MANAGEMENT'S DISCUSSION AND ANALYSIS
AlliedSignal Inc.

1994 COMPARED WITH 1993

IN 1994  THE  COMPANY  DEVELOPED  NEW  INITIATIVES  TO  IMPROVE  EFFICIENCY  AND
ELIMINATE WASTE,  SHARPEN ITS FOCUS ON CUSTOMER  SATISFACTION AND TARGET FOREIGN
GROWTH  OPPORTUNITIES.  PRODUCTIVITY  PROGRAMS  STARTED SINCE 1991  CONTINUED TO
ENHANCE AND GROW THE BUSINESS.  One new initiative -- Operational  Excellence --
will enhance productivity  programs by redesigning the Company's basic processes
to remove variations and improve manufacturing yields as well as by implementing
measurement tools to monitor our progress. Scrap and rework will be reduced from
the  design  phase  to  the  customer's  acceptance  of  our  products.  Another
initiative  -- Customer  Partnerships  -- involves  customers in  designing  the
Company's  products.  This program  strengthens  customer  relationships,  while
reducing cycle times in  engineering,  manufacturing  and product  support.  The
Company will start training  employees in 1995 in Total Quality Leadership Phase
II to provide  natural work teams with  analytical  tools for achieving  process
improvements. Previous actions -- forming commodity purchasing teams, partnering
with  suppliers,  sharing common  services  throughout  the Company,  cycle time
reductions and  rationalizing  the  organization  -- continued to move ahead and
generated significant savings.  Mainly as a result of these actions, the Company
had significantly higher operating margins in 1994.

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

  *  Aerospace  acquired Textron's  Lycoming Turbine  Engine  Division (Lycoming
Engine) in October 1994 for $375 million in cash and the  assumption  of certain
liabilities.  Lycoming  Engine is expected  to have 1995 sales of  approximately
$450 million.  This acquisition extends the Engines group's product offerings in
the  robust  regional  aircraft  market  as well as into  helicopter  and  other
commercial and military  applications for turbine  engines.  To reduce costs and
improve  competitiveness  in its core product lines,  Aerospace  consolidated 12
businesses  into  four  integrated  units  and  merged  its  sales  and  service
organizations  into a single group.  During the year  Aerospace  introduced  new
high-technology  products  to enhance  flight  safety and also  agreed to form a
number of strategic  alliances in Japan and China to better position itself as a
global  supplier  and to  secure  a share  of the  fast-growing  markets  in the
Asian-Pacific  region.  The Company had a strong bidding success rate during the
year; it was awarded 64% of new programs bid.

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

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

THE BOARD OF DIRECTORS VOTED TO INCREASE THE REGULAR  QUARTERLY  DIVIDEND ON THE
COMMON  STOCK BY 16%,  FROM $0.1675 TO $0.195 PER SHARE.  The dividend  increase
will be  effective  in the first  quarter of 1995.  The Company  had  previously
increased its regular quarterly dividend by 16% in the second quarter of 1994.

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

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

INCOME FROM  OPERATIONS of $1,152  million in 1994 improved by $198 million,  or
21%.  Excluding the nonrecurring items in 1993 (see Note 3 of Notes to Financial
Statements for information), income from operations improved by $214 million, or
23%.  Aerospace's income increased 12%; Automotive was 17% higher and Engineered
Materials had a 30% gain.  Profit margins increased from 7.9% in 1993 to 9.0% in
1994 and productivity (the constant dollar basis relationship of sales to costs)
increased by 6.2% over last year reflecting business consolidations,  cycle time
reductions,  materials management initiatives and unit sales increases.  See the
detailed discussion of net income below for information by industry segment.

                                                                              19



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

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

THE  EFFECTIVE TAX RATE in 1994 was 31.7%  compared with 27.9% in 1993.  The 3.8
percentage  point increase in 1994 was due to a higher level of earnings subject
to the U.S. statutory rate, additional  non-deductible  expenses in 1994 and the
absence   of  the   favorable   impact   of  a  rate   increase   on  the   1993
beginning-of-the-year deferred tax balances as a result of the 1993 Tax Act. See
Note 7 of Notes to Financial Statements for further information.

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

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

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



                                                  ADJUSTED
AEROSPACE       NET SALES       NET INCOME      NET INCOME
- ----------------------------------------------------------
                                           
1994              $ 4,623           $  260          $  260
1993                4,530              224             228
- ----------------------------------------------------------
Increase          $    93           $   36          $   32
- ----------------------------------------------------------





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

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


                                                            1992    1993    1994
                                                            ----    ----    ----
 
                                                                   
                                                            12.0    11.8    12.8

 
- ------------
 
* Baseline is $10 billion.
 
[GRAPHIC REPRESENTATION  of  Capital  Expenditures/R&D  (dollars  in  millions),
expressed numerically below.]
 


                                                          1992     1993     1994
                                                          -----    -----    ----
 
                                                                   
Capital expenditures...................................     691      718     639
Company-funded R&D.....................................     320      313     318
                                                          -----    -----    ----
     Total.............................................   1,011    1,031     957
                                                          -----    -----    ----


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

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

     The U.S.  defense budget is expected to continue to decline for a number of
years.  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 sales
will decline as rapidly as the defense budget because of its strong  competitive
position on various programs.  The Company's ability to successfully  retain and
compete  for such  business is highly  dependent  on its  technical  excellence,
management proficiency, strategic alliances and cost-effective performance.

     The Company believes that the cyclical downturn for the commercial aircraft
industry  will reach  bottom in 1995 and may show a small  improvement  in 1996.
Regional  airline traffic grew  significantly  and new regional  aircraft orders
were higher in 1994.  Aftermarket  shipments to the major airlines were slightly
lower than last year,  in part  because the  airlines  have  continued to reduce
excess inventories.

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

20



     At December 31, 1994 and 1993 the Company had firm orders for its aerospace
products  from the U.S. and foreign  governments  of $1,803 and $1,861  million,
respectively.  Total backlog,  including commercial contracts,  at year-end 1994
and 1993 was $4,730 and $4,773 million,  respectively.  The Company  anticipates
that  approximately  $2,681  million  of the total 1994  backlog  will be filled
during 1995.



                                                     ADJUSTED
AUTOMOTIVE         NET SALES       NET INCOME      NET INCOME
- -------------------------------------------------------------
                                              
1994                 $ 4,922           $  223          $  223
1993                   4,506              226             184
- -------------------------------------------------------------
Increase/(Decrease)  $   416           $   (3)         $   39
- -------------------------------------------------------------


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

     Automotive's  adjusted net income increased by 21%, reflecting higher sales
for  turbochargers,  braking  systems,  truck brakes and air bags. OE sales were
very strong in the North American market, and European  businesses  strengthened
due to the  economic  turnaround  occurring  mainly in France and Spain.  Income
growth  was  limited  by  temporary  capacity  constraints  in the  turbocharger
business.  The Company will be expanding a number of turbocharger  facilities in
1995  to  meet   the   customer   demand.   Productivity   improvements,   plant
rationalization and materials management throughout the segment also contributed
to the significantly higher earnings.

     Sales in 1995 are expected to be moderately  higher due to a modest rise in
North American OE sales volume, a stronger European economy,  continued strength
for  turbochargers,  air bags  and ABS,  acquisitions  and a  somewhat  improved
worldwide aftermarket volume.



                                                          ADJUSTED
ENGINEERED MATERIALS    NET SALES       NET INCOME      NET INCOME
- ------------------------------------------------------------------
                                                   
1994                      $ 3,272           $  331          $  331
1993                        2,791              269             272
- ------------------------------------------------------------------
Increase                  $   481           $   62          $   59
- ------------------------------------------------------------------


     Engineered  Materials'  sales  increased 17% because of strong  automotive,
housing,  industrial and electronics markets. Higher sales volumes of industrial
and carpet  fibers also reflect  shipments  from the new  polyester  facility in
France and the acquisition of a carpet nylon business in Europe.  Laminates grew
significantly  through continued  globalization and market share gains. Fluorine
products  had  improved  sales  of  environmentally-safer   CFC  substitutes  as
additional  capacity  was  added  during  the  year and as a  result  of  recent
acquisitions.  Environmental  catalysts  had strong  sales to the OE  automotive

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


                                                            1992    1993    1994
                                                            ----    ----    ----
 
                                                                   
                                                             535     656     759

 
- ------------
 
*   Before cumulative effect  of changes in  accounting principles. Baseline  is
   $400 million.
 
[GRAPHIC  REPRESENTATION of Earnings  Per Share* (dollars  per share), expressed
numerically below.]
 


                                                           1992     1993    1994
                                                           -----    ----    ----
 
                                                                   
                                                            1.90     2.31    2.68


- ------------
 
*   Before cumulative effect  of changes in  accounting principles.

industry. Plastics had higher sales to the automotive, packaging and distributor
markets.  Amorphous  metals  expanded  sales  to the  article  surveillance  and
transformer markets.

     Adjusted  net income for  Engineered  Materials  was up by 22%,  reflecting
higher sales volumes for all businesses as well as operating  efficiencies.  The
laminate  systems  business had strong earnings on  substantially  higher sales.
Fluorine products had higher income reflecting increased CFC substitute capacity
and cost  reductions,  although pricing  pressures  limited gains. The amorphous
metals,  performance chemicals and uranium hexafluoride businesses had increased
income on higher sales.  Carpet and industrial fibers had  substantially  higher
earnings on  increased  sales  volumes  and prices,  but these gains were mostly
offset by higher raw  material  costs and by start-up  costs at the  Longlaville
facility.  Higher  profit  contributions  were  also  realized  from  Engineered
Materials'  joint ventures -- Paxon  high-density  polyethylene  (Paxon) and UOP
process technology (UOP).

REGARDING  ENVIRONMENTAL  MATTERS,  the  Company is subject to various  federal,
state and local requirements relating to the protection of the environment.  The
Company  believes  that,  as a  general  matter,  its  policies,  practices  and
procedures are properly  designed to prevent  unreasonable risk of environmental
damage and that its  handling,  manufacture,  use and  disposal of  hazardous or
toxic substances are in accord with environmental laws and regulations. However,
mainly because of past operations and operations of predecessor  companies,  the
Company 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 on the  completion of feasibility  studies
or the settlement of claims, but in no event later than the Company's commitment
to a plan of action.

                                                                              21



     Remedial  response  and  voluntary  cleanup  expenditures  were $66 and $65
million in 1994 and 1993, respectively,  and are currently estimated to increase
to approximately  $85 million in 1995. While annual  expenditures have generally
increased from year to year, and may continue to increase over time, the Company
expects  it will  be  able  to  fund  such  expenditures  from  cash  flow  from
operations. The timing of expenditures depends on a number of factors, including
regulatory approval of cleanup projects,  remedial techniques to be utilized and
agreements with other parties.

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

     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 20 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 40  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 16 of  Notes  to  Financial  Statements  for  further  information  on
financial instruments.

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

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

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


                                                            1992    1993    1994
                                                            ----    ----    ----
 
                                                                    
                                                            40.5    37.9*  30.4*

 
- ------------
 
* Includes impact of cumulative effect of 1993 accounting change.
 
[GRAPHIC  REPRESENTATION of  Return on Shareowners'  Equity (after-tax percent),
expressed numerically below.]
 


                                                            1992    1993    1994
                                                            ----    ----    ----
 
                                                                   
                                                            26.4    30.6*  28.9*

 
- ------------
 
* Includes impact of cumulative effect of 1993 accounting change.

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

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

TOTAL DEBT at year-end  1994 was $1,687  million,  a decrease  of $273  million,
primarily  as a result of paying down  commercial  paper and a  redemption  of a
deutsche  mark bond  issue.  Long-term  debt was  reduced by $178  million.  The
Company's  total debt as a percent of capital  was 34.1% at December  31,  1994,
down from 42.7% at year-end  1993. The long-term debt to capital ratio was 30.4%
at  year-end  1994,  down from 37.9% at year-end  1993.  See Note 14 of Notes to
Financial  Statements  for details of  long-term  debt and a  discussion  of the
Credit Agreements.

THE COMPANY  REPURCHASED  2.9 MILLION SHARES OF COMMON STOCK for $103 million in
1994.  Common stock was  repurchased in 1994 to meet expected  requirements  for
shares  issued  under   employee   benefit  plans  and  a  shareowner   dividend
reinvestment  plan. At year-end,  the Company had 75.1 million  shares of common
stock held in  treasury  carried at $1,505  million.  As of year-end  1994,  the
Company was authorized to repurchase 13.6 million shares of common stock.

22



CAPITAL  EXPENDITURES  during 1994 were $639 million,  a decrease of $79 million
from the $718 million  spent in 1993.  Spending by the  segments  and  Corporate
since 1992 is shown in Note 26 of Notes to Financial  Statements.  The Company's
total  capital  expenditures  in 1995 are  currently  projected  at  about  $700
million.  These expenditures are expected to be financed by internally generated
funds.  Approximately  65% of the projected  1995  expenditures  are planned for
expansion and cost  reduction,  25% for  replacement and maintenance and 10% for
environmental projects.

1993 COMPARED WITH 1992

IN 1993 THE COMPANY INITIATED A NUMBER OF NEW PROGRAMS AND FURTHERED THOSE BEGUN
IN 1991 AND 1992. A number of growth  businesses were enhanced  through internal
product development,  strategic  acquisitions,  joint ventures and major capital
investments.  The Company is overhauling  its basic processes to increase market
penetration  and  forming  commodity  purchasing  teams  and  working  with  its
customers and suppliers to raise product quality and reduce production costs.

THE COMPANY STRENGTHENED A NUMBER OF MAJOR BUSINESSES IN 1993:

  *  To  become a more  broad-based  avionics  supplier,  the  Company  acquired
Sundstrand Data Control for $195 million.  The acquired business  manufactures a
variety of avionics  products  for data  management,  ground  hazard  avoidance,
general aviation  communications,  navigation and  instrumentation.  The Company
also acquired the aircraft wheel and brake repair and overhaul operations of Air
Treads, Inc.

  *  To  strengthen  the  Company's  position in air brake  controls and related
products  for the truck  industry,  the  Company  and  Knorr-Bremse  formed  two
ventures -- one in North America and one in Europe.  The Company owns 65% of the
North American  operation and 35% of the European  operations.  The Company also
acquired  Filtram  S.A.,  a  manufacturer  and  distributor  of its Fram  filter
products in Mexico.

  *  In the fibers business,  the Company, as the majority shareowner,  and Akzo
NV of Arnhem,  the  Netherlands  formed a new company to manufacture  and market
commercial carpet fibers in Europe. The Company also started up its $200 million
industrial polyester fiber plant in Longlaville, France.

  *  The Company expanded its  fluorocarbon  business through the acquisition of
the U.S. sterilant gas business of Praxair Inc. and by more than doubling,  from
20 to 50 million pounds per year, the Company's  hydrofluorocarbons  (HCFC)-141b
capacity  at its El Segundo,  California  facility.  HCFC-141b  is a new blowing
agent used in a variety of  commercial  and  residential  rigid-insulating  foam
applications.

THE COMPANY ADOPTED,  EFFECTIVE JANUARY 1, 1993, AN ACCOUNTING CHANGE RELATED TO
POSTEMPLOYMENT  BENEFITS. The Financial Accounting Standards Board (FASB) issued
Statement No. 112 -- Employers' Accounting for Postemployment Benefits (FASB No.
112) which  requires the accrual of cost over an employee's  service  life.  The
1993 impact of FASB No. 112 was an after-tax  provision of $11 million, or $0.04
a share. As part of the adoption,  the Company also recorded catch-up  after-tax
charges  totaling $245 million,  or $0.86 a share.  This one-time charge reduced
the Company's shareowners' equity by 11%.

RESULTS OF  OPERATIONS.  The  Company's  earnings  grew to record levels in 1993
benefiting from  productivity  actions and only a slowly recovering U.S. economy
which more than  offset  the  impact of a  depressed  aerospace  industry  and a
recession in Europe.

NET SALES in 1993 were  $11,827  million,  down 2% from last  year.  Of the $215
million  decrease,  $206  million  was the  effect  of the  stronger  dollar  on
Automotive  and $81 million was because of reduced sales volumes  reflecting the
recession in Europe and weakness in the  aerospace  industry,  offset in part by
$72 million of price increases.

COST OF GOODS SOLD, as a percent of sales, decreased from 82.4% in 1992 to 80.8%
in 1993.  The  improvement  was the  result  of  productivity  gains,  including
cycle-time  reductions  and  materials  management  initiatives  throughout  the
Company. Productivity grew by 5.8% over last year.

NONRECURRING  ITEMS  consist of a net gain of $16 million from the  formation of
the Knorr-Bremse venture offset mainly by the cost of several unusual items. See
Note 3 of Notes to Financial Statements for additional information.

INCOME  FROM  OPERATIONS  of $954  million  in 1993  improved  by $539  million.
Excluding  the  nonrecurring  items in 1993 and the  current  year's  impact  of
adopting FASB No. 112 as well as charges for streamlining  and  restructuring in
1992 (special  provisions),  income from operations improved by $173 million, or
22%,  reflecting  significant  earnings  gains  despite a  generally  slow world
economy. After excluding the special provisions, Aerospace's income increased 4%
and  Automotive's  and Engineered  Materials'  income both increased 32%. Profit
margins,  adjusted to exclude  nonrecurring  items in 1993 and  streamlining and
restructuring  charges in 1992,  increased from 6.5% in 1992 to 7.9% mainly as a
result of improved  productivity  throughout the Company.  See the discussion of
net income below for information by segment.

EQUITY  IN INCOME OF  AFFILIATED  COMPANIES  of $122  million  increased  by $19
million, or 18%, reflecting higher earnings for UOP. Paxon,  however,  had lower
income as industry overcapacity depressed prices.

EARNINGS FROM UNION TEXAS  INVESTMENT  reflects the disposition of the Company's
common  stock  holdings in 1992 as  discussed  in Note 22 of Notes to  Financial
Statements.

OTHER INCOME (EXPENSE), a $9 million loss, compares with a gain of $9 million in
1992 reflecting  increased  foreign  exchange losses in Europe and Brazil partly
offset by higher interest income from investments in short-term securities.

INTEREST AND OTHER FINANCIAL CHARGES of $157 million  decreased $63 million,  or
29%, from last year because of a lower  average level of total debt  outstanding
reflecting in part the redemption of three debt issues and lower interest rates.

THE EFFECTIVE TAX RATE in 1993 was 27.9% compared with 23.8% in 1992.  Excluding
the  impact  in 1992 of  streamlining  and  restructuring  charges  and the gain
relating to Union Texas Petroleum  Holdings,  Inc. (Union Texas),  the effective
tax rate for 1992 was 24.1%.  The 3.8  percentage  point  increase  was due to a
higher  level of earnings  taxed at the new higher U.S. tax rate and the absence
of preferentially taxed Union Texas dividends. A partial offset resulted from an
adjustment  to deferred  tax balances  because of the 1993 tax rate change.  Net
income for 1993 benefited by about $0.02 a share from the net effect of the 1993
tax law  changes.  See Note 7 of  Notes  to  Financial  Statements  for  further
information.

                                                                              23



INCOME BEFORE THE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING  PRINCIPLES of $656
million,  or $2.31 a share,  in 1993 increased  $121 million,  or $0.41 a share,
compared with $535 million, or $1.90 a share, last year.

NET INCOME (LOSS) in 1993 was income of $411 million,  or $1.45 a share. In 1992
the Company  reported a loss of $712 million,  or $2.52 a share.  However,  both
periods were affected by the cumulative  effects of adopting  accounting changes
as well as unusual  items.  The 1993 results  included the current year's charge
for adopting  FASB No. 112, a net  nonrecurring  gain and the impact of the U.S.
tax increase. Results in 1992 include streamlining and restructuring charges and
the gain on the  disposition  of Union  Texas.  Excluding  these items from both
years, the current year's net income was $659 million,  or $2.33 a share,  which
compares with net income of $541 million,  or $1.92 a share, in 1992. The higher
income was the result of  significant  increases for  Automotive  and Engineered
Materials.

A DISCUSSION OF THE OPERATIONS OF THE BUSINESS  SEGMENTS,  before the cumulative
impact of  accounting  changes  on net  income,  follows.  Adjusted  net  income
excludes the impact of the 1993 nonrecurring items and the 1992 streamlining and
restructuring provision. (Dollars in millions)



                                                     ADJUSTED
AEROSPACE          NET SALES       NET INCOME      NET INCOME
- -------------------------------------------------------------
                                              
1993                 $ 4,530           $  224          $  228
1992                   4,937              105             227
- -------------------------------------------------------------
Increase/(Decrease)  $  (407)          $  119          $    1
- -------------------------------------------------------------


     Aerospace  sales  decreased  8% because  of  continued  significant  volume
reductions  in  military,   commercial  and  general  aviation  markets.   Lower
production of general  aviation  aircraft  resulted in fewer  propulsion  engine
deliveries.  Aftermarket sales were  significantly  lower in the auxiliary power
unit (APU) product line. Mainly because of a reduction in the number of aircraft
built,  sales of controls and  accessories and fluid systems as well as avionics
and  communications  systems were materially lower.  Technical service contracts
awarded by various  government  agencies  and sales of ocean  systems  increased
moderately. Sales of aircraft landing systems increased slightly and aftermarket
sales related to propulsion  engines were higher.  The acquisition of Sundstrand
Data Control in the fourth quarter of 1993 contributed $24 million to sales.

     Overall,  the Company's  1993 sales to the DOD, as a prime  contractor  and
subcontractor,  declined by 11% compared  with 1992  because of reduced  defense
spending. Sales to the commercial and foreign government markets declined by 9%,
while sales to NASA and other U.S.  government agencies increased by 6% in 1993.
Sales to the DOD accounted for 31% of  Aerospace's  total sales, a decrease of 1
percentage point compared with 1992.

     Although  total sales were lower and 1993  results  included  an  after-tax
charge of $5 million reflecting the impact of adopting FASB No. 112, Aerospace's
adjusted  net  income  improved  slightly  compared  to  last  year.  Continuing
productivity  improvements and sales increases in several product lines were the
principal  offsets.  Significant  cost savings were realized at every  operating
business  unit.   Aerospace  Systems  and  Equipment  had  substantially  higher
earnings.   Higher  aftermarket  sales  related  to  aircraft  landing  systems,
propulsion  engines and guidance and control  systems as well as higher sales of
ocean systems and technical services also contributed to the favorable earnings.
Earnings were lower for avionics,  APUs and  communications  systems  because of
lower sales.

     At December 31, 1993 and 1992 the Company had firm orders for its aerospace
products  from the U.S. and foreign  governments  of $1,861 and $1,712  million,
respectively.  Total backlog,  including commercial contracts,  at year-end 1993
and 1992 was $4,773 and $4,859 million, respectively.



                                                     ADJUSTED
AUTOMOTIVE         NET SALES       NET INCOME      NET INCOME
- -------------------------------------------------------------
                                              
1993                 $ 4,506           $  226          $  184
1992                   4,499               76             141
- -------------------------------------------------------------
Increase             $     7           $  150          $   43
- -------------------------------------------------------------


     Automotive sales were essentially level with last year despite the negative
impact,   totaling  $206  million,   of  translating  mainly  weakened  European
currencies  to the U.S.  dollar.  Sales of all  products  in the North  American
market were higher.  OE sales for passenger cars,  light trucks and heavy trucks
rebounded.  Sales of passenger-side air bags were especially strong and sales of
seat belts,  aftermarket products,  turbocharging systems and ABS also improved.
Sales by the Company's Brazilian operations improved. OE and aftermarket product
sales were materially lower in Europe reflecting the impact of the recession.

     Automotive's adjusted net income increased significantly, reflecting higher
sales to the North  American OE  manufacturers  and the  aftermarket  and strong
productivity   gains.   Rationalization  and  enhanced   productivity   programs
continued,  mainly in Europe,  where sales are down  materially  due to the poor
economy.  In the North  American  market,  automotive  and truck brakes,  safety
restraints,  aftermarket  products and  turbochargers  had substantial  earnings
growth. Productivity improvements and higher sales volumes substantially reduced
prior year losses in Brazil.  The 1993 results include an after-tax charge of $3
million reflecting the impact of adopting FASB No. 112.



                                                           ADJUSTED
ENGINEERED MATERIALS     NET SALES       NET INCOME      NET INCOME
- -------------------------------------------------------------------
                                                    
1993                       $ 2,791           $  269          $  272
1992                         2,601              190             215
- -------------------------------------------------------------------
Increase                   $   190           $   79          $   57
- -------------------------------------------------------------------


     Engineered  Materials had a 7% sales increase.  Sales of fluorine products,
including  environmentally-safer  substitutes for CFCs, grew substantially,  and
sales of laminate systems,  oximes,  performance additives and tar products were
materially  higher.  Sales of carpet and industrial  fibers also  improved,  but
sales of intermediate  chemicals and environmental  catalysts were lower because
of weak market conditions.

     Engineered  Materials' adjusted net income was significantly higher in 1993
because  of  strong  productivity  gains  and  improved  revenues  for  fluorine
products,  industrial fibers,  performance  additives and tar products.  Results
also improved for UOP.  Partially  offsetting  these gains were higher operating
costs for laminate systems,  reduced demand for intermediate chemicals and lower
earnings for Paxon.  The 1993 results include an after-tax  charge of $2 million
reflecting the impact of adopting FASB No. 112.

24



REGARDING  ENVIRONMENTAL  MATTERS,   remedial  response  and  voluntary  cleanup
expenditures were $65 and $69 million in 1993 and 1992, respectively.

     During 1993 the Company  charged $41 million  against  income for  remedial
response  and  voluntary  cleanup  costs.  At  December  31,  1993 the  recorded
liability for environmental  matters was $480 million. In addition,  the Company
incurred ongoing operating costs, and made capital  expenditures of $39 million,
relating to compliance with environmental regulations.

FINANCIAL  CONDITION.  Cash flow from operating activities was materially higher
as a result of strong earnings  growth and a  strengthening  balance sheet which
reflects greatly improved  operating working capital and a significant  customer
advance.

TOTAL  ASSETS at December  31,  1993 were  $10,829  million,  an increase of $73
million from December 31, 1992. Cash and cash  equivalents at year-end 1993 were
$892 million, a decrease of $39 million, however, cash investments classified as
long-term  increased  $40 million,  to $90 million,  at December 31, 1993.  Cash
flows from operating activities, provided by significantly improved earnings for
1993 and a reduction in working capital,  increased by $111 million. The current
ratio at year-end  1993 was 1.3x,  down slightly from 1.4x at December 31, 1992.
Mainly through a reduction in accounts receivable and inventories, the Company's
working  capital  turnover was improved to 4.8x at December 31, 1993 from 4.5x a
year earlier.

THE MAXIMUM AMOUNT OF BORROWING  available under the Company's Credit Agreements
was  reduced  by the  Company in July 1993 from  $1.11  billion to $900  million
reflecting the Company's strong cash position, significantly higher earnings and
current  credit  requirements.  The Credit  Agreements  support the  issuance of
commercial  paper  and  outstanding  floating  rate ESOP  notes.  There was $164
million of commercial  paper  outstanding at year-end 1993 and $4 million at the
end of 1992.  Commercial  paper borrowing  reached a high of $484 million during
1993. Outstanding ESOP notes, at favorable floating interest rates, totaled $259
million at December 31, 1993 and 1992.

TOTAL DEBT at year-end  1993 was $1,960  million,  a decrease  of $153  million.
Long-term debt was reduced by $175 million mainly from the redemption of various
debt  issues.  The  Company's  total  debt as a percent  of  capital,  after the
adoption of FASB No. 112,  was 42.7% at December  31,  1993,  down from 44.7% at
year-end  1992.  The long-term debt to capital ratio was 37.9% at year-end 1993,
down from 40.5% at year-end 1992. In January 1993 Moody's upgraded the Company's
long-term  debt from A3 to A2 and its  commercial  paper  from P-2 to P-1.  This
followed a comparable upgrading from Standard & Poor's in December 1992.

THE COMPANY  REPURCHASED  6.7 MILLION SHARES OF COMMON STOCK for $220 million in
1993.  Common stock was repurchased in 1993 to offset the issuance of shares for
employee benefit plans and a shareowner dividend reinvestment plan.

CAPITAL  EXPENDITURES  during 1993 were $718 million, an increase of $27 million
from the $691 million  spent in 1992.  Spending by the segments and Corporate is
shown in Note 26 of Notes to Financial Statements.

                                                                              25



CONSOLIDATED STATEMENT OF INCOME
AlliedSignal Inc.
 


(dollars in millions except per share amounts)
Years ended December 31                                                            1994     1993     1992
                                                                                         
- ---------------------------------------------------------------------------------------------------------
Net sales                                                                       $12,817  $11,827  $12,042
- ---------------------------------------------------------------------------------------------------------
Cost of goods sold                                                               10,299    9,551    9,923
Selling, general and administrative expenses                                      1,366    1,338    1,336
Streamlining and restructuring                                                       --       --      368
Nonrecurring items                                                                   --      (16)      --
- ---------------------------------------------------------------------------------------------------------
Total costs and expenses                                                         11,665   10,873   11,627
- ---------------------------------------------------------------------------------------------------------
Income from operations                                                            1,152      954      415
Equity in income of affiliated companies                                            129      122      103
Earnings from Union Texas investment                                                 --       --      395
Other income (expense)                                                              (27)      (9)       9
Interest and other financial charges                                               (143)    (157)    (220)
- ---------------------------------------------------------------------------------------------------------
Income before taxes on income                                                     1,111      910      702
Taxes on income                                                                     352      254      167
- ---------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles                 759      656      535
Cumulative effect of changes in accounting principles:
   Accounting for income taxes                                                       --       --     (148)
   Accounting for postemployment benefits, net of income taxes                       --     (245)      --
   Accounting for postretirement benefits other than pensions,
      net of income taxes                                                            --       --   (1,099)
- ---------------------------------------------------------------------------------------------------------
Net income (loss)                                                               $   759  $   411  $  (712)
- ---------------------------------------------------------------------------------------------------------
Earnings (loss) per share of common stock: (a)
Before cumulative effect of changes in accounting principles                    $  2.68  $  2.31  $  1.90
Cumulative effect of changes in accounting principles:
   Accounting for income taxes                                                       --       --     (.52)
   Accounting for postemployment benefits, net of income taxes                       --     (.86)      --
   Accounting for postretirement benefits other than pensions,
      net of income taxes                                                            --       --    (3.90)
- ---------------------------------------------------------------------------------------------------------
Net earnings (loss)                                                             $  2.68  $  1.45  $ (2.52)
- ---------------------------------------------------------------------------------------------------------

 
(a)  Earnings per share  of common stock  are based upon  the following weighted
average number of shares: 1994, 283,446,399 shares; 1993, 283,233,078 shares and
1992, 281,973,006  shares. No  dilution results  from outstanding  common  stock
equivalents.
 
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
 


(dollars in millions except per share amounts)
Years ended December 31                                                            1994     1993     1992
                                                                                         
- ---------------------------------------------------------------------------------------------------------
Balance at beginning of year                                                    $ 1,023  $   747  $ 1,594
Net income (loss)                                                                   759      411     (712)
Other                                                                                11       27        8
Common stock dividends (1994 -- $.6475 per share;
   1993 -- $.58 per share; 1992 -- $.50 per share)                                 (180)    (162)    (143)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year                                                          $ 1,613  $ 1,023  $   747
- ---------------------------------------------------------------------------------------------------------

 
The 'Notes to Financial Statements' are an integral part of these statements.
 
26



CONSOLIDATED BALANCE SHEET
AlliedSignal Inc.
 


(dollars in millions)
December 31                                                                                 1994     1993
                                                                                            
- ---------------------------------------------------------------------------------------------------------
ASSETS
- ---------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents                                                                $   508  $   892
Accounts and notes receivable                                                              1,697    1,343
Inventories                                                                                1,743    1,745
Other current assets                                                                         637      587
- ---------------------------------------------------------------------------------------------------------
Total current assets                                                                       4,585    4,567
 
Investments and long-term receivables                                                        475      553
Property, plant and equipment -- net                                                       4,260    4,094
Cost in excess of net assets of acquired companies -- net                                  1,349    1,087
Other assets                                                                                 652      528
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                             $11,321  $10,829
- ---------------------------------------------------------------------------------------------------------
 
LIABILITIES
- ---------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable                                                                         $ 1,296  $ 1,207
Short-term borrowings                                                                        133       57
Commercial paper                                                                              --      164
Current maturities of long-term debt                                                         130      137
Accrued liabilities                                                                        1,832    1,924
- ---------------------------------------------------------------------------------------------------------
Total current liabilities                                                                  3,391    3,489
 
Long-term debt                                                                             1,424    1,602
Deferred income taxes                                                                        406      339
Postretirement benefit obligations other than pensions                                     1,790    1,689
Other liabilities                                                                          1,328    1,320
 
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                                                      2,458    2,453
Common stock held in treasury, at cost: 1994 -- 75,096,896 shares;
   1993 -- 74,395,236 shares                                                              (1,505)  (1,437)
Cumulative foreign exchange translation adjustment                                            18       (7)
Unrealized holding gain on equity securities                                                  40       --
Retained earnings                                                                          1,613    1,023
- ---------------------------------------------------------------------------------------------------------
Total shareowners' equity                                                                  2,982    2,390
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY                                                $11,321  $10,829
- ---------------------------------------------------------------------------------------------------------

 
The 'Notes to Financial Statements' are an integral part of this statement.
 
                                                                              27
 

CONSOLIDATED STATEMENT OF CASH FLOWS
AlliedSignal Inc.
 


(dollars in millions)
Years ended December 31                                                              1994    1993    1992
                                                                                           
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------
Net income (loss)                                                                  $  759  $  411  $ (712)
Adjustments to reconcile net income (loss) to net cash flows from operating
   activities:
   Cumulative effect of change in accounting for:
      Income taxes                                                                     --      --     148
      Postemployment benefits                                                          --     245      --
      Postretirement benefits other than pensions                                      --      --   1,099
   Nonrecurring items                                                                  --     (59)     --
   Gain on disposition of Union Texas                                                  --      --    (357)
   Streamlining and restructuring                                                    (180)   (217)    133
   Depreciation and amortization (includes goodwill)                                  560     547     529
   Undistributed earnings of equity affiliates (includes Union Texas in 1992)         (10)    (34)    (47)
   Deferred taxes                                                                     180     110      83
   Decrease (increase) in accounts and notes receivable                              (195)     91    (104)
   Decrease in inventories                                                            134     123     130
   Decrease (increase) in other current assets                                        (65)     14      31
   Increase in accounts payable                                                       113      20     157
   Increase (decrease) in accrued liabilities                                         (56)    151     167
   Other                                                                             (197)   (222)   (188)
- ---------------------------------------------------------------------------------------------------------
Net cash flow provided by operating activities                                      1,043   1,180   1,069
 
CASH FLOWS FROM INVESTING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------
Expenditures for property, plant and equipment                                       (639)   (718)   (691)
Proceeds from disposals of property, plant and equipment                               54      37      42
Decrease in investments and long-term receivables                                      32      48      59
(Increase) in other investments                                                        (8)    (31)    (18)
Cash paid for acquisitions                                                           (531)   (244)   (113)
Proceeds from sales of investments and businesses                                     130     129   1,044
Decrease (increase) in marketable securities                                           90     (40)    (50)
- ---------------------------------------------------------------------------------------------------------
Net cash flow provided by (used for) investing activities                            (872)   (819)    273
 
CASH FLOWS FROM FINANCING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in commercial paper                                          (164)    160    (259)
Net increase (decrease) in short-term borrowings                                       64     (88)   (307)
Proceeds from issuance of common stock                                                 43     143     244
Proceeds from issuance of long-term debt                                                7     131     121
Repurchases of long-term debt (including current maturities)                         (215)   (355)   (163)
Repurchases of common stock                                                          (103)   (229)   (142)
Cash dividends on common stock                                                       (180)   (162)   (143)
Redemption of common stock purchase rights                                             (7)     --      --
- ---------------------------------------------------------------------------------------------------------
Net cash flow (used for) financing activities                                        (555)   (400)   (649)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                 (384)    (39)    693
Cash and cash equivalents at beginning of year                                        892     931     238
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                           $  508  $  892  $  931
- ---------------------------------------------------------------------------------------------------------

 
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
majority-owned subsidiaries.
 
INVENTORIES are  valued  at the  lower  of cost  or  market using  the  last-in,
first-out  (LIFO)  method for  certain qualifying  domestic inventories  and the
first-in, first-out (FIFO) or the average cost method for other inventories.
 
INVESTMENTS AND LONG-TERM  RECEIVABLES are  carried at market  value if  readily
determinable  or  cost  in  1994;  prior  to  1994,  investments  and  long-term
receivables were  carried  at  the  lower of  cost  or  market.  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 various  periods  ranging from  20  to 40  years. The
cumulative amount of goodwill  amortized at December 31,  1994 and December  31,
1993 is $358 and $315 million, respectively.
 
POSTEMPLOYMENT  BENEFITS for former or  inactive employees, excluding retirement
benefits, are  accounted  for  under  the  provisions  of  Financial  Accounting
Standards   Board  (FASB)  Statement  No.  112  --  'Employers'  Accounting  for
Postemployment Benefits' (FASB No. 112), effective January 1, 1993. FASB No. 112
requires  the  Company  to  accrue  the  cost  of  certain  benefits,  including
severance,  workers' compensation and  health care coverage,  over an employee's
service life. A one-time charge for the adoption of FASB No. 112 of $396 million
(after-tax $245 million,  or $0.86  a share)  was recognized  as the  cumulative
effect of a change in accounting principle in 1993. The 1993 ongoing expense was
$18  million (after-tax  $11 million,  or $0.04 a  share). The  Company uses the
services of an enrolled actuary  to calculate postemployment costs. The  Company
previously  expensed  the cost  of  such benefits  on  a pay-as-you-go  basis or
recognized the impact at the time of a specific event.
 
RECOGNITION OF  CONTRACT REVENUES  primarily  relates to  Aerospace  operations.
Under  fixed-price contracts, sales and related costs are recorded as deliveries
are made. Sales and related costs under cost-reimbursable contracts are recorded
as costs are  incurred. Anticipated future  losses on contracts  are charged  to
income  when identified. Contracts which are part  of a program are evaluated on
an overall program basis.
 
ENVIRONMENTAL expenditures that  relate to  current operations  are expensed  or
capitalized  as appropriate. Expenditures  that relate to  an existing condition
caused by past  operations, and  which do not  contribute to  current or  future
revenue  generation, are  expensed. Liabilities are  recorded when environmental
assessments are  made or  remedial efforts  are probable  and the  costs can  be
reasonably  estimated.  The  timing  of  these  accruals  is  generally  on  the
completion of feasibility studies or the  settlement of claims, but in no  event
later  than the Company's  commitment to a  plan of action.  The liabilities for
environmental costs recorded  in Accrued  Liabilities and  Other Liabilities  at
December  31, 1994 and 1993 were $78 and  $416 million and $66 and $414 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 as a hedge of such items. Agreements not
qualifying for hedge accounting are reflected at fair value.
* Changes in  the  amount  to  be  received or  paid  under  interest  rate swap
  agreements are recognized in Interest and Other Financial Charges.
* Changes  in the  fair value  of foreign  currency agreements are recognized in
  Other Income (Expense) or  Cumulative Foreign Exchange Translation Adjustment,
  as appropriate.
 
INCOME  TAXES are  based on  the asset and  liability approach  embodied in FASB
Statement No. 109  -- 'Accounting for  Income Taxes' (FASB  No. 109),  effective
January  1, 1992. Under FASB No. 109, deferred tax liabilities or assets reflect
the impact of temporary  differences between amounts  of assets and  liabilities
for  financial and  tax reporting.  Such amounts  are subsequently  adjusted, as
appropriate, to reflect changes in tax rates  expected to be in effect when  the
temporary  differences  reverse. A  valuation allowance  is established  for any
deferred tax asset for  which realization is not  likely. Deferred income  taxes
have  not been provided on approximately  $177 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 2. ACQUISITIONS
 
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. 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. The Company  also made a number  of smaller acquisitions in
1994.
   In 1993  the  Company  acquired  the  data  control  business  of  Sundstrand
Corporation  (Data Controls) for $195 million in cash. The business had sales of
$194 million in 1992. Data Controls  manufactures a wide range of avionics  such
as  ground  proximity  warning systems,  reactive  windshear  detection systems,
flight data and voice  recorders, general aviation  in-flight phone systems  and
aircraft condition monitoring systems. The Company also made a number of smaller
acquisitions in 1993.
 
NOTE 3. NONRECURRING ITEMS
 
The  1993 nonrecurring  items consist  of a gain  of $89  million (after-tax $50
million, or $0.17 a share)  from the formation of  an alliance of the  Company's
air-brake control and related
 
                                                                              29
 

product operations for heavy trucks with those of Knorr-Bremse AG, partly offset
by  a provision totaling $73  million (after-tax $49 million,  or $0.17 a share)
covering transaction  and other  costs, including  formation costs  relating  to
Knorr-Bremse  and other business ventures  as well as the  cost of several legal
actions.
 
NOTE 4. STREAMLINING AND RESTRUCTURING
 
The 1992 provision  reflects a  pretax charge  of $368  million (after-tax  $227
million,  or $0.80 a  share) covering programs to  improve the Company's overall
productivity. These  programs  include  the consolidation  of  facilities  ($187
million),  further streamlining of operations  and administration ($103 million)
and the  cost of  product modifications  to improve  customer satisfaction  ($78
million).  The various programs include the  elimination of about 900 hourly and
salaried employees. The  actions contemplated  in the 1992  provision have  been
essentially completed.
 
NOTE 5. OTHER INCOME (EXPENSE)
 


Years ended December 31                    1994   1993   1992
                                               
- -------------------------------------------------------------
Interest income and other                 $  29  $  41  $  24
Minority interests                          (30)    (7)    (8)
Foreign exchange (loss) (1)                 (26)   (43)    (7)
- -------------------------------------------------------------
                                          $ (27) $  (9) $   9
- -------------------------------------------------------------

 
(1)  Includes the amortization of premiums for foreign currency forward exchange
contracts of $(12), $(38) and $(28) million, in each of the respective years. In
part, the contracts, in conjunction  with domestic borrowings, were utilized  to
finance  certain  foreign operations  and contributed  to  lower expense  on the
'Interest and Other Financial Charges' line.
 
NOTE 6. INTEREST AND OTHER FINANCIAL CHARGES
 


Years ended December 31                    1994   1993   1992
                                               
- -------------------------------------------------------------
Total interest and other financial
   charges                                $ 166  $ 186  $ 247
Less -- Capitalized interest                (23)   (29)   (27)
- -------------------------------------------------------------
                                          $ 143  $ 157  $ 220
- -------------------------------------------------------------

 
NOTE 7. TAXES ON INCOME
INCOME BEFORE TAXES ON INCOME
 


Years ended December 31                    1994   1993   1992
                                               
- -------------------------------------------------------------
United States                            $  973  $ 799  $ 634
Foreign                                     138    111     68
- -------------------------------------------------------------
                                         $1,111  $ 910  $ 702
- -------------------------------------------------------------

 
TAXES ON INCOME
 


Years ended December 31                    1994   1993   1992
                                               
- -------------------------------------------------------------
United States                             $ 297  $ 244  $ 160
Foreign                                      55     10      7
- -------------------------------------------------------------
                                          $ 352  $ 254  $ 167
- -------------------------------------------------------------

 


Years ended December 31                    1994   1993   1992
                                               
- -------------------------------------------------------------
Taxes on income consist of:
Current:
   United States                          $  98  $  95  $  55
   State                                     34     25     15
   Foreign                                   40     24     14
- -------------------------------------------------------------
                                            172    144     84
- -------------------------------------------------------------
Deferred:
   United States                            129     99     92
   State                                     36     25     (2)
   Foreign                                   15    (14)    (7)
- -------------------------------------------------------------
                                            180    110     83
- -------------------------------------------------------------
                                          $ 352  $ 254  $ 167
- -------------------------------------------------------------

 


Years ended December 31                    1994   1993   1992
                                               
- -------------------------------------------------------------
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%  34.0%
Taxes on foreign earnings
   (under) U.S. tax rate                    (.6)  (2.4)  (3.6)
Asset basis differences                    (3.3)  (1.7)    --
Nondeductible amortization                  1.0    1.2    1.5
State income taxes                          3.9    3.3     .4
Tax benefits of Foreign Sales
   Corporation                             (1.4)  (1.9)  (2.9)
Dividends received deduction                (.1)   (.2)  (1.5)
ESOP dividend tax benefit                   (.9)   (.9)  (1.1)
Impact of rate change on beginning-
   of-the-year deferred tax balances         --   (1.5)    --
All other items -- net                     (1.9)  (3.0)  (3.0)
- -------------------------------------------------------------
                                           31.7%  27.9%  23.8%
- -------------------------------------------------------------

 
DEFERRED INCOME TAXES
 


December 31                                       1994   1993
                                                  
- -------------------------------------------------------------
Included in the following balance sheet
   accounts:
Other current assets                             $ 483  $ 468
Other assets                                       124    104
Deferred income taxes                             (406)  (339)
- -------------------------------------------------------------
                                                 $ 201  $ 233
- -------------------------------------------------------------

 
DEFERRED TAX ASSETS/(LIABILITIES)
 


December 31                                       1994   1993
                                                  
- -------------------------------------------------------------
The temporary differences and carryforwards
   which give rise to deferred tax assets and
   liabilities are as follows:
Property, plant and equipment basis differences  $(793) $(742)
Postretirement benefits other than pensions        741    716
Postemployment benefits                            106    158
Investment and other asset basis differences      (515)  (465)
Streamlining, restructuring and other
   nonrecurring items                              265    290
Other accrued items                                423    334
Other tax credits                                   31     41
Alternative minimum tax credit                      12     60
Foreign net operating losses                       181    118
U.S. capital loss                                   22     43
All other items -- net                            (199)  (239)
- -------------------------------------------------------------
                                                   274    314
Valuation allowance                                (73)   (81)
- -------------------------------------------------------------
                                                 $ 201  $ 233
- -------------------------------------------------------------

 
30
 

Other tax credits relate  primarily to U.S. general  business tax credits  which
are  available  to  reduce  income  tax  payments  through  the  year  2008. The
alternative minimum  tax  credit  is  available to  reduce  regular  income  tax
payments  for an  indefinite period  of time.  The foreign  net operating losses
relate to several  countries. Such  losses are  available to  reduce income  tax
payments  in the future,  subject to varying expiration  rules. The U.S. capital
loss is available to offset income tax payments on capital gains through 1997.
 
NOTE 8. ACCOUNTS AND NOTES RECEIVABLE
 


December 31                                      1994    1993
                                                 
- -------------------------------------------------------------
Trade                                          $1,526  $1,245
Other                                             204     126
- -------------------------------------------------------------
                                                1,730   1,371
Less -- Allowance for doubtful accounts and
   refunds                                        (33)    (28)
- -------------------------------------------------------------
                                               $1,697  $1,343
- -------------------------------------------------------------

 
The Company is a party to agreements under which it can sell undivided interests
in designated pools  of trade accounts  receivable up to  $500 million  (average
outstanding  was $500 and $492 million  during 1994 and 1993, respectively). New
receivables are sold  under the  agreements as previously  sold receivables  are
collected. During 1994, this represented an average collection period of 47 days
or  a replacement of receivables of  approximately eight times. At both December
31, 1994  and 1993,  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 9. INVENTORIES
 


December 31                                      1994    1993
                                                 
- -------------------------------------------------------------
Raw materials                                  $  488  $  504
Work in process                                   706     635
Finished products                                 766     824
Supplies and containers                            70      51
- -------------------------------------------------------------
                                                2,030   2,014
Less --
Progress payments                                (160)   (154)
Reduction to LIFO cost basis                     (127)   (115)
- -------------------------------------------------------------
                                               $1,743  $1,745
- -------------------------------------------------------------

 
Inventories valued at  LIFO amounted to  $267 million at  December 31, 1994  and
$316   million  at  December  31,  1993,  which  amounts  were  below  estimated
replacement cost by $127 and $115 million, respectively.
 
NOTE 10. OTHER CURRENT ASSETS
 


December 31                                       1994   1993
                                                  
- -------------------------------------------------------------
Current - deferred taxes                         $ 483  $ 468
Other                                              154    119
- -------------------------------------------------------------
                                                 $ 637  $ 587
- -------------------------------------------------------------

 
NOTE 11. INVESTMENTS AND LONG-TERM RECEIVABLES
 


December 31                                      1994    1993
                                                 
- -------------------------------------------------------------
Affiliates (1)                                  $ 416   $ 395
Marketable securities                              --      90
Long-term receivables                              59      68
- -------------------------------------------------------------
                                                $ 475   $ 553
- -------------------------------------------------------------

 
(1) Includes  in  1994 an  unrealized  holding gain  of  $66 million  on  equity
securities  in  accordance with  FASB  No. 115.  The  cost basis  of  the equity
securities was $44 million at December 31, 1994.
 
The Company has  a 50% partnership  interest in two  significant joint  ventures
accounted  for under the  equity method, UOP and  Paxon Polymer Company (Paxon).
The UOP joint venture is in the process technology and catalyst business,  while
the Paxon joint venture manufactures and sells high-density polyethylene resins.
The  Company's share of  the equity of  the joint ventures  exceeds its carrying
value for these investments  by $84 million, which  is being amortized over  the
remaining useful lives of the related assets.
   Combined  selected financial  data for these  two entities  are summarized as
follows:
 


Years ended December 31                    1994       1993       1992
                                                   
- ---------------------------------------------------------------------
Net sales                             $   1,251  $   1,238  $   1,225
Income from operations                      165        151        142
Income before cumulative effect
   of changes in accounting
   principles (1)                           147        149        149
Net income (1) (2)                          132         90        149
- ---------------------------------------------------------------------

 


December 31                                      1994    1993
                                                 
- -------------------------------------------------------------
Current assets                                 $  854  $  819
Total assets                                    1,523   1,505
Current liabilities                               304     224
Noncurrent liabilities                            351     350
Equity                                            868     931
- -------------------------------------------------------------

 
(1) No U.S. taxes have been provided  by the entities on partnership income,  as
the  individual partners are  responsible for their  proportionate share of U.S.
taxes payable.
(2) Reflects in 1994 the adoption of FASB No. 106 ($15 million) and in 1993  the
adoptions of FASB No. 106 ($37 million) and FASB No. 112 ($22 million).
 
NOTE 12. PROPERTY, PLANT & EQUIPMENT
 


December 31                                      1994    1993
                                                 
- -------------------------------------------------------------
Land and land improvements                     $  333  $  321
Machinery and equipment                         5,862   5,296
Buildings                                       1,371   1,241
Office furniture and equipment                    702     634
Transportation equipment                          145     145
Construction in progress                          379     531
- -------------------------------------------------------------
                                                8,792   8,168
Less -- Accumulated depreciation and
   amortization                                (4,532) (4,074)
- -------------------------------------------------------------
                                               $4,260  $4,094
- -------------------------------------------------------------

 
                                                                              31
 

NOTE 13. ACCRUED LIABILITIES
 


December 31                                      1994    1993
                                                 
- -------------------------------------------------------------
Customer advance payments/deposits             $  235  $  244
Insurance                                         132     163
Postemployment benefits                            99     166
Retiree medical benefits                          128     125
Wages                                             304     296
Other                                             934     930
- -------------------------------------------------------------
                                               $1,832  $1,924
- -------------------------------------------------------------

 
NOTE 14. LONG-TERM DEBT AND CREDIT AGREEMENTS
 


December 31                                      1994    1993
                                                 
- -------------------------------------------------------------
Employee stock ownership plan refunding
   notes, 6.957% and 7.19%, due 1995 - 1997    $  120  $  200
Employee stock ownership plan floating rate
   notes, 2.876% - 5.32%, due 1995 - 1999         212     218
9 7/8% debentures due June 1, 2002                250     250
9.20% debentures due February 15, 2003            100     100
Medium term notes, 8.28% - 9.28%, due
   1995 - 2001                                    129     153
Zero coupon bonds and money multiplier notes,
   12.95% - 13.518%, due 1995 - 2009              278     257
9 1/2% debentures due June 1, 2016                100     100
Industrial development bond obligations,
   2.68% - 6.75%, maturing at various dates
   through 2026                                   105     112
Other (including capitalized leases), 2.0% -
   14.75%, maturing at various dates through
   2016                                           131     214
- -------------------------------------------------------------
                                                1,425   1,604
Less -- Unamortized discount                       (1)     (2)
- -------------------------------------------------------------
                                               $1,424  $1,602
- -------------------------------------------------------------

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


                                                      LONG-TERM
                                                         DEBT
At December 31, 1994                                      (1)
                                                   
- -------------------------------------------------------------
1995                                                   $  130
1996                                                      179
1997                                                      121
1998                                                      205
1999                                                      161
Thereafter                                                758
- -------------------------------------------------------------
                                                        1,554
Less -- Current portion                                  (130)
- -------------------------------------------------------------
                                                       $1,424
- -------------------------------------------------------------

 
(1) Amounts are net of repurchases.

   The  Company has two credit  agreements with a group of  21 banks (3 Year and
364 Day Credit Agreements) with commitments aggregating $900 million. The  funds
available  under the  Credit Agreements may  be used for  any corporate purpose.
Loans under the $450 million 3 Year  Credit Agreement are required to be  repaid
no  later than July 7, 1997. Annually, the Company may request that the maturity
of the 3 Year Credit Agreement be extended by another year. The Company  intends
to request an extension of the agreement in 1995. The banks' commitments to lend
under  the $450 million 364  Day Credit Agreement terminate  on July 3, 1995 and
any loans then outstanding will be converted  to term loans maturing on July  3,
1996. The Company intends to renegotiate this agreement in 1995. The Company has
agreed  to pay  facility fees  of 0.10%  per annum  and 0.08%  per annum  on the
aggregate commitments for 3  Year and 364  Day Credit Agreements,  respectively,
subject  to  increase or  decrease  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 with, or  occurrence of, which would prevent any
further borrowings and would generally require the repayment of any  outstanding
borrowings under either Credit Agreement. Such conditions include the absence of
any  material  adverse  change  in  the  ability  of  the  Company  to  pay  its
indebtedness when due,  and such events  of default include  (a) non-payment  of
Credit Agreement debt and interest thereon, (b) non-compliance with the terms of
the  covenants, (c) cross-default with other  debt in certain circumstances, (d)
bankruptcy and  (e)  defaults upon  obligations  under the  Employee  Retirement
Income  Security Act. Additionally, each of the banks has the right to terminate
its commitment  to lend  under the  Credit  Agreements if  any person  or  group
acquires  beneficial ownership of 30%  or more of the  Company's voting stock or
during any 12-month period individuals who were directors of the Company at  the
beginning  of  the  period  cease  to constitute  a  majority  of  the  board of
directors.
   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 average floating base rate of two reference banks, 0.5% above the average CD
rate, or 0.5% above the Federal funds rate; or (c) a spread (equal to 21.25  and
23.25  basis points for the 3 Year  and 364 Day Credit Agreements, respectively,
and if either  Credit Agreement  is drawn  down in excess  of 50%  of its  total
amount, 27.5 and 29.5 basis points for the 3 Year and 364 Day Credit Agreements,
respectively)  over the average LIBOR  or CD rate of  three reference banks. The
spreads over the LIBOR or  CD rates are 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, 1994. The  Credit Agreements  have
served  as support for the issuance of commercial paper and certain notes issued
under the Company's Employee Stock  Ownership Plan funding program. At  December
31,  1994, the Company  had outstanding $217  million of notes  supported by the
Credit Agreements.
 
NOTE 15. LEASE COMMITMENTS
 
Future minimum lease payments under operating leases having initial or remaining
noncancellable lease terms in excess of one year are as follows:
 


                                                           LEASE
At December 31, 1994                                    PAYMENTS
                                                 
- ----------------------------------------------------------------
1995                                                        $ 92
1996                                                          63
1997                                                          46
1998                                                          37
1999                                                          29
Thereafter                                                   193
- ----------------------------------------------------------------
Total                                                       $460
- ----------------------------------------------------------------

 
   Rent expense  of  $135, $128  and  $131 million  was  included in  costs  and
expenses for 1994, 1993 and 1992, respectively.
 
32
 

NOTE 16. 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, 1994.
   At December 31, 1994 and 1993, the Company held interest rate swap agreements
maturing through  1999. At  December  31, 1994,  interest rate  swap  agreements
effectively  changed $82  million of London  Interbank Offer  Rate (LIBOR) based
floating rate debt (average  5.21%) to fixed rate  debt (average 7.12%)  thereby
reducing  the potential  impact of increasing  short-term interest  rates on the
Company's results  of  operations. At  December  31, 1993,  interest  rate  swap
agreements  effectively changed $373 million of  fixed rate debt (average 9.66%)
to LIBOR based  floating rate debt  (average 5.3%), $82  million of LIBOR  based
floating  rate debt (average 3.11%) to fixed rate debt (average 7.24%) and a $41
million fixed rate obligation (7.5%) to a LIBOR floating rate obligation (3.5%).
   The Company's exposure to changes  in foreign currency exchange rates  arises
from  inter-company 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
(i.e., 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. The  Company's principal foreign currency
exposures relate to  the French  franc, the  German deutsche  mark, the  British
pound  and the U.S. dollar.  At December 31, 1994 and  1993, the Company held or
had written foreign  currency forward  and option  agreements, maturing  through
1997.  The Company uses some of these  agreements to reduce exposures to changes
in foreign currency  exchange rates  and to reduce  the risk  that such  changes
would  adversely affect  its results  of operations  or financial  condition. In
addition, some of these instruments are hedges of firmly committed  transactions
and forecasted transactions that will or are expected to occur through 1995.
   The  Company's financial instrument counterparties are substantial investment
or commercial  banks  with significant  experience  with such  instruments.  The
Company  manages exposure to  counterparty credit risk  through specific minimum
credit  standards  and  diversification  of  counterparties.  The  Company   has
procedures to monitor the credit exposure amounts. The Company believes that the
credit  risks, in part  because of the  above practices and  procedures, are not
significant. At December 31, 1994 the  net market risk exposures from  financial
instruments were not significant.
   The  values of the Company's  outstanding derivative financial instruments at
December 31, 1994 and 1993 are as follows:
 


                                   NOTIONAL
                                  PRINCIPAL        FAIR     CARRYING
                                     AMOUNT       VALUE        VALUE
                                                
- --------------------------------------------------------------------
December 31, 1994
Interest rate swap agreements
   held                               $  82       $   6        $   1
Foreign currency forward
   agreements held                      953          21           18
Foreign currency forward
   agreements written                 1,130         (24)         (28)
Foreign currency options held           276           2            2
- --------------------------------------------------------------------
December 31, 1993
Interest rate swap agreements
   held                               $ 496       $   8        $  --
Foreign currency forward
   agreements held                      210           5            6
Foreign currency forward
   agreements written                   117          (1)           1
Foreign currency options held           117           1            1
- --------------------------------------------------------------------

 
   The only other material financial instruments that are  not  carried  in  the
Consolidated  Balance Sheet at amounts which approximate fair values are certain
debt instruments.  The carrying  value  of long-term  debt and  related  current
maturities (excluding capitalized leases of $47 and $52 million at year-end 1994
and  1993, respectively)  is $1,507  and $1,687  million and  the fair  value is
$1,590 and $1,945 million at December 31, 1994 and 1993, 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 17. 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 of Directors (the Board), are entitled
to  one vote per share, and are entitled,  in the event of liquidation, to share
ratably in all the assets of the Company which are available for distribution to
the common shareowners. Common shareowners do not have preemptive or  conversion
rights.  Shares of common stock  issued and outstanding or  held in the treasury
are not  liable to  further calls  or assessments.  There is  no restriction  on
dividends  or the repurchase or  redemption of common stock  by the Company. The
Company has  remaining authority  to repurchase  from time  to time  up to  13.6
million shares of common stock.
   The  Board determined on February 7, 1994 to redeem the share purchase rights
that accompanied each share of common stock outstanding on February 18, 1994  at
$0.05 a right.
 
                                                                              33
 
 


                                                  COMMON
                                      SHARES       STOCK/
                                 OUTSTANDING      PAID-IN     TREASURY
                               (IN MILLIONS)      CAPITAL        STOCK
                                                   
- -----------------------------------------------------------------------
Balance December 31, 1991              276.3       $ 2,747     $ (1,423)
Purchased under repurchase
   programs                             (5.3)           --         (152)
Used for Dividend
   Reinvestment Plan                      .2            --            3
Used for employee benefit plans
   (including related
   tax benefits)                        12.6            35          236
- -----------------------------------------------------------------------
Balance December 31, 1992              283.8         2,782       (1,336)
Purchased under repurchase
   programs                             (6.7)           --         (220)
Used for Dividend
   Reinvestment Plan                      .1            --            3
Used for employee benefit plans
   (including related
   tax benefits)                         6.6            29          116
- -----------------------------------------------------------------------
Balance December 31, 1993              283.8         2,811       (1,437)
Purchased under repurchase
   programs                             (2.9)           --         (103)
Used for Dividend
   Reinvestment Plan                      .2            --            3
Used for employee benefit plans
   (including related
   tax benefits)                         2.0            12           32
Redemption of common
   stock purchase rights                  --            (7)          --
- -----------------------------------------------------------------------
Balance December 31, 1994              283.1       $ 2,816     $ (1,505)
- -----------------------------------------------------------------------

 
NOTE 18. STOCK OPTIONS AND AWARDS
 
The  Company has  a 1993  Stock Plan and  a 1985  Stock Plan  available to grant
options and other related benefits to  employees. Under both plans, the  Company
may  grant incentive and non-qualified  stock options, stock appreciation rights
(SARs), restricted shares  and restricted  units (Units) to  officers and  other
employees.  SARs entitle an optionee to  surrender unexercised stock options for
cash or stock equal to  the excess of the fair  market value of the  surrendered
shares  over the option value  of such shares. The  1993 Stock Plan provides for
the annual grant  of awards  in an amount  not in  excess of 1.5%  of the  total
shares  issued (including shares  held in treasury)  on December 31  of the year
preceding the year of the award. Any  shares that are available for awards  that
are  not utilized in a given year will be available for use in subsequent years.
Units have  been granted  to  certain employees,  which  entitle the  holder  to
receive  shares of common stock. At December 31, 1994 there were 1,206,109 Units
outstanding, including 428,680 Units granted in 1994, the restrictions on  which
generally  lapse  over periods  not  exceeding nine  years  from date  of grant.
Incentive stock options have a term determined by the Management Development and
Compensation Committee of the  Board (the Committee), but  not in excess of  ten
years.  Non-qualified stock options  have been granted  with terms of  up to ten
years and one  day. An  option becomes  exercisable at  such times  and in  such
installments  as set by the Committee. Options generally become exercisable over
a three-year period.
 


                                                         NUMBER OF
STOCK OPTIONS                                               SHARES
                                                   
- ------------------------------------------------------------------
Outstanding at December 31, 1991                        22,276,124
Granted at $22.07 - $27.82 per share                     5,934,198
Less --
Exercised at $10.12 - $23.41 per share                   8,823,506
Lapsed or canceled                                         286,290
Surrendered upon exercise of SARs                          270,262
- ------------------------------------------------------------------
Outstanding at December 31, 1992                        18,830,264
Granted at $29.13 - $36.94 per share                     5,949,990
Less --
Exercised at $10.34 - $34.35 per share                   4,986,618
Lapsed or canceled                                         145,190
Surrendered upon exercise of SARs                           30,000
- ------------------------------------------------------------------
Outstanding at December 31, 1993                        19,618,446
Granted at $33.57 - $39.07 per share                     6,809,010
Less --
Exercised at $13.75 - $35.91 per share                   1,693,567
Lapsed or canceled                                         344,720
Surrendered upon exercise of SARs                           17,450
- ------------------------------------------------------------------
Outstanding at December 31, 1994,
$13.75 - $39.07 per share                               24,371,719
- ------------------------------------------------------------------
Exercisable at December 31, 1994                        12,659,343
- ------------------------------------------------------------------
Available for grant at December 31, 1993                 6,191,044
- ------------------------------------------------------------------
Available for grant at December 31, 1994                 4,739,240
- ------------------------------------------------------------------

 
   The Company  also has  a Stock  Plan for  Non-Employee Directors  (Directors)
under  which restricted shares and options are  granted. Prior to April 25, 1994
Directors received  one-time grants  of 3,000  shares of  common stock  and  new
Directors  after that date will 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 stock  plan. Options  generally  become exercisable  over a
three-year period and have a term of ten years.
   All options were  granted at  not less  than fair  market value  at dates  of
grant.
   Treasury  shares  of  common stock  have  been  used upon  exercise  of stock
options. Differences  between the  cost of  treasury stock  used and  the  total
option price of shares exercised have been reflected in retained earnings.
 
NOTE 19. CUMULATIVE FOREIGN EXCHANGE TRANSLATION ADJUSTMENT
 


December 31                            1994  1993  1992
                                          
- -------------------------------------------------------
Balance at beginning of year           $ (7) $ 58  $ 65
Translation adjustment and impact of
   hedges and intercompany balances      25   (65)   (7)
- -------------------------------------------------------
                                       $ 18  $ (7) $ 58
- -------------------------------------------------------

 
NOTE 20. COMMITMENTS AND CONTINGENCIES
 
The  Company is subject to a number of lawsuits, investigations and claims (some
of which  involve  substantial  amounts)  arising out  of  the  conduct  of  its
business,  including  those  relating  to  commercial  transactions,  government
contracts, product liability and environmental,  safety and health matters.  One
such  lawsuit was brought by  The B. F. Goodrich  Company (Goodrich) in the U.S.
District Court for Delaware alleging infringement by the Company of two  patents
relating
 
34
 

to  aircraft brakes  and seeking injunctive  relief and  damages. The allegation
against the Company related only  to brakes for the Boeing  777, which is to  be
introduced in 1995, and not to any other brake program of the Company. At trial,
Goodrich  claimed  damages of  approximately  $350 million  before  trebling. On
November 10, 1994, after a  full trial on the  merits, the District Court  ruled
the  Goodrich patents were invalid, turned down Goodrich's claim for damages and
denied its request  for an  injunction. On December  8, 1994,  Goodrich filed  a
notice  that it would  appeal this decision. The  Company believes that Goodrich
will not prevail on appeal.
   In accordance with  the Company's accounting  policy described in  Note 1  of
Notes  to  Financial  Statements,  liabilities  are  recorded  for environmental
matters generally on the completion of feasibility studies or the settlement  of
claims, but in no event later than the Company's commitment to a plan of action.
Although  the  Company  does  not currently  possess  sufficient  information to
reasonably estimate the amounts  of the liabilities to  be recorded upon  future
completion  of studies, they  may be significant to  the consolidated results of
operations, but  management does  not  expect that  they  will have  a  material
adverse  effect  on the  consolidated financial  position  of the  Company. With
respect to all  other matters,  while the  ultimate results  of these  lawsuits,
investigations  and claims cannot be determined, management does not expect that
these matters will have a material adverse effect on the consolidated results of
operations or financial position of the Company.
   The Company  has  issued  or  is  a party  to  various  direct  and  indirect
guarantees,  bank letters of credit and customer guarantees. Management does not
expect these guarantees will have a material adverse effect on the  consolidated
results of operations or financial position of the Company.
 
NOTE 21. SUPPLEMENTAL CASH FLOW AND OTHER INFORMATION
 
Cash and cash equivalents includes cash on hand and on deposit and highly liquid
debt  instruments  with  maturities  generally of  three  months  or  less. Cash
payments during the years  1994, 1993 and 1992  included interest of $121,  $180
and $241 million and income taxes of $164, $130 and $115 million, respectively.
   In  November 1994 the  Company and General Motors  Corporation formed a joint
venture to manufacture coated substrates  for catalytic converters. The  Company
contributed  its environmental catalysts business and General Motors contributed
other assets and a long-term sales contract to the venture. The transaction  had
the following non-cash impact on the Company's 1994 balance sheet:
 


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

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


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

 
   The weighted average  interest rate on  short-term borrowings and  commercial
paper  outstanding  at  December  31,  1994  and  1993  was  11.21%  and  9.12%,
respectively.
 
NOTE 22. OIL AND GAS INVESTMENT
 
During 1992 the  Company disposed of  its remaining investments  in Union  Texas
Petroleum  Holdings,  Inc. (Union  Texas)  resulting in  a  pretax gain  of $357
million (after-tax  $221  million,  or  $0.78 a  share).  The  Company  received
approximately  $585 million, after underwriters'  discount, from the disposition
of its approximate 39% interest in the common stock of Union Texas. In addition,
the Company received  $355 million  from the redemption  at face  value of  $200
million  of preferred shares  and $155 million  of warrants of  Union Texas. The
Company received dividends from its preferred  investment in Union Texas of  $30
million in 1992.
 
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  1994, 1993 and 1992 the Company's cost for providing other postretirement
benefits aggregated $150,  $153 and  $166 million,  respectively, excluding  the
cumulative  pretax impact  of adopting  FASB No. 106  in 1992  of $1,790 million
(after-tax $1,099 million, or $3.90 a  share). The Company uses the services  of
an enrolled actuary to calculate postretirement benefit costs.
   For  measurement purposes,  the assumed  annual rate  of increase  in the per
capita cost of covered health care benefits  was 11% for 1994, which reduces  to
6% in 2000 and remains at that level thereafter. The health care cost trend rate
assumption  has a  significant effect  on the  amounts reported.  To illustrate,
increasing the assumed  health care cost  trend rates by  1 percentage point  in
each year would increase the accumulated postretirement benefit obligation as of
December
 
                                                                              35
 

31,  1994 by  $116 million and  the aggregate  of the service  and interest cost
component of net periodic postretirement benefit cost for the year then ended by
$11  million.  The  weighted-average  discount  rate  used  in  determining  the
accumulated  postretirement benefit obligation  was 8.75% and  7.25% at December
31, 1994 and 1993, respectively.
 
   Net periodic postretirement benefit cost for 1994, 1993 and 1992 included the
following components:
 


Years ended December 31                    1994   1993   1992
                                               
- -------------------------------------------------------------
Service cost-benefits attributed to
   service during the period              $  27  $  23  $  22
Interest cost on accumulated post-
   retirement benefit obligation            133    137    143
Net amortization                            (10)    (7)    --
- -------------------------------------------------------------
                                            150    153    165
Foreign plans                                --     --      1
- -------------------------------------------------------------
Net periodic postretirement
   benefit cost                           $ 150  $ 153  $ 166
- -------------------------------------------------------------

 
   Presented below are the plans' status and amounts recognized in the Company's
Consolidated Balance Sheet at December 31, 1994 and 1993:
 


December 31                                      1994    1993
                                                 
- -------------------------------------------------------------
Accumulated postretirement benefit
   obligation:
   Retirees                                    $1,120  $1,279
   Fully eligible active plan participants        172     200
   Other active plan participants                 393     418
- -------------------------------------------------------------
                                                1,685   1,897
Unrecognized prior service cost                   139     132
Unrecognized net gain (loss)                       94    (215)
- -------------------------------------------------------------
Accrued postretirement benefit cost            $1,918  $1,814
- -------------------------------------------------------------

 
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 provided based on years of service and  employees'
compensation  during the last years  of employment or as  a flat dollar benefit.
Benefits are generally paid from funds  previously provided to trustees. In  the
Company's  principal U.S. plans, funds are contributed to a trustee as necessary
to provide for current service and for any unfunded projected benefit obligation
over a  reasonable period.  To  the extent  that  these requirements  are  fully
covered  by assets  on hand  for a  plan, a  contribution may  not be  made in a
particular year. As  of year-end 1994  approximately 56% of  the assets of  U.S.
plans  were  held in  equity  securities, with  the  balance primarily  in fixed
income-type securities.
   Pension expense  in 1994,  1993 and  1992 was  $109, $104  and $102  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  1994, 1993  and 1992  included the following
components:
 


Years ended December 31                    1994   1993   1992
                                               
- -------------------------------------------------------------
Service cost-benefits earned during the
   period                                 $ 132  $ 115  $ 113
Interest cost on projected benefit
   obligation                               363    369    360
Actual return on plan assets                (65)  (663)  (320)
Net amortization and deferral              (338)   269    (69)
- -------------------------------------------------------------
Net periodic pension cost for defined
   benefit plans                             92     90     84
Foreign plans and other                      17     14     18
- -------------------------------------------------------------
Net periodic pension cost                 $ 109  $ 104  $ 102
- -------------------------------------------------------------

 
   The assumed rate  of return for  the Company's U.S.  defined benefit  pension
plans  was  9%  in  1994, 1993  and  1992.  The assumed  discount  rate  used in
calculating the projected  benefit obligations  at December 31,  1994, 1993  and
1992  was 8.75%, 7.25% and 8.25%,  respectively. In addition, the assumed annual
increase in compensation over employees'  estimated remaining working lives  was
5% in 1994 and 5.5% for both 1993 and 1992.
 
   Presented  below are the  plans' funded status and  amounts recognized in the
Company's Consolidated  Balance Sheet  at December  31, 1994  and 1993  for  its
significant defined benefit pension plans:
 


December 31                                                                             1994                                 1993
                                                                                                        
- ---------------------------------------------------------------------------------------------------------------------------------
                                                              ASSETS EXCEED      ACCUMULATED       ASSETS EXCEED      ACCUMULATED
                                                                ACCUMULATED         BENEFITS         ACCUMULATED         BENEFITS
                                                                   BENEFITS    EXCEED ASSETS            BENEFITS    EXCEED ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
   Vested                                                           $ 3,252           $  678             $ 3,471           $  731
   Nonvested                                                            228               82                 256               74
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation                                      $ 3,480           $  760             $ 3,727           $  805
- ---------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation                                        $ 3,911           $  802             $ 4,396           $  857
Less -- Fair value of assets                                          4,127              617               4,227              678
- ---------------------------------------------------------------------------------------------------------------------------------
Over (under) funded plans                                               216             (185)(a)            (169)            (179)
Unrecognized transition (asset) liability                                 8              (45)                (11)              (7)
Unrecognized net (gain) loss                                            (79)             (13)                360                2
Unrecognized prior service cost                                         (16)              93                  (2)              63
- ---------------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost                                      $   129           $ (150)            $   178           $ (121)
- ---------------------------------------------------------------------------------------------------------------------------------

 
(a)   Included  in  this  amount  is  $152  million  for  unfunded  foreign  and
supplemental domestic pension plans.
 
36
 

NOTE 25. GEOGRAPHIC AREAS --  FINANCIAL DATA
 


                                                                                                           ADJUSTMENTS
                                                         UNITED                                 OTHER              AND
                                                     STATES (1)      CANADA      EUROPE  INTERNATIONAL    ELIMINATIONS     TOTAL
                                                                                                   
- --------------------------------------------------------------------------------------------------------------------------------
Net sales (2)                           1994            $ 9,739      $  202     $ 2,283         $  593          $   --  $ 12,817
                                        1993              9,220         225       1,897            485              --    11,827
                                        1992              8,978         331       2,295            438              --    12,042
- --------------------------------------------------------------------------------------------------------------------------------
Income before cumulative                1994                654          23          65             17              --       759
effect of changes in                    1993                570          26          55              5              --       656
accounting principles (3)               1992                512          32           6            (15)             --       535
- --------------------------------------------------------------------------------------------------------------------------------
Assets (4)                              1994              8,977         205       2,295            543            (699)   11,321
                                        1993              8,517         199       1,967            548            (402)   10,829
                                        1992              8,677         177       1,940            501            (539)   10,756
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities (4)                         1994              7,290          87       1,319            342            (699)    8,339
                                        1993              7,175          98       1,235            333            (402)    8,439
                                        1992              7,374         113       1,293            264            (539)    8,505
- --------------------------------------------------------------------------------------------------------------------------------

 
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 $1,818, $1,699 and
$1,810 million for each of the respective years.
(3) Includes  in 1993  after-tax nonrecurring  items of  a gain  for the  United
States  of $13 million and a loss for Europe of $12 million. Includes in 1992 an
after-tax provision  to cover  Streamlining and  Restructuring charges  for  the
United States of $163, Europe of $56 and Other International of $8 million. Also
included  in the  'United States' column  in 1992  is the after-tax  gain on the
disposition of the Union Texas common stock of $221 million.
(4) Reclassified for comparative purposes.

NOTE 26. SEGMENT FINANCIAL DATA
 


                                                                               ENGINEERED       CORPORATE AND
                                                 AEROSPACE       AUTOMOTIVE     MATERIALS     UNALLOCATED (1)            TOTAL
                                                                                             
- ------------------------------------------------------------------------------------------------------------------------------
Net sales (2)                        1994          $ 4,623          $ 4,922          $ 3,272           $   --         $ 12,817
                                     1993            4,530            4,506            2,791               --           11,827
                                     1992            4,937            4,499            2,601                5           12,042
- ------------------------------------------------------------------------------------------------------------------------------
Research and development             1994              126               73              110                9              318
expense                              1993              127               63              113               10              313
                                     1992              122               64              124               10              320
- ------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization        1994              183              148              171               21              523
                                     1993              184              156              153               21              514
                                     1992              186              162              135               13              496
- ------------------------------------------------------------------------------------------------------------------------------
Income from operations (3)           1994              458              411              409             (126)           1,152
                                     1993              402              432              309             (189)             954
                                     1992              187              174              201             (147)             415
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative             1994              260              223              331              (55)             759
effect of changes in                 1993              224              226              269              (63)             656
accounting principles (3) (4)        1992              105               76              190              164              535
- ------------------------------------------------------------------------------------------------------------------------------
Capital expenditures                 1994              148              245              232               14              639
                                     1993              139              205              354               20              718
                                     1992              162              202              301               26              691
- ------------------------------------------------------------------------------------------------------------------------------
Identifiable assets                  1994            5,104            3,276            2,562              379           11,321
                                     1993            4,502            2,838            2,502              987           10,829
                                     1992            4,380            3,082            2,295              999           10,756
- ------------------------------------------------------------------------------------------------------------------------------

 
Intersegment sales approximate market and are not significant.
(1) The 'Corporate and Unallocated' column includes amounts for businesses  sold
and  Corporate items. Income  before cumulative effect  of changes in accounting
principles includes  amounts (including  preferred dividends)  for Union  Texas,
accounted  for on the equity basis, for  1992 of $261 million (includes the gain
on the disposition of the common stock of Union Texas of $221 million, or  $0.78
a share).
(2)  Sales to  the U.S.  Government and its  agencies, mainly  for the Aerospace
segment, were  $1,089, $1,096  and $1,170  million for  each of  the  respective
years.
(3)  Includes in 1993 a pre- and after-tax provision to cover the current year's
impact of the  adoption of  FASB No.  112 for Aerospace  of $8  and $5  million,
Automotive  of $5 and $3 million, Engineered  Materials of $4 and $2 million and
Corporate and Unallocated of $1 and  $1 million, respectively. Includes in  1993
pre-  and after-tax impact of nonrecurring items for Aerospace of a charge of $6
and $4 million, a gain of $81 and $42 million for Automotive, a charge of $5 and
$3 million for  Engineered Materials and  a charge  of $54 and  $34 million  for
Corporate  and Unallocated, respectively. Includes in  1992 a pre- and after-tax
provision to cover Streamlining and Restructuring charges for Aerospace of  $213
and $122 million, Automotive of $95 and $65 million, Engineered Materials of $40
and  $25  million  and  Corporate  and  Unallocated  of  $20  and  $15  million,
respectively. In 1993 a reclassification of the reported 1992 pre- and after-tax
provision for Streamlining  and Restructuring of  $48 and $30  million was  made
reducing Corporate and Unallocated and increasing Aerospace.
(4) A finance charge is made by Corporate Office to the segments on the basis of
relative  capitalization, 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 27. UNAUDITED QUARTERLY FINANCIAL INFORMATION
 


                                                                         1994                                                   1993
                                                                                              
                         -----------------------------------------------------------------------------------------------------------
                          MAR. 31    JUNE 30    SEPT. 30    DEC. 31      YEAR    MAR. 31    JUNE 30    SEPT. 30    DEC. 31      YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales                 $ 2,986    $ 3,187     $ 3,110    $ 3,534  $ 12,817    $ 2,901    $ 3,055     $ 2,812    $ 3,059  $ 11,827
As originally reported: (a)
   Gross profit               584        646         607        681     2,518        548        590         555        585
   Net income                 169        196         189        205       759        149        170         168        178
   Per share                  .60        .69         .67        .73      2.68        .52        .60         .59        .63
1993 restatement of
change in accounting
principle: (a)
   Gross profit                                                                       (1)        (1)         --         --
   Cumulative after-tax
      effect                                                                        (245)        --          --         --
   Per share                                                                        (.86)        --          --         --
   Quarterly after-tax
      effect                                                                        (248)        (3)         (3)        --
   Per share                                                                        (.87)      (.01)       (.01)        --
As restated: (a)
   Gross profit               584        646         607        681     2,518        547        589         555        585     2,276
   Income before
      cumulative effect
      of change in
      accounting
      principle               169        196         189        205       759        146        167         165        178       656
   Per share                  .60        .69         .67        .73      2.68        .51        .59         .58        .63      2.31
   Net income (loss)          169        196         189        205       759        (99)       167         165        178       411
   Per share                  .60        .69         .67        .73      2.68       (.35)       .59         .58        .63      1.45
Dividends paid                .145       .1675       .1675      .1675     .6475      .145       .145        .145       .145      .58
Market price (b)
High                        40.75      37.63       38.75      36.00     40.75      34.63      35.25       37.50      40.13     40.13
Low                         34.25      33.13       33.63      30.38     30.38      28.75      30.88       32.13      34.88     28.75
- ------------------------------------------------------------------------------------------------------------------------------------

 
(a)  FASB No.  112 was adopted  in the fourth  quarter of 1993,  effective as of
January 1,  1993. As  a result,  the  first three  quarters were  restated.  For
further information see Note 1 of Notes to Financial Statements.
(b)  From composite  tape --  stock is  primarily traded  on the  New York Stock
Exchange.
 
REPORT OF INDEPENDENT ACCOUNTANTS
 
                                                                  Morristown, NJ
                                                                February 1, 1995
 
[Logo]
 
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, 1994  and 1993, and  the results  of
their  operations and their cash flows for each of the three years in the period
ended December  31,  1994,  in conformity  with  generally  accepted  accounting
principles.  These financial statements are  the responsibility of the Company's
management; our  responsibility is  to  express an  opinion on  these  financial
statements  based on our audits. We conducted  our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on  a
test  basis, evidence  supporting the amounts  and disclosures  in the financial
statements, assessing the accounting  principles used and significant  estimates
made by management, and evaluating the overall financial statement presentation.
We  believe that our audits provide a reasonable basis for the opinion expressed
above.
 

As discussed in Notes 1 and 23 to the financial statements, the Company  changed
its  methods of  accounting for postemployment  benefits in 1993  and for income
taxes and postretirement benefits other than pensions in 1992.

PRICE WATERHOUSE LLP
____________________

PRICE WATERHOUSE LLP


38



SELECTED FINANCIAL DATA
AlliedSignal Inc.
 


(dollars in millions except per share amounts)
Years ended December 31                1994        1993         1992          1991          1990      1989      1988         1987
                                                                                                 
- ---------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR (a)
Net sales                          $ 12,817    $ 11,827     $ 12,042      $ 11,831      $ 12,343  $ 11,942  $ 11,909     $ 11,116
Income (loss) from continuing
   operations                           759         656          535(b)       (273)(b)       462       528       463(b)       515(b)
Net income (loss)                       759         411(c)      (712)(c)      (273)          462       528       463          656
Per share of common stock:
Earnings (loss) from continuing
   operations                          2.68        2.31         1.90         (1.00)         1.67      1.78      1.55         1.53
Net earnings (loss)                    2.68        1.45        (2.52)        (1.00)         1.67      1.78      1.55         1.95
Dividends                               .6475       .58          .50           .80           .90       .90       .90          .90
- ---------------------------------------------------------------------------------------------------------------------------------
AT YEAR-END (a)
Net working capital                $  1,194    $  1,078     $  1,414      $    526      $    892  $  1,065  $  1,040     $    722
Property, plant and equipment
    -- net                            4,260       4,094        3,897         3,638         3,584     3,321     3,214        3,330
Total assets                         11,321      10,829       10,756        10,382        10,456    10,342    10,069       10,321
Long-term debt                        1,424       1,602        1,777         1,914         2,051     1,903     2,044        2,017
Shareowners' equity                   2,982       2,390        2,251         2,983         3,380     3,412     3,268        3,129
Book value per share of common
   stock                              10.53        8.42         7.93         10.79         12.55     11.77     11.05        10.44
Average investment (d)                4,848       4,506        4,939         6,771         6,723     6,520     6,629        6,859
Common shares outstanding (in
   millions)                          283.1       283.8        283.8         276.3         269.4     290.0     295.9        299.9
Common shareowners of record         82,095      84,248       84,254        91,492        97,210   102,042   111,402      109,322
Employees (e)                        87,500      86,400       89,300        98,300       105,800   107,100   109,550      115,300
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS (f)
Return on sales (income from
   operations)                          9.0         8.1          3.4          (2.5)          5.9       8.0       5.7          6.8
Return on sales (after-tax)             5.9         5.5          4.4          (2.3)          3.7       4.4       3.9          4.6
Return on average investment
   (after-tax)                         17.5        16.6         13.8          (1.3)          9.6      11.0      10.3         10.1
Return on average shareowners'
   equity (after-tax)                  28.9        30.6         26.4          (8.4)         13.9      15.6      14.5         14.5
Interest coverage ratio                 6.8         5.1          3.3           (.9)          2.6       3.0       2.8          3.6
Long-term debt as a percent of
   total capital                       30.4        37.9         40.5          34.9          33.6      30.8      33.2         33.9
Total debt as a percent of total
   capital                             34.1        42.7         44.7          43.9          40.4      35.7      35.9         39.0
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATISTICS (f) (g)
Return on sales (income from
   operations)                          9.0         7.9          6.5           4.7           5.9       8.0       7.4          6.8
Return on sales (after-tax)             5.9         5.5          4.5           2.9           3.7       4.4       4.3          3.9
Return on average investment
   (after-tax)                         17.5        16.6         13.9           7.8           9.6      11.0      10.9          8.9
Return on average shareowners'
   equity (after-tax)                  28.9        30.5         26.7          10.5          13.9      15.6      15.9         12.2
Interest coverage ratio                 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                       30.4        37.9         40.5          34.9          33.6      30.8      33.2         33.9
Total debt as a percent of total
   capital                             34.1        42.7         44.7          43.9          40.4      35.7      35.9         39.0
- ---------------------------------------------------------------------------------------------------------------------------------

 
(a)  Share and per share data for all periods reflect the March 1994 two-for-one
stock split.
(b)  Includes  in  1992  the  effect   of  a  provision  for  Streamlining   and
Restructuring  charges as well  as a gain on  the sale of  common stock of Union
Texas resulting in a net charge of $11 million (after-tax $6 million, or $0.02 a
share) as  discussed  in  Notes 4  and  22  of Notes  to  Financial  Statements,
respectively.  In 1991 includes  the effect of a  provision for Streamlining and
Restructuring charges as well as gains  on asset sales by Union Texas  resulting
in  a net charge of $838 million (after-tax  $615 million, or $2.25 a share). In
1988 includes an after-tax provision of $125 million, or $0.42 a share, to cover
Streamlining and Restructuring  charges, an  after-tax gain of  $36 million,  or
$0.12  a  share, from  the sale  of  the Company's  investment in  Akebono Brake
Industry Company Ltd. and an  after-tax gain of $81  million, or $0.27 a  share,
from nonrecurring items. Includes in 1987 the effect of the sale of common stock
by  Union Texas which resulted  in the Company recording  a gain of $108 million
(after-tax $82 million, or $0.24 a share), reflecting the Company's share of  an
increase in Union Texas' equity.
(c) Includes in 1993 the cumulative after-tax provision for the adoption of FASB
No.  112 of  $245 million,  or $0.86  a share.  Includes in  1992 the cumulative
after-tax provision for the adoption of FASB Nos. 106 and 109 of $1,247 million,
or $4.42 a share.  Such accounting changes  are discussed in Notes  1 and 23  of
Notes to Financial Statements.
(d)  Investment  is  defined  as shareowners'  equity  and  non-current deferred
taxes-net plus total debt.
(e) Includes employees at facilities operated for the U.S. Department of Energy.
(f) The returns and interest coverage ratio exclude the impact of the cumulative
effect of changes in accounting principles on income.
(g) The returns and interest coverage  ratio exclude the impact of  nonrecurring
items  in 1993, provisions  for Streamlining and  Restructuring charges in 1992,
1991 and 1988, gain  on sale of common  stock of Union Texas  in 1992, gains  on
asset sales by Union Texas in 1991, nonrecurring income in 1988 and Union Texas'
equity transaction in 1987.
 
                                                                              39