating   production
facilities,  rationalizing  manufacturing  capacity and  optimizing  operational
capabilities.  As a result,  approximately 6,100 positions will be eliminated in
some plants and 2,900 positions will be added in others,  for a net reduction of
3,200  positions.  The  components  of the  repositioning  charge  include asset
write-downs  of $136  million,  severance  costs of $127  million and other exit
costs of $14 million.  The  repositioning  actions are generally  expected to be
completed by 1998. In 1996, cash  expenditures  for  repositioning  actions were
approximately $10 million, primarily for severance costs.

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

Repositioning  and other  charges  totaling $637 million are included as part of
Cost of Goods Sold for 1996.  Other  Income  (Expense)  for 1996  includes a $15
million credit for  repositioning  and other charges  representing  the minority
interest share of such charges. The total pretax impact of the repositioning and
other charges for 1996 is $622 million  (after-tax  $359  million,  or $1.27 per
share).

Cost of Goods Sold in 1995 includes a provision of $115 million  (after-tax  $71
million,  or $0.25 per share) relating to management's  decision to exit the ABS
business.  The provision consists of the revaluation of the Company's ABS assets
to their fair market value and certain other closure costs.

NOTE 4 GAIN ON SALE OF BUSINESS

In April 1996,  the Company  sold its braking  business to Robert  Bosch GmbH, a
privately-held  German company.  The braking  business had 1995 sales and income
from operations of  approximately  $2.0 billion and $154 million,  respectively.
The  Company  received  consideration  of  $1.5  billion,   subject  to  certain
post-closing adjustments.  The sale of the braking business resulted in a pretax
gain of $655 million (after-tax $368 million, or $1.30 per share).

In  December  1995,  the  Company  transferred  the  assets of its  high-density
polyethylene (HDPE) business joint venture, Paxon Polymer Company, L.P. (Paxon),
to Exxon Chemical  Company  (Exxon).  The transfer of the HDPE business to Exxon
resulted in a pretax gain of $71 million  (after-tax  $71 million,  or $0.25 per
share).

NOTE 5 OTHER INCOME (EXPENSE)

YEARS ENDED DECEMBER 31          1996    1995     1994
- --------------------------------------------------------------------------------
                                         
INTEREST INCOME AND OTHER       $ 94    $ 35     $ 29
MINORITY INTERESTS               (18)    (36)     (30)
FOREIGN EXCHANGE GAIN (LOSS)      11     (21)     (26)
- --------------------------------------------------------------------------------
                                $ 87    $(22)    $(27)
================================================================================

NOTE 6 INTEREST AND OTHER FINANCIAL CHARGES

YEARS ENDED DECEMBER 31          1996    1995     1994
- --------------------------------------------------------------------------------
                                        
TOTAL INTEREST AND OTHER
  FINANCIAL CHARGES             $209    $189     $166
LESS-- CAPITALIZED INTEREST      (23)    (21)     (23)
- --------------------------------------------------------------------------------
                                $186    $168     $143
================================================================================

NOTE 7 TAXES ON INCOME

YEARS ENDED DECEMBER 31          1996    1995     1994
- --------------------------------------------------------------------------------
INCOME BEFORE TAXES
ON INCOME
- --------------------------------------------------------------------------------
                                       
UNITED STATES                  $1,099   $1,101 $  973
FOREIGN                           454      160    138
- --------------------------------------------------------------------------------
                               $1,553   $1,261 $1,111
================================================================================

YEARS ENDED DECEMBER 31          1996    1995     1994
- ---------------------------------------------------------------------------------------

TAXES ON INCOME
- ---------------------------------------------------------------------------------------
                                        
UNITED STATES                   $359   $347     $297
FOREIGN                          174     39       55
- ---------------------------------------------------------------------------------------
                                $533   $386     $352
=======================================================================================

YEARS ENDED DECEMBER 31          1996    1995     1994
- ---------------------------------------------------------------------------------------
                                       
TAXES ON INCOME CONSIST OF:
CURRENT:
   UNITED STATES               $190    $118      $98
   STATE                         41      25       34
   FOREIGN                       89      44       40
- ---------------------------------------------------------------------------------------
                                320     187      172
- ---------------------------------------------------------------------------------------
DEFERRED:

   UNITED STATES                133     192      129
   STATE                         (5)     12       36
   FOREIGN                       85      (5)      15
- ---------------------------------------------------------------------------------------
                                213     199      180
- ---------------------------------------------------------------------------------------
                               $533    $386     $352
=======================================================================================

30

YEARS ENDED DECEMBER 31                             1996        1995        1994
- ---------------------------------------------------------------------------------------
                                                                   
THE PRINCIPAL ITEMS ACCOUNTING
  FOR THE DIFFERENCE IN TAXES ON
  INCOME COMPUTED AT THE U.S. 
  STATUTORY RATE AND AS RECORDED
  ON AN OVERALL BASIS ARE AS FOLLOWS:
STATUTORY U.S. FEDERAL INCOME
  TAX RATE                                          35.0%       35.0%       35.0%
TAXES ON FOREIGN EARNINGS OVER
  (UNDER) U.S. TAX RATE                               .4        (1.7)        (.6)
ASSET BASIS DIFFERENCES                              (.1)       (2.0)       (3.3)
NONDEDUCTIBLE AMORTIZATION                           2.1         1.1         1.0
STATE INCOME TAXES                                   1.3         1.6         3.9
TAX BENEFITS OF FOREIGN
  SALES CORPORATION                                 (1.9)       (1.5)       (1.4)
DIVIDENDS RECEIVED DEDUCTION                         (.2)        (.1)        (.1)
ESOP DIVIDEND TAX BENEFIT                            (.7)        (.8)        (.9)
ALL OTHER ITEMS-- NET                               (1.6)       (1.0)       (1.9)
- ---------------------------------------------------------------------------------------
                                                    34.3%       30.6%       31.7%
=======================================================================================

DECEMBER 31                              1996     1995
- ---------------------------------------------------------------------------------------
DEFERRED INCOME TAXES

- ---------------------------------------------------------------------------------------
                                           
INCLUDED IN THE FOLLOWING BALANCE
  SHEET ACCOUNTS:
OTHER CURRENT ASSETS                   $ 309    $ 431
OTHER ASSETS                             178      180
ACCRUED LIABILITIES                      (18)     (16)
DEFERRED INCOME TAXES                   (610)    (551)
- ---------------------------------------------------------------------------------------
                                       $(141)   $  44
=======================================================================================

DECEMBER 31                                1996     1995
- ---------------------------------------------------------------------------------------
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                        $(733)   $(719)
POSTRETIREMENT BENEFITS OTHER
  THAN PENSIONS                              764      761
POSTEMPLOYMENT BENEFITS                       69       71
INVESTMENT AND OTHER ASSET BASIS
  DIFFERENCES                               (474)    (346)
NONRECURRING ITEMS                           179      133
OTHER ACCRUED ITEMS                          424      378
FOREIGN NET OPERATING LOSSES                 188      241
U.S. CAPITAL LOSS                             --       14
DEFERRED FOREIGN GAIN                        (50)      --
UNDISTRIBUTED EARNINGS
  OF SUBSIDIARIES                            (67)     (64)
ALL OTHER ITEMS-- NET                       (404)    (373)
- ---------------------------------------------------------------------------------------
                                            (104)      96
VALUATION ALLOWANCE                          (37)     (52)
- ---------------------------------------------------------------------------------------
                                           $(141)     $44
=======================================================================================

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.

Deferred  income taxes have not been provided on  approximately  $326 million of
undistributed earnings of foreign affiliated companies,  which are considered to
be permanently reinvested.  Any U.S. taxes payable on foreign earnings which may
be remitted, however, will be substantially offset by foreign tax credits.

NOTE 8 SHORT-TERM INVESTMENTS

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

NOTE 9 ACCOUNTS AND NOTES RECEIVABLE

DECEMBER 31                              1996     1995
- ---------------------------------------------------------------------------------------
                                              
TRADE                                   $1,330   $1,477
OTHER                                      362      308
- ---------------------------------------------------------------------------------------
                                         1,692    1,785

LESS -- ALLOWANCE FOR DOUBTFUL
  ACCOUNTS AND REFUNDS                     (31)     (34)
- ---------------------------------------------------------------------------------------
                                        $1,661   $1,751
=======================================================================================

The Company is a party to agreements under which it can sell undivided interests
in designated  pools of trade  accounts  receivable up to $575 million  (average
outstanding was $517 and $500 million during 1996 and 1995,  respectively).  New
receivables  are sold under the agreements as previously  sold  receivables  are
collected. During 1996, this represented an average collection period of 45 days
or a replacement of receivables of  approximately  eight times. At both December
31, 1996 and 1995,  customer  accounts  receivable on the  Consolidated  Balance
Sheet have been reduced by $500 million  reflecting such sales. The Company acts
as an agent for the  purchasers  in the  collection  and  administration  of the
receivables.

NOTE 10 INVENTORIES

DECEMBER 31                            1996     1995
- ---------------------------------------------------------------------------------------
                                            
RAW MATERIALS                         $  538   $  650
WORK IN PROCESS                          762      769
FINISHED PRODUCTS                        814      747
SUPPLIES AND CONTAINERS                   88       98
- ---------------------------------------------------------------------------------------
                                       2,202    2,264

LESS --
PROGRESS PAYMENTS                       (126)    (145)
REDUCTION TO LIFO COST BASIS            (130)    (128)
- ---------------------------------------------------------------------------------------
                                      $1,946   $1,991
=======================================================================================

Inventories  valued at LIFO  amounted to $223  million at December  31, 1996 and
$286  million  at  December  31,  1995,   which  amounts  were  below  estimated
replacement cost by $130 and $128 million, respectively.

NOTE 11 OTHER CURRENT ASSETS

DECEMBER 31                            1996     1995
- ---------------------------------------------------------------------------------------
                                            
CURRENT-- DEFERRED TAXES                $309     $431
OTHER                                    157      177
- ---------------------------------------------------------------------------------------
                                        $466     $608
=======================================================================================

                                                                              31

 

 

NOTE 12 INVESTMENTS AND LONG-TERM RECEIVABLES

DECEMBER 31                            1996     1995
- ---------------------------------------------------------------------------------------
                                           
AFFILIATES(1)                          $379     $382
LONG-TERM RECEIVABLES                    94       97
- ---------------------------------------------------------------------------------------
                                       $473     $479
=======================================================================================

(1)  INCLUDES  UNREALIZED  HOLDING  GAINS OF $23 AND $44 MILLION AT DECEMBER 31,
     1996   AND   1995,   RESPECTIVELY,  ON  EQUITY  SECURITIES  CLASSIFIED   AS
     AVAILABLE-FOR-SALE.THE COST  BASIS OF THE EQUITY SECURITIES WAS $21 AND $25
     MILLION AT DECEMBER 31, 1996 AND 1995, RESPECTIVELY.

At December 31, 1996, the Company had a 50% partnership interest in UOP, a joint
venture accounted for under the equity method.  UOP is in the process technology
and catalyst  business.  Prior to December 28, 1995,  the Company also had a 50%
partnership  interest in Paxon,  a joint venture  accounted for under the equity
method.  On that date,  Paxon  transferred  the HDPE  business  to Exxon.  Paxon
manufactures and sells high-density polyethylene resins.

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
- ---------------------------------------------------------------------------------------
                                            
NET SALES                             $1,516   $1,251
INCOME FROM OPERATIONS                   265      165
INCOME BEFORE CUMULATIVE EFFECT OF
  CHANGE IN ACCOUNTING PRINCIPLE(1)      219      147
NET INCOME(1)(2)                         219      132
=======================================================================================

DECEMBER 31                                       1995
- ---------------------------------------------------------------------------------------
                                               
CURRENT ASSETS                                   $419
TOTAL ASSETS                                      986
CURRENT LIABILITIES                               373
NONCURRENT LIABILITIES                            325
EQUITY                                            288
=======================================================================================

(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).

NOTE 13 PROPERTY, PLANT & EQUIPMENT

DECEMBER 31                          1996       1995
- ---------------------------------------------------------------------------------------
                                            
LAND AND LAND IMPROVEMENTS         $   331    $   370
MACHINERY AND EQUIPMENT              5,760      6,528
BUILDINGS                            1,415      1,545
OFFICE FURNITURE AND EQUIPMENT         868        781
TRANSPORTATION EQUIPMENT               153        173
CONSTRUCTION IN PROGRESS               449        388
- ---------------------------------------------------------------------------------------
                                     8,976      9,785

LESS -- ACCUMULATED DEPRECIATION
  AND AMORTIZATION                  (4,757)    (5,043)
- ---------------------------------------------------------------------------------------
                                    $4,219     $4,742
=======================================================================================

NOTE 14 ACCRUED LIABILITIES

DECEMBER 31                            1996     1995
- ---------------------------------------------------------------------------------------
                                           
CUSTOMER ADVANCE PAYMENTS/DEPOSITS   $  127   $  182
INSURANCE                               102      113
POSTRETIREMENT BENEFITS OTHER
  THAN PENSIONS                         135      122
WAGES                                   315      267
OTHER                                 1,216    1,091
- ---------------------------------------------------------------------------------------
                                     $1,895   $1,775
=======================================================================================

NOTE 15 LONG-TERM DEBT AND CREDIT AGREEMENTS

DECEMBER 31                                 1996     1995
- ---------------------------------------------------------------------------------------
                                                  
EMPLOYEE STOCK OWNERSHIP
  PLAN REFUNDING NOTES, 6.957%
  AND 7.016%, DUE 1997                    $   --     $   44
EMPLOYEE STOCK OWNERSHIP
  PLAN FLOATING RATE NOTES,
  4.39% - 5.11%, DUE 1997 - 1999             164        203
6.75% NOTES DUE AUGUST 15, 2000              100        100
97/8% 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             116        129
ZERO COUPON BONDS AND MONEY
  MULTIPLIER NOTES, 13.0% - 14.26%,
  DUE 1997 - 2009                            229        214
91/2% DEBENTURES DUE JUNE 1, 2016            100        100
INDUSTRIAL DEVELOPMENT BOND
  OBLIGATIONS, 4.0% - 6.75%, MATURING
  AT VARIOUS DATES THROUGH 2026              103        105
OTHER (INCLUDING CAPITALIZED LEASES),
  1.07% - 15.3%, MATURING AT VARIOUS
  DATES THROUGH 2016                         156        122
- ---------------------------------------------------------------------------------------
                                           1,318      1,367

LESS-- UNAMORTIZED DISCOUNT                   (1)        (1)
- ---------------------------------------------------------------------------------------
                                          $1,317     $1,366
=======================================================================================

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

                                              LONG-TERM
AT DECEMBER 31, 1996                            DEBT(1)
- ---------------------------------------------------------------------------------------
                                             
1997                                          $   112
1998                                              247
1999                                              165
2000                                              172
2001                                               38
THEREAFTER                                        695
- ---------------------------------------------------------------------------------------
                                                1,429
LESS -- CURRENT PORTION                          (112)
- ---------------------------------------------------------------------------------------
                                               $1,317
=======================================================================================

(1) AMOUNTS ARE NET OF REPURCHASES.

The Company has two credit  agreements  (Credit  Agreements)  with a group of 20
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, 2001. 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
1997.  The banks'  commitments  to lend under the $375  million  364-Day  Credit
Agreement  terminate on June 27, 1997. The Company  intends to renegotiate  this
agreement  in 1997.  The  Company has agreed to pay  facility  fees of 0.07% per
annum and 0.05% 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
comply

32

     

 

 

with, or occurrence of, 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 17.5 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,  1996.  The Credit
Agreements presently serve as support for the issuance of commercial paper.

NOTE 16 LEASE COMMITMENTS

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

                                                LEASE
AT DECEMBER 31, 1996                         PAYMENTS
- ---------------------------------------------------------------------------------------
                                          
1997                                            $ 63
1998                                              58
1999                                              54
2000                                              45
2001                                              40
THEREAFTER                                       147
- ---------------------------------------------------------------------------------------
                                                $407
=======================================================================================

Rent  expense of $98,  $121 and $135  million was included in costs and expenses
for 1996, 1995 and 1994, respectively.

NOTE 17 FINANCIAL INSTRUMENTS

The Company,  as a result of its global operating and financing  activities,  is
exposed to changes in interest rates and foreign  currency  exchange rates which
may adversely  affect its results of  operations  and  financial  condition.  In
seeking to minimize the risks and/or costs associated with such activities,  the
Company  manages  exposure  to changes in interest  rates and  foreign  currency
exchange rates through its regular operating and financing  activities and, when
deemed appropriate,  through the use of derivative  financial  instruments.  The
instruments  utilized include forward,  option and swap agreements.  The Company
does not use financial  instruments for trading or other  speculative  purposes.
The Company had no  leveraged  financial  instruments  at December  31, 1996 and
1995.

At December 31, 1996 and 1995, interest rate swap agreements effectively changed
$300  million of  fixed-rate  debt at an average  rate of 9.53% in both years to
U.S. commercial paper based floating rate debt with an effective average rate of
7.94% and 8.24%,  respectively.  Based on their terms,  these agreements will be
terminated  by the  counterparty  if  short-term  interest  rates  drop  below a
predetermined  level.  Other  interest  rate swaps at December 31, 1996 and 1995
effectively changed $66 and $74 million, respectively, of London Interbank Offer
Rate  (LIBOR)  based  floating  rate debt at an average rate of 4.76% and 5.26%,
respectively,  to fixed rate debt with an  effective  average  rate of 7.00% and
6.92%,  respectively.  The Company's interest rate swaps mature through the year
2000.

The Company's exposure to changes in foreign currency exchange rates arises from
intercompany  loans  utilized  to  finance  foreign  subsidiaries,  receivables,
payables and firm  commitments  arising  from  international  transactions.  The
Company  attempts to have all such  transaction  exposures  hedged with internal
natural  offsets to the fullest  extent  possible and, once these  opportunities
have been exhausted, through derivative financial instruments with third parties
using forward or option  agreements.  The Company currently also uses derivative
financial  instruments  to hedge the  Company's  exposure  to changes in foreign
currency  exchange rates for the translated  U.S. dollar value of the net income
of a number of foreign subsidiaries. Forward and option agreements used to hedge
net  income  are  marked to market and  recognized  immediately  in income.  The
Company's  principal  currency  exposures relate to the French franc, the German
deutsche mark, the British pound and the U.S. dollar.  At December 31, 1996, the
Company  held or had written  foreign  currency  forward and option  agreements,
maturing  through  1998.  The Company only writes  foreign  currency  options in
combination  with  purchased  options as an integral  transaction  and  economic
alternative to using forward agreements.

Financial  instruments  expose  the  Company  to  counterparty  credit  risk for
nonperformance  and to market risk for changes in interest and  currency  rates.
The Company  manages  exposure to  counterparty  credit  risk  through  specific
minimum credit standards,  diversification  of counterparties  and procedures to
monitor  the  amount of credit  exposure.  The  Company's  financial  instrument
counterparties  are substantial  investment or commercial banks with significant
experience with such instruments. The Company also has procedures to monitor the
impact of market risk on the fair value and costs of its  financial  instruments
considering  reasonably  possible  changes in interest and currency  rates.  The
Company  manages  market risk by  restricting  the use of  derivative  financial
instruments  to  hedging  activities  and by  limiting  potential  interest  and
currency  rate  exposures  to amounts  that are not  material  to the  Company's
consolidated  results  of  operations  and  cash  flows.  Because  of the  above
practices and  procedures,  management  believes  that the Company's  credit and
market risk exposures from financial derivatives are not significant at December
31, 1996.

                                                                              33

 

 

The values of the Company's  outstanding  derivative  financial  instruments  at
December 31, 1996 and 1995 are as follows:

                                              NOTIONAL
                                             PRINCIPAL        FAIR      CARRYING
DECEMBER 31, 1996                               AMOUNT     VALUE(1)        VALUE
- ---------------------------------------------------------------------------------------
                                                               
INTEREST RATE SWAP
  AGREEMENTS HELD                                 $366        $ (1)         $--
FOREIGN CURRENCY FORWARD
   AGREEMENTS HELD                                 425          (1)          (1)
FOREIGN CURRENCY FORWARD
   AGREEMENTS WRITTEN                              420           2            4
FOREIGN CURRENCY OPTIONS HELD                      120           1            1
FOREIGN CURRENCY OPTIONS
   WRITTEN                                          76          (1)          (1)
=======================================================================================

DECEMBER 31, 1995

- ---------------------------------------------------------------------------------------
                                                               
INTEREST RATE SWAP
  AGREEMENTS HELD                             $  374         $ (4)         $ --
FOREIGN CURRENCY FORWARD
  AGREEMENTS HELD                                630           (4)           (4)
FOREIGN CURRENCY FORWARD
 AGREEMENTS WRITTEN                            1,311          (11)          (13)
=======================================================================================

(1) FAIR VALUES FOR FORWARD, OPTION AND INTEREST RATE SWAP CONTRACTS ARE BASED
    ON MARKET QUOTES.

The only  other  material  financial  instruments  that are not  carried  on the
Consolidated  Balance Sheet at amounts which approximate fair values are certain
debt  instruments.  The carrying  values of long-term  debt and related  current
maturities (excluding capitalized leases of $41 and $43 million at year-end 1996
and 1995,  respectively)  are $1,388 and $1,512  million and the fair values are
$1,560 and $1,733 million at December 31, 1996 and 1995, respectively.  The fair
values are estimated based on the quoted market price for the issues (if traded)
or based on current rates offered to the Company for debt of the same  remaining
maturity and characteristics.

NOTE 18 CAPITAL STOCK

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

The Company is  authorized  to issue up to  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 Board increased
the  Company's  repurchase  authority  by 50 million  shares of common  stock in
December  1996. As a result,  as of December 31, 1996, the Company had remaining
authority to  repurchase  from time to time up to 51.2 million  shares of common
stock.

 
                                                           COMMON
                                               SHARES      STOCK/
                                          OUTSTANDING     PAID-IN       TREASURY
                                         (IN MILLIONS)    CAPITAL          STOCK
- ---------------------------------------------------------------------------------------
                                                                  
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)
PURCHASED UNDER REPURCHASE
  PROGRAMS                                       (7.0)         --          (409)
USED FOR DIVIDEND
  REINVESTMENT PLAN                                .1          --             2
USED FOR EMPLOYEE BENEFIT
  PLANS (INCLUDING RELATED
  TAX BENEFITS)                                   6.7          58           109
USED FOR ACQUISITIONS                              .2          --             3
- ---------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996                       282.8      $2,905       $(1,953)
=======================================================================================

NOTE 19 STOCK OPTIONS AND AWARDS

The  Company  has a 1993 Stock Plan and a 1985  Stock  Plan  available  to grant
incentive and non-qualified  stock options,  stock  appreciation  rights (SARs),
restricted  shares and restricted units (Units) to officers and other employees.
The 1993 Stock Plan  provides for the annual grant of awards in an amount not in
excess of 1.5% of the total shares issued (including shares held in treasury) as
of December 31 of the year preceding the year of the award.  Any shares that are
available for awards that are not utilized in a given year will be available for
use in subsequent years. There were 4,102,156 and 3,597,248 shares available for
future  grants under the terms of the  Company's  stock option plans at December
31, 1996 and 1995, respectively.  Incentive stock options have a term determined
by  the  Management   Development  and  Compensation   Committee  of  the  Board
(Committee),   but  not  in  excess  of  ten  years  from  the  date  of  grant.
Non-qualified  stock options have been granted with terms of up to ten years and
one day. An option becomes exercisable at such times and in such installments as
set by the Committee.  Options  generally  become  exercisable over a three-year
period. SARs entitle an optionee to surrender unexercised stock options for cash
or stock equal to the excess of the fair market value of the surrendered  shares
over the  option  value of such  shares.  Units  have been  granted  to  certain
employees,  which  entitle  the holder to  receive  shares of common  stock.  At
December 31, 1996,  there were 1,177,680 Units  outstanding,  including  131,950
Units granted in 1996, the  restrictions  on which  generally lapse over periods
not exceeding ten years from date of grant.  Compensation  expense is recognized
over the restricted period.

34

 

 

The following table summarizes  information  about stock option activity for the
three years ended December 31, 1996:

                                                                            AVERAGE
                                                                           EXERCISE
                                                            NUMBER            PRICE
                                                        OF OPTIONS        PER SHARE
- ---------------------------------------------------------------------------------------
                                                                          
OUTSTANDING AT DECEMBER 31, 1993                        19,618,446           $24.95
GRANTED                                                  6,809,010            37.55
EXERCISED                                               (1,693,567)           19.32
LAPSED OR CANCELED                                        (344,720)           32.88
SURRENDERED UPON EXERCISE OF SARS                          (17,450)           21.41
- ---------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1994                        24,371,719            28.75
GRANTED                                                  6,399,590            36.53
EXERCISED                                               (4,199,415)           22.87
LAPSED OR CANCELED                                        (358,567)           34.75
- ---------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1995                        26,213,327            31.51
GRANTED                                                  4,718,270            51.20
EXERCISED                                               (5,001,777)           28.15
LAPSED OR CANCELED                                        (369,007)           42.02
- ---------------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1996                        25,560,813            35.65
=======================================================================================

The following table summarizes  information  about stock options  outstanding at
December 31, 1996:

                                                                    OPTIONS
                                   OPTIONS OUTSTANDING            EXERCISABLE
                    ----------------------------------     ----------------------------
                                                AVERAGE                   AVERAGE
RANGE OF                                       EXERCISE                  EXERCISE
EXERCISE                  NUMBER     AVERAGE      PRICE         NUMBER      PRICE
PRICES               OUTSTANDING     LIFE(1)  PER SHARE    EXERCISABLE  PER SHARE
- ---------------------------------------------------------------------------------------
                                                            
$14.35-$29.16          5,796,205         4.2     $21.62      5,796,205     $21.62
$32.00-$35.50          5,353,761         6.6      34.40      4,031,886      34.40
$35.57-$39.07          9,286,347         7.7      36.91      4,170,681      37.61
$42.50-$63.69          5,124,500         9.0      50.53        183,960      45.33
                      ----------                            ----------
                      25,560,813         6.9      35.65     14,182,732      30.27
=======================================================================================

(1) AVERAGE  REMAINING  CONTRACTUAL  LIFE IN YEARS.  THERE WERE  14,052,739  AND
12,659,343  OPTIONS  EXERCISABLE AT AVERAGE  EXERCISE PRICES PER SHARE OF $27.49
AND $23.55 AT DECEMBER 31, 1995 AND 1994, RESPECTIVELY.

As permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based  Compensation"  (SFAS No. 123),  effective for 1996, the Company
continues  to  account  for  stock  compensation  costs in  accordance  with the
provisions of Accounting  Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees".  Had  compensation  cost been determined based on the fair
value  at the  grant  dates  for  awards  under  the  Company's  stock  plans in
accordance  with SFAS No. 123, net income would have been reduced by $24 million
($0.09  per  share)  and  $15  million  ($0.05  per  share)  in 1996  and  1995,
respectively.  As required by SFAS No. 123,  the fair value of each option grant
is estimated on the date of grant using the  Black-Scholes  option pricing model
with the  following  assumptions  for 1996 and  1995,  respectively:  historical
dividend  yield of 1.8% in both years;  an expected  life of five years and five
and one-half years; historical volatility of 21% and 23% and a risk-free rate of
return of 5.52% and  7.21%.  The  weighted-average  fair  values of the  options
granted during 1996 and 1995 were $12.43 and $11.06 per share, respectively.

The Company also has a Stock Plan for Non-Employee  Directors  (Directors' Plan)
under which  restricted  shares and options are granted.  New directors  receive
grants of 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 from the date of grant.

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

Treasury  shares of common stock have been used upon exercise of stock  options.
Differences  between the cost of treasury  stock used and the total option price
of shares exercised have been reflected in retained earnings.

NOTE 20 CUMULATIVE FOREIGN EXCHANGE TRANSLATION ADJUSTMENT

DECEMBER 31                      1996    1995     1994
- ---------------------------------------------------------------------------------------
                                         
BALANCE AT BEGINNING OF YEAR     $61    $18      $(7)
TRANSLATION ADJUSTMENT AND
  IMPACT OF HEDGES               (59)    43       25
- ---------------------------------------------------------------------------------------
                                 $ 2    $61      $18
=======================================================================================

NOTE 21 COMMITMENTS AND CONTINGENCIES

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

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

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

NOTE 22 SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION

Cash and cash equivalents includes cash on hand and on deposit as well as highly
liquid debt instruments with maturities  generally of three months or less. Cash
payments  during the years 1996,  1995 and 1994 included  interest of $178, $183
and $121 million and income taxes of $221, $185 and $164 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:

                                                                              35

 

 

                                                  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)
=======================================================================================

The weighted average interest rate on short-term borrowings and commercial paper
outstanding at December 31, 1996 and 1995 was 6.0% and 7.0%, respectively.

NOTE 23 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The Company's U.S.  retiree  medical  programs  cover  employees who retire with
pension  eligibility  for  hospital,  professional  and other  medical  services
(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 1996,  1995 and 1994 the Company's  cost for providing  other  postretirement
benefits aggregated $121, $142 and $150 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 1996 were 6.75% to 9% for  indemnity
programs and 6% to 6.75% 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  one
percentage  point in each year would  increase  the  accumulated  postretirement
benefit  obligation as of December 31, 1996 by $121 million and the aggregate of
the service and interest cost component of net periodic  postretirement  benefit
cost for the year then ended by $12 million. The weighted-average  discount rate
used in determining the accumulated  postretirement benefit obligation was 7.75%
and 7.25% at December 31, 1996 and 1995, respectively.

Net periodic  postretirement  benefit cost for 1996,  1995 and 1994 included the
following components:

YEARS ENDED DECEMBER 31                            1996        1995        1994
- ---------------------------------------------------------------------------------------
                                                                   
SERVICE COST-BENEFITS ATTRIBUTED
  TO SERVICE DURING THE PERIOD                    $  24       $  20       $  27
INTEREST COST ON ACCUMULATED
  POSTRETIREMENT BENEFIT OBLIGATION                 110         133         133
NET AMORTIZATION                                    (14)        (12)        (10)
- ---------------------------------------------------------------------------------------
                                                    120         141         150
FOREIGN PLANS                                         1           1          --
- ---------------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT
  BENEFIT COST                                     $121        $142        $150
=======================================================================================

Presented  below are the plans'  status and amounts  recognized in the Company's
Consolidated Balance Sheet at December 31, 1996 and 1995:

DECEMBER 31                                               1996            1995
- ---------------------------------------------------------------------------------------
                                                                      
ACCUMULATED POSTRETIREMENT
  BENEFIT OBLIGATION:
  RETIREES                                               $1,054          $1,310
  FULLY ELIGIBLE ACTIVE PLAN
    PARTICIPANTS                                            126             184
  OTHER ACTIVE PLAN PARTICIPANTS                            353             455
- ---------------------------------------------------------------------------------------
                                                          1,533           1,949
UNRECOGNIZED PRIOR SERVICE COST                             115             161
UNRECOGNIZED NET GAIN (LOSS)                                274            (124)
- ---------------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT COST                      $1,922          $1,986
=======================================================================================

NOTE 24 PENSIONS

The Company's  pension plans, most of which are defined benefit plans and almost
all of which are  noncontributory,  cover substantially all employees.  Benefits
under  the  plans  are  generally  based  on  years of  service  and  employees'
compensation  during the last years of employment  or as a flat dollar  benefit.
Benefits are generally paid from funds previously  provided to trustees.  In the
Company's  principal U.S. plans, funds are contributed to a trustee as necessary
to provide for current service and for any unfunded projected benefit obligation
over a  reasonable  period.  To the  extent  that these  requirements  are fully
covered  by  assets  on hand  for a plan,  a  contribution  may not be made in a
particular year. At December 31, 1996,  approximately  61% of the assets of U.S.
plans  were held in  equity  securities,  with the  balance  primarily  in fixed
income-type securities.

Pension  expense  in  1996,  1995 and  1994  was  $88,  $115  and $109  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  1996,  1995 and 1994  included  the  following
components:

YEARS ENDED DECEMBER 31                       1996          1995           1994
- ---------------------------------------------------------------------------------------
                                                                   
SERVICE COST-BENEFITS EARNED
  DURING THE PERIOD                           $ 133       $   107         $ 132
INTEREST COST ON PROJECTED
  BENEFIT OBLIGATION                            398           395           363
ACTUAL RETURN ON PLAN ASSETS                   (841)       (1,019)          (65)
NET AMORTIZATION AND DEFERRAL                   388           616          (338)
- ---------------------------------------------------------------------------------------
NET PERIODIC PENSION COST FOR
  DEFINED BENEFIT PLANS                          78            99            92
FOREIGN PLANS AND OTHER                          10            16            17
- ---------------------------------------------------------------------------------------
NET PERIODIC PENSION COST                     $  88       $   115         $ 109
=======================================================================================

The assumed rate of return for the Company's U.S.  defined benefit pension plans
was 9.5% in 1996 and 9% in 1995 and  1994.  The  assumed  discount  rate used in
calculating  the projected  benefit  obligations at December 31, 1996,  1995 and
1994 was 7.75%, 7.25% and 8.75%,  respectively.  In addition, the assumed annual
increase in compensation over employees'  estimated  remaining working lives was
5% in 1996, 1995 and 1994.

36

 

 

Presented  below are the plans'  funded  status and  amounts  recognized  in the
Company's  Consolidated  Balance  Sheet at  December  31,  1996 and 1995 for its
significant defined benefit pension plans:

                                                           1996                                  1995
                                             ----------------------------------------------------------------------
                                             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                                           $ 3,715           $   832              $ 3,813           $   805
  NONVESTED                                            256                65                  244               113
- -------------------------------------------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION                     $ 3,971           $   897              $ 4,057           $   918
===================================================================================================================
PROJECTED BENEFIT OBLIGATION                       $ 4,474           $   933              $ 4,703           $   953
LESS -- FAIR VALUE OF ASSETS                         5,116               711                4,694               699
- -------------------------------------------------------------------------------------------------------------------
OVER (UNDER) FUNDED PLANS                              642              (222)(1)               (9)             (254)
UNRECOGNIZED TRANSITION (ASSET) LIABILITY               (6)              (24)                --                 (34)
UNRECOGNIZED NET (GAIN) LOSS                          (549)              (55)                  85                26
UNRECOGNIZED PRIOR SERVICE COST                        (10)               90                  (11)               86
- -------------------------------------------------------------------------------------------------------------------
PREPAID (ACCRUED) PENSION COST                     $    77           $  (211)             $    65           $  (176)
===================================================================================================================

(1)  INCLUDES  $220  MILLION  FOR  UNFUNDED  FOREIGN AND  SUPPLEMENTAL  DOMESTIC
     PENSION PLANS.

Note 25 SEGMENT FINANCIAL DATA

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

                                                                                             CORPORATE
                                                                          ENGINEERED               AND
                                                 AEROSPACE   AUTOMOTIVE    MATERIALS   UNALLOCATED (1)         TOTAL
- --------------------------------------------------------------------------------------------------------------------
                                                                                               
NET SALES(2)                             1996     $  5,714     $  4,240     $  4,013          $      4      $ 13,971
                                         1995        5,084        5,549        3,713              --          14,346
                                         1994        4,623        4,922        3,272              --          12,817
- --------------------------------------------------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT EXPENSE         1996          173           49          123              --             345
                                         1995          154           80          109                10           353
                                         1994          126           73          110                 9           318
- --------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION            1996          186          127          207                31           551
                                         1995          186          164          185                28           563
                                         1994          183          148          171                21           523
- --------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS(3)                1996          359          900          438              (188)        1,509
                                         1995          551          292          563              (146)        1,260
                                         1994          458          411          409              (126)        1,152
- --------------------------------------------------------------------------------------------------------------------
NET INCOME(3)(4)                         1996          206          521          361               (68)        1,020
                                         1995          303          146          473               (47)          875
                                         1994          260          215          330               (46)          759
- --------------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES                     1996          143          212          336                64           755
                                         1995          131          214          334                67           746
                                         1994          148          245          232                14           639
- --------------------------------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS                      1996        5,172        2,729        3,453             1,475        12,829
                                         1995        5,079        3,813        3,302               271        12,465
                                         1994        5,104        3,276        2,562               379        11,321
====================================================================================================================

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 $1,172, $1,107 AND $1,089 MILLION FOR EACH OF THE RESPECTIVE
     YEARS.

(3)  INCLUDES IN 1996 A PRE- AND AFTER-TAX PROVISION FOR REPOSITIONING AND OTHER
     CHARGES FOR AEROSPACE OF $292 AND $179 MILLION,  AUTOMOTIVE OF $117 AND $49
     MILLION,  ENGINEERED  MATERIALS OF $129 AND $71 MILLION AND  CORPORATE  AND
     UNALLOCATED  OF $99 AND $60 MILLION,  RESPECTIVELY.  ALSO  INCLUDES IN 1996
     PRE-  AND  AFTER-TAX  GAIN ON SALE OF  BRAKING  BUSINESS  OF $655  AND $368
     MILLION FOR AUTOMOTIVE. INCLUDES IN 1995 A PRE- AND AFTER-TAX PROVISION FOR
     REPOSITIONING CHARGE OF $115 AND $71 MILLION FOR AUTOMOTIVE, AND A PRE- AND
     AFTER-TAX  GAIN OF $71 AND $71 MILLION  FOR  ENGINEERED  MATERIALS.

(4)  AN INTEREST CHARGE IS MADE BY CORPORATE OFFICE TO THE SEGMENTS ON THE BASIS
     OF  RELATIVE  INVESTMENT.  TAXES ON INCOME ARE  GENERALLY  INCLUDED  IN THE
     SEGMENTS  WHICH  GAVE  RISE TO THE TAX  EFFECTS  AND  EQUITY  IN  INCOME OF
     AFFILIATED  COMPANIES IS INCLUDED IN THE SEGMENTS IN WHICH THESE  COMPANIES
     OPERATE.

                                                                              37

 

 

Note 26 GEOGRAPHIC AREAS -- FINANCIAL DATA

                                                                                         ADJUSTMENTS
                              UNITED                                           OTHER             AND
                           STATES(1)          CANADA          EUROPE   INTERNATIONAL    ELIMINATIONS            TOTAL
- ---------------------------------------------------------------------------------------------------------------------
                                                                                             
NET SALES(2)    1996         $10,774            $252        $  2,397        $    548       $    --           $ 13,971
                1995          10,734             230           2,740             642            --             14,346
                1994           9,739             202           2,283             593            --             12,817
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME(3)   1996             736              28             212              44            --              1,020
                1995             734              31              58              52            --                875
                1994             654              23              65              17            --                759
- ---------------------------------------------------------------------------------------------------------------------
ASSETS          1996           9,880             302           2,501             729            (583)          12,829
                1995           9,378             219           2,964             588            (684)          12,465
                1994           8,977             205           2,295             543            (699)          11,321
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES     1996           8,059             132             798             243            (583)           8,649
                1995           7,623             106           1,535             293            (684)           8,873
                1994           7,290              87           1,319             342            (699)           8,339
=====================================================================================================================

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 $2,399,  $2,119 AND
     $1,818 MILLION FOR EACH OF THE RESPECTIVE YEARS.

(3)  INCLUDES IN 1996 AN AFTER-TAX PROVISION FOR REPOSITIONING AND OTHER CHARGES
     FOR THE UNITED  STATES OF $356 AND EUROPE OF $3 MILLION.  ALSO  INCLUDES IN
     1996 AN AFTER-TAX  GAIN ON THE SALE OF THE BRAKING  BUSINESS FOR THE UNITED
     STATES OF $244 AND EUROPE OF $143 MILLION AND A LOSS FOR OTHER INT'L OF $19
     MILLION.  INCLUDES IN 1995 AN AFTER-TAX  GAIN FOR THE UNITED  STATES OF $42
     MILLION AND A LOSS FOR EUROPE OF $42 MILLION.

Note 27 UNAUDITED QUARTERLY FINANCIAL INFORMATION

                                            1996                                             1995
- -----------------------------------------------------------------------------------------------------------------------
                   MAR. 31   JUNE 30      SEPT. 30   DEC. 31       YEAR  MAR. 31  JUNE 30  SEPT. 30   DEC. 31      YEAR
- -----------------------------------------------------------------------------------------------------------------------
                                                                                      
NET SALES           $3,778    $3,347        $3,348    $3,498    $13,971   $3,419   $3,630    $3,499    $3,798   $14,346
GROSS PROFIT           766       112(1)        750       737      2,365      672      728       699       593     2,692
NET INCOME             225       272(1)(2)     253       270      1,020      198      227       217       233       875
PER SHARE              .80       .96(1)(2)     .90       .96       3.61      .70      .80       .77       .83      3.09
DIVIDENDS PAID        .225      .225          .225      .225        .90     .195     .195      .195      .195       .78
MARKET PRICE(3)                                                                                                          
HIGH                 59.25     60.38         66.38     74.38      74.38    39.88    44.50     47.13     49.88     49.88
LOW                  47.13     54.25         52.75     61.88      47.13    33.38    38.38     43.13     41.13     33.38
=======================================================================================================================

(1)  INCLUDES A PROVISION OF $637 MILLION (AFTER-TAX $359 MILLION,  OR $1.27 PER
     SHARE)  FOR  REPOSITIONING  AND  OTHER  CHARGES.  SEE  NOTE 3 OF  NOTES  TO
     FINANCIAL  STATEMENTS  FOR FURTHER  INFORMATION.

(2)  INCLUDES AN AFTER-TAX GAIN OF $368 MILLION, OR $1.30 PER SHARE, ON THE SALE
     OF THE BRAKING  BUSINESS.  SEE NOTE 4 OF NOTES TO FINANCIAL  STATEMENTS FOR
     FURTHER  INFORMATION.  

(3)  FROM  COMPOSITE  TAPE -- STOCK  IS  PRIMARILY TRADED  ON THE NEW YORK STOCK
     EXCHANGE.

Report of Independent Accountants

PRICE WATERHOUSE LLP [LOGO]

January 31, 1997

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, 1996 and 1995,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 1996,  in  conformity  with  generally  accepted  accounting
principles.  These financial  statements are the responsibility of the Company's
management;  our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion  expressed
above.

PRICE WATERHOUSE LLP

Morristown, NJ

38

 

 

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

Years ended December 31             1996    1995    1994    1993    1992    1991    1990    1989    1988    1987
- ----------------------------------------------------------------------------------------------------------------
                                                                               
FOR THE YEAR                                                                                                    
- ----------------------------------------------------------------------------------------------------------------
NET SALES                        $13,971 $14,346 $12,817 $11,827 $12,042 $11,831 $12,343 $11,942 $11,909 $11,116
INCOME (LOSS) FROM CONTINUING                                                                                   
 OPERATIONS(1)                     1,020     875     759     656     535    (273)    462     528     463     515
NET INCOME (LOSS)(2)               1,020     875     759     411    (712)   (273)    462     528     463     656
PER SHARE OF COMMON STOCK:                                                                                      
EARNINGS (LOSS) FROM                                                                                            
 CONTINUING OPERATIONS              3.61    3.09    2.68    2.31    1.90   (1.00)   1.67    1.78    1.55    1.53
NET EARNINGS (LOSS)                 3.61    3.09    2.68    1.45   (2.52)  (1.00)   1.67    1.78    1.55    1.95
DIVIDENDS                            .90     .78   .6475     .58     .50     .80     .90     .90     .90     .90

AT YEAR-END                                                                                                     
- ----------------------------------------------------------------------------------------------------------------
NET WORKING CAPITAL              $ 2,143 $ 1,086 $ 1,194 $ 1,078 $ 1,414 $   526 $   892 $ 1,065 $ 1,040 $   722
PROPERTY, PLANT AND                                                                                             
 EQUIPMENT -- NET                  4,219   4,742   4,260   4,094   3,897   3,638   3,584   3,321   3,214   3,330
TOTAL ASSETS                      12,829  12,465  11,321  10,829  10,756  10,382  10,456  10,342  10,069  10,321
LONG-TERM DEBT                     1,317   1,366   1,424   1,602   1,777   1,914   2,051   1,903   2,044   2,017
SHAREOWNERS' EQUITY                4,180   3,592   2,982   2,390   2,251   2,983   3,380   3,412   3,268   3,129
BOOK VALUE PER SHARE OF                                                                                         
 COMMON STOCK                      14.78   12.70   10.53    8.42    7.93   10.79   12.55   11.77   11.05   10.44
AVERAGE INVESTMENT(3)              6,468   5,598   4,848   4,506   4,939   6,771   6,723   6,520   6,629   6,859
COMMON SHARES OUTSTANDING                                                                                       
 (IN MILLIONS)                     282.8   282.8   283.1   283.8   283.8   276.3   269.4   290.0   295.9   299.9
COMMON SHAREOWNERS OF RECORD      77,856  79,046  82,095  84,248  84,254  91,492  97,210 102,042 111,402 109,322
EMPLOYEES(4)                      76,600  88,500  87,500  86,400  89,300  98,300 105,800 107,100 109,550 115,300

FINANCIAL STATISTICS(5)                                                                                         
- ----------------------------------------------------------------------------------------------------------------
RETURN ON SALES (INCOME FROM                                                                                    
 OPERATIONS)                        10.8     8.8     9.0     8.1     3.4    (2.5)     5.9    8.0     5.7     6.8
RETURN ON SALES (AFTER-TAX)          7.3     6.1     5.9     5.5     4.4    (2.3)     3.7    4.4     3.9     4.6
RETURN ON AVERAGE INVESTMENT                                                                                    
 (AFTER-TAX)                        17.5    17.4    17.5    16.6    13.8    (1.3)     9.6   11.0    10.3    10.1
RETURN ON AVERAGE SHAREOWNERS'                                                                                  
 EQUITY (AFTER-TAX)                 26.6    26.7    28.9    30.6    26.4    (8.4)    13.9   15.6    14.5    14.5
INTEREST COVERAGE RATIO              7.6     6.5     6.8     5.1     3.3     (.9)     2.6    3.0     2.8     3.6
LONG-TERM DEBT AS A PERCENT OF                                                                                  
 TOTAL CAPITAL                      22.2    25.6    30.4    37.9    40.5    34.9     33.6   30.8    33.2    33.9
TOTAL DEBT AS A PERCENT OF TOTAL                                                                                
 CAPITAL                            29.5    33.7    34.1    42.7    44.7    43.9     40.4   35.7    35.9    39.0

FINANCIAL STATISTICS(5)(6)                                                                                      
- ----------------------------------------------------------------------------------------------------------------
RETURN ON SALES (INCOME FROM                                                                                    
 OPERATIONS)                        10.7     9.1     9.0     7.9     6.5     4.7      5.9    8.0     7.4     6.8
RETURN ON SALES (AFTER-TAX)          7.2     6.1     5.9     5.5     4.5     2.9      3.7    4.4     4.3     3.9
RETURN ON AVERAGE INVESTMENT                                                                                    
 (AFTER-TAX)                        17.4    17.4    17.5    16.6    13.9     7.8      9.6   11.0    10.9     8.9
RETURN ON AVERAGE SHAREOWNERS'                                                                                  
 EQUITY (AFTER-TAX)                 26.3    26.7    28.9    30.5    26.7    10.5     13.9   15.6    15.9    12.2
INTEREST COVERAGE RATIO              7.5     6.8     6.8     5.0     3.3     2.1      2.6    3.0     2.9     3.2
LONG-TERM DEBT AS A PERCENT OF                                                                                  
 TOTAL CAPITAL                      22.2    25.6    30.4    37.9    40.5    34.9     33.6   30.8    33.2    33.9
TOTAL DEBT AS A PERCENT OF TOTAL                                                                                
 CAPITAL                            29.5    33.7    34.1    42.7    44.7    43.9     40.4   35.7    35.9    39.0
================================================================================================================

(1)  IN 1996,  INCLUDES THE EFFECT OF A PROVISION  FOR  REPOSITIONING  AND OTHER
     CHARGES, AS WELL AS A GAIN ON THE SALE OF THE BRAKING BUSINESS RESULTING IN
     A NET GAIN OF $33 MILLION  (AFTER-TAX $9 MILLION,  OR $0.03 PER SHARE).  IN
     1992, INCLUDES THE EFFECT OF A PROVISION FOR REPOSITIONING  CHARGES AS WELL
     AS A GAIN ON THE SALE OF COMMON  STOCK OF UNION TEXAS  PETROLEUM  HOLDINGS,
     INC. (UNION TEXAS)  RESULTING IN A NET CHARGE OF $11 MILLION  (AFTER-TAX $6
     MILLION,  OR $0.02 PER SHARE). IN 1991,  INCLUDES THE EFFECT OF A PROVISION
     FOR  REPOSITIONING  CHARGES AS WELL AS GAINS ON ASSET  SALES BY UNION TEXAS
     RESULTING IN A NET CHARGE OF $838 MILLION (AFTER-TAX $615 MILLION, OR $2.25
     PER SHARE). IN 1988, INCLUDES AN AFTER-TAX CHARGE OF $125 MILLION, OR $0.42
     PER SHARE, FOR REPOSITIONING  CHARGES, AN AFTER-TAX GAIN OF $36 MILLION, OR
     $0.12 PER SHARE, FROM THE SALE OF THE COMPANY'S INVESTMENT IN AKEBONO BRAKE
     INDUSTRY  COMPANY LTD. AND AN AFTER-TAX  GAIN OF $81 MILLION,  OR $0.27 PER
     SHARE, FROM NONRECURRING ITEMS. IN 1987, INCLUDES THE EFFECT OF THE SALE OF
     COMMON  STOCK BY  UNION  TEXAS  WHICH  RESULTED  IN A GAIN OF $108  MILLION
     (AFTER-TAX $82 MILLION, OR $0.24 PER SHARE).

(2)  INCLUDES IN 1993 THE  CUMULATIVE  AFTER-TAX  PROVISION  FOR THE ADOPTION OF
     FASB NO.  112 OF $245  MILLION,  OR $0.86 PER 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 PER SHARE.

(3)  INVESTMENT  IS DEFINED AS  SHAREOWNERS'  EQUITY  AND  NON-CURRENT  DEFERRED
     TAXES-NET PLUS TOTAL DEBT.

(4)  INCLUDES  EMPLOYEES  AT  FACILITIES  OPERATED  FOR THE U.S.  DEPARTMENT  OF
     ENERGY.

(5)  THE RETURNS AND INTEREST COVERAGE RATIO EXCLUDE THE IMPACT ON INCOME OF THE
     CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES.

(6)  THE RETURNS AND INTEREST  COVERAGE RATIO EXCLUDE THE IMPACT OF NONRECURRING
     ITEMS IN 1993,  PROVISIONS FOR  REPOSITIONING  CHARGES IN 1996, 1995, 1992,
     1991 AND 1988,  GAIN ON THE SALE OF THE BRAKING  BUSINESS IN 1996,  GAIN ON
     THE TRANSFER OF THE HDPE BUSINESS TO EXXON IN 1995,  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
AlliedSignal Technical Services Corporation......................    Delaware        Common Stock      100

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

                                                                      EXHIBIT 23
 
                       CONSENT OF INDEPENDENT ACCOUNTANTS
 
     We hereby consent  to the  incorporation by reference  in the  Prospectuses
constituting  part of AlliedSignal  Inc.'s Registration Statements  on Forms S-8
(Nos. 33-09896,  33-51455,  33-55410, 33-58345,  33-58347,  33-60261,  33-62963,
33-64295  and  333-14673),  on  Forms S-3  (Nos.  33-13211,  33-14071, 33-55425,
33-64245 and 333-22355) and on Form S-8 (filed as an amendment to Form S-14, No.
2-99416-01) of our report dated January 31,  1997 appearing in the  1996  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, 1996.
 
PRICE WATERHOUSE LLP
 
Morristown, New Jersey
February 28, 1997

 

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

          (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1996,

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

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

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

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

Dated: January 23, 1997

 

 

                                POWER OF ATTORNEY
                                -----------------

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

          (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1996,

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

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

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

                                                /s/   Hans W. Becherer
                                                ------------------------------
                                                      Hans W. Becherer
Dated: January 23, 1997

 

 

                                POWER OF ATTORNEY
                                -----------------

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

          (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1996,

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

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

Dated: January 23, 1997

 

 

                                POWER OF ATTORNEY

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

          (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1996,

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

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

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

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

Dated: January 23, 1997

 

 

                                POWER OF ATTORNEY

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

          (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1996,

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

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

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

                                                /s/   Robert P. Luciano
                                                ------------------------------
                                                      Robert P. Luciano
Dated: January 23, 1997

 

 

                                POWER OF ATTORNEY

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

          (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1996,

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

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

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

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

Dated: January 23, 1997

 

 

                                POWER OF ATTORNEY

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

          (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1996,

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

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

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

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

Dated: January 23, 1997

 

 

                                POWER OF ATTORNEY

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

          (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1996,

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

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

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

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

Dated: January 23, 1997

 

 

                                POWER OF ATTORNEY

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

          (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1996,

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

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

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

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

Dated: January 23, 1997

 

 

                                POWER OF ATTORNEY

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

          (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1996,

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

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

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

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

Dated: January 23, 1997

 

 

                                POWER OF ATTORNEY

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

          (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1996,

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

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

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

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

Dated: January 23, 1997

 

 

                                POWER OF ATTORNEY

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

          (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1996,

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

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

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

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

Dated: January 23, 1997

 

 

                                POWER OF ATTORNEY

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

          (i) to sign the Company's Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1996,

          (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 therewil h,

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 confuming all that said attorneys-in-fact and
agents, or any of them, or their or his or her substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.

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

Dated: January 23, 1997

  

 5

     This schedule contains summary financial information extracted from the
consolidated balance sheet at December 31. 1996 and the consolidated statement
of income for the year ended December 31. 1996 and is qualified in its entirety
by reference to such financial statements.

                          1,000

                         YEAR
                     DEC-31-1996
                          DEC-31-1996
                                1,465
                            301
                         1,330
                             31
                           1,946
                      5,839
                                8,976
                        4,757
                       12,829
                 3,696
                               1,317
                                358
                     0
                               0
                            3,822
          12,829
                               13,971
                      13,971
                                 11,606
                         11,606
                           0
                           0
                       186
                        1,553
                             533
                    1,020
                             0
                            0
                                  0
                           1,020
                           3.61
                              0