ARCO CHEMICAL CO, 10-K, 1997-02-25

ARCO CHEMICAL CO
10-K, 1997-02-25
INDUSTRIAL ORGANIC CHEMICALS

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[LOGO OF ARCO CHEMICAL COMPANY APPEARS HERE]

ARCO CHEMICAL COMPANY

ANNUAL REPORT ON FORM 10-K
1996

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1996

FORM 10-K

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934

For the fiscal year ended December 31, 1996

Commission file number 1-9678

ARCO CHEMICAL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 51-0104393
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

3801 WEST CHESTER PIKE, NEWTOWN SQUARE, PENNSYLVANIA 19073-2387
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Registrant's telephone number, including area code: (610) 359-2000

Securities registered pursuant to Section 12(b) of the Act:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant on January 30, 1997, based on the closing price on the New York
Stock Exchange composite tape on that date, was $797,904,448.

Number of shares of Common Stock, $1.00 par value, outstanding at December 31,
1996: 96,759,317.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant's definitive proxy statement, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1996
(incorporated by reference under Part III).
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TABLE OF CONTENTS

PART I
<TABLE>
<CAPTION>
PAGE
ITEM ----
<C> <S> <C>
1. and 2. Business and Properties...................................... 1
General Development of Business............................ 1
Industry Segment and Geographic Disclosure................. 1
Summary Description of Business and Products............... 1
Sales and Marketing........................................ 4
Joint Ventures and Other Arrangements...................... 4
Research and Development................................... 5
Raw Materials.............................................. 5
Competition................................................ 5
Properties and Production Facilities....................... 7
Patents, Trade Names, and Trademarks....................... 8
Environmental Matters...................................... 8
Human Resources............................................ 9
3. Legal Proceedings............................................ 9
4. Submission of Matters to a Vote of Security Holders.......... 10
---------------------------
Executive Officers of the Company............................ 11
PART II
5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 13
6. Selected Financial Data...................................... 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
8. Financial Statements......................................... 20
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 43
PART III
10. Directors and Executive Officers of the Registrant........... 43
11. Executive Compensation....................................... 43
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
13. Certain Relationships and Related Transactions............... 43
PART IV
14. Exhibits and Reports on Form 8-K............................. 43
</TABLE>

(i)
<PAGE>

PART I

ITEMS 1. AND 2.BUSINESS AND PROPERTIES

GENERAL DEVELOPMENT OF BUSINESS

ARCO Chemical Company (the Company) is a Delaware corporation with principal
executive offices at 3801 West Chester Pike, Newtown Square, Pennsylvania
19073-2387 (telephone no. 610-359-2000). The Company is the successor to
certain portions of the ARCO Chemical Division of Atlantic Richfield Company
(ARCO), a Delaware corporation. On June 9, 1987, ARCO transferred
substantially all the assets and liabilities of the oxygenates and
polystyrenics businesses of the then ARCO Chemical Division to the Company in
exchange for 80,000,001 shares of common stock. On October 5, 1987, the
Company completed an initial public offering of 19,550,000 shares of common
stock. As of January 30, 1997, ARCO's 80,000,001 shares represented
approximately 82.7 percent of the outstanding shares of common stock. See Item
13.

Prior to October 5, 1987, the Company and ARCO entered into a number of
agreements for the purpose of defining their ongoing relationship. These
agreements were developed in connection with the establishment of the Company
by ARCO, and, therefore, were not the result of arm's-length negotiations
between independent parties. For additional information relating to certain
continuing relationships between the Company and ARCO, including potential
conflicts of interest, see Item 13 and Note 3 of Notes to Consolidated
Financial Statements.

On September 30, 1996, the Company sold its plastics business to NOVA
Chemicals Inc. (NOVA). With the sale of the plastics business the Company no
longer manufactures or sells styrene monomer derivatives, but the Company will
continue to manufacture and market styrene monomer. See Note 21 of Notes to
Consolidated Financial Statements.

On December 4, 1996, the Company purchased substantially all of the assets
of Olin Corporation's (Olin) toluene diisocyanate (TDI) and aliphatic
diisocyanate (ADI) businesses. The purchase included Olin's TDI and ADI
production facilities at Lake Charles, Louisiana, and certain related assets,
including trademarks, patents and technology. This acquisition supplements the
Company's entry into the isocyanates market in 1995, through a long-term,
European-based TDI supply arrangement with Rhone-Poulenc. The Olin acquisition
gives the Company a U.S.-based TDI manufacturing presence. Also, see Note 20
of Notes to Consolidated Financial Statements.

INDUSTRY SEGMENT AND GEOGRAPHIC DISCLOSURE

The Company operates in one industry segment. Reference is made to Note 4 of
Notes to Consolidated Financial Statements for disclosure of financial
information by geographic location.

SUMMARY DESCRIPTION OF BUSINESS AND PRODUCTS

The Company, including its subsidiaries, is a leading international
manufacturer and marketer of intermediate chemicals and specialty products
used in a broad range of consumer goods. The Company operates in a single
industry segment and conducts business primarily in the Americas, Europe, and
the Asia Pacific region.

The Company's core product is propylene oxide (PO), which it produces
through two distinct process technologies based on indirect oxidation
(peroxidation) processes that yield co-products. One process yields tertiary
butyl alcohol (TBA) as the co-product; the other process yields styrene
monomer (SM) as the co-product. The two technologies are mutually exclusive
such that either a dedicated PO/TBA plant or a dedicated PO/SM plant must be
built.
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The Company also manufactures numerous derivatives of PO and TBA. Among
these are polyols, a key derivative of PO, and methyl tertiary butyl ether
(MTBE), a principal derivative of TBA. MTBE is used in oxygenated fuels and as
an octane additive. In 1995, the Company began selling TDI obtained under
long-term supply agreements with Rhone-Poulenc. With the 1996 acquisition of
Olin's TDI production facilities, the Company also manufactures TDI. TDI and
polyols are combined in the manufacture of polyurethanes.

Following is a list of certain of the Company's principal products, the
forms in which they are sold, and typical end uses.

<TABLE>
<CAPTION>
PRODUCT FORM TYPICAL USES
- ------- ---- ------------
<S> <C> <C>
Propylene oxide PO Polyether polyols (polyols), propylene
(PO) glycols, ethers, and surfactants
Polyols Combined with isocyanates, such as
TDI, for polyurethane applications
such as flexible foam for seat
cushions, bedding and carpet
underlay; and coatings, adhesives,
sealants, and elastomers
Propylene glycols (PG) Unsaturated polyester resins; food,
cosmetic, and pharmaceutical
applications; automotive coolants and
aircraft deicers
Propylene glycol ethers Coatings and paints, cleaning
(PGE) and PGE acetates compounds, solvents, and inks
Butanediol, Engineering resins, fibers, solvents,
Tetrahydrofuran (THF) and resins, coatings and polyurethanes
N-Methyl
Pyrrolidone (NMP)
Toluene diisocyanate TDI Combined with polyols to manufacture
(TDI) polyurethanes
Tertiary butyl Methyl tertiary butyl Gasoline additives to increase octane
alcohol ether (MTBE) and reduce emissions
(TBA) and ethyl tertiary butyl
ether (ETBE)
Gasoline-grade TBA (GTBA) Octane additive
Styrene monomer SM Acrylonitrile-butadiene-styrene (ABS)
(SM) resins,
polystyrene, expandable polystyrene
(EPS), rubber components, and
polyester resins
</TABLE>

Propylene Oxide and Derivatives

Propylene oxide is a commodity chemical that the Company consumes directly
or delivers to the merchant market through processing or sales agreements for
further conversion by its customers into derivative products, including
polyols for polyurethane applications, propylene glycols and PGEs, and various
other chemical products. Sales and other operating revenues for PO and
derivatives constituted 47 percent, 45 percent, and 48 percent, respectively,
of the Company's total 1996, 1995, and 1994 sales and other operating
revenues. In the aggregate, the Company consumed approximately 56 percent of
its PO production in 1996 for the production of derivatives. See Item 7 for
additional discussion.

Based on published data, worldwide demand for PO was approximately 8.7
billion pounds in 1996. Approximately 90 percent of that volume was consumed
in the manufacture of three derivative families of products: polyols, PG, and
PGE.

The largest of the PO derivative families is polyols, which are used in the
manufacture of polyurethanes. Within the polyurethane industry, the largest
market for polyols is in flexible foams, which are produced when polyols are
reacted with isocyanates, such as TDI. Polyols and isocyanates are also used
in coatings, adhesives, sealants and elastomers.

Propylene glycols are principally used as intermediate chemicals to produce
unsaturated polyester resins. Propylene glycols have low toxicity and are also
used in certain food, cosmetic, and pharmaceutical applications and in
automotive coolants and aircraft deicers. Propylene glycol ethers and acetates
are low toxicity, high performance solvents. Past studies have indicated that

2
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these materials generally have safer toxicological profiles than their
ethylene oxide-based counterparts.

Butanediol is an intermediate chemical having diverse applications in
engineering resins, elastomers, and solvents. The Company produces butanediol
from allyl alcohol, a PO derivative.

Isocyanates

In January 1995, the Company entered into long-term agreements under which
Rhone-Poulenc supplies TDI, which the Company markets to customers. On
December 4, 1996, the Company purchased substantially all of the assets of
Olin's TDI and ADI businesses. The purchase includes Olin's TDI and ADI
production facilities at Lake Charles, Louisiana, and certain related assets,
including trademarks, patents and technology. Also, see Note 20 of Notes to
Consolidated Financial Statements. TDI complements the Company's existing line
of polyols products and strengthens its position as a chemical supplier to the
polyurethanes market. See Item 7 for additional discussion.

Tertiary Butyl Alcohol and Derivatives

Tertiary butyl alcohol is the major co-product of one of the Company's two
PO processes. The Company utilizes most of its TBA, combined with methanol, to
make MTBE, a gasoline blending component that increases octane and reduces
emissions. The Company also has the capability of producing ETBE, an
alternative gasoline blending component. ETBE is manufactured from TBA and
ethanol and has a lower vapor pressure than MTBE or ethanol.

Worldwide demand for MTBE in 1996 was approximately 375 thousand barrels per
day, based on published data. Worldwide MTBE demand has increased dramatically
over the past seven years as a result of the U.S. Clean Air Act Amendments of
1990 (the Amendments), state and local regulations and the need for
incremental octane in the U.S. and other countries. In the U.S., the
Amendments set minimum levels for oxygenates, such as MTBE, in gasoline sold
in areas not meeting specified air quality standards. The Environmental
Protection Agency recently proposed a reduction in the ozone standard in the
U.S. which, if adopted, may create additional demand for oxygenates. However,
other federal and local legislative initiatives, challenging the effectiveness
of oxygenated fuels in reducing air pollution or responding to consumer
concerns about the possible health effects of widespread use of oxygenated
fuels, could adversely affect demand for MTBE. Sales and other operating
revenues for TBA and derivatives constituted 29 percent, 27 percent, and 30
percent, respectively, of the Company's total 1996, 1995, and 1994 sales and
other operating revenues. See Item 7 for additional discussion.

Styrene Monomer

Styrene is the major co-product of the second of the Company's two PO
processes. Styrene is a commodity chemical produced and traded worldwide.
Based on published data, worldwide demand in 1996 was approximately 38 billion
pounds. The major markets include commodity and specialty polymer
applications, such as polystyrene, ABS, EPS and polyester resins, as well as
various rubber industry uses. Sales and other operating revenues for SM and
derivatives constituted 15 percent, 20 percent, and 19 percent, respectively,
of the Company's total 1996, 1995, and 1994 sales and other operating
revenues. The Company delivers most of its styrene production to the U.S.
merchant market and to selected export markets through sales or processing
agreements. See Item 7 for additional discussion. The Company utilized about
12 percent of its styrene production in 1995 for the manufacture of
derivatives. With the sale of the plastics business to NOVA on September 30,
1996, the Company no longer manufactures or sells styrene monomer derivatives.
The Company has substantially replaced this volume by entering

3
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into a long-term sales agreement to supply NOVA with approximately the same
volume of SM that had been consumed by the plastics business before its sale.

SALES AND MARKETING

In 1996, most of the Company's sales and other operating revenues were
derived from sales to, or processing agreements with, unrelated third parties.
Over the past three years, no single unrelated third-party customer, or any
related party customer, accounted for more than 10 percent of total sales and
other operating revenues in any one year.

The Company delivers products through sales agreements, processing
agreements, and spot sales. The Company purchases limited amounts of MTBE and
SM for resale to the extent that demand for these co-products exceeds the
Company's production. Production levels of co-products are based upon the
demand for PO and the market economics of the co-products.

For several years, the Company has followed the practice of entering into
multi-year PO processing or sales agreements in an effort to mitigate any
adverse impact from competitive factors and economic business cycles on demand
for the Company's PO. The Company has also entered into a number of multi-year
SM sales and processing agreements and MTBE sales agreements.

The SM processing agreements include long-term processing agreements
providing for the delivery of fixed annual quantities of SM-see Joint Ventures
and Other Arrangements below.

On September 30, 1996, the Company sold its plastic business to NOVA. As
part of the transaction, the Company entered into a long-term sales agreement
to supply NOVA with styrene monomer.

The Company entered into a number of multi-year, fixed-margin MTBE toll-
based sales contracts covering a substantial portion of the Company's U.S.-
based MTBE volume. Those contracts have had the effect of reducing the
exposure of the MTBE business to market cycles. A significant number of those
contracts have terminated, while the remainder will terminate in early 1997.
The Company is in the process of negotiating new contracts. In view of current
market conditions, however, it is anticipated that the pricing in the new
contracts will provide margins that are less favorable than those provided in
the former contracts.

The Company's sales are made through its own marketing and sales personnel
and through distributors and independent agents. The Company maintains sales
offices or sales representation in the United States, Australia, Austria,
Brazil, Canada, China, Finland, France, Germany, Hong Kong, Indonesia, Italy,
Japan, Mexico, the Netherlands, New Zealand, Russia, Singapore, South Africa,
Spain, Taiwan, Thailand, Turkey, and the United Kingdom.

For information about certain data relating to foreign operations and export
sales, see Note 4 of Notes to Consolidated Financial Statements.

JOINT VENTURES AND OTHER ARRANGEMENTS

In January 1995, the Company entered into long-term TDI supply agreements
with Rhone-Poulenc. Since January 1, 1995, the Company has been entitled to
the entire TDI output of Rhone-Poulenc's two plants in France, which have a
combined annual capacity of approximately 264 million pounds. The Company
markets this TDI principally in Europe and Asia.

4
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The world-scale PO/SM plant at the Channelview, Texas complex that was
completed in 1992 (PO/SM II) is owned by the Company together with third-party
investors. The Company sold additional interests to the investors in 1994 and
1996. In addition, portions of the pending PO/SM II expansion--see Item 7 for
additional discussion--are being funded through third-party investment. The
Company retains a majority interest in the PO/SM II plant. A substantial
portion of the current SM output of the PO/SM II plant is committed, and the
increased SM output resulting from the expansion will be committed, under
long-term processing agreements. As of December 31, 1996, 800 million pounds
per year of the PO/SM II plant's existing SM capacity was committed under such
agreements.

The Company, through an affiliate, has a 50 percent equity interest in Nihon
Oxirane Co., Ltd. (Nihon Oxirane), a joint venture with Sumitomo Chemical Co.,
Ltd. and Showa Denko K.K. Since 1976, Nihon Oxirane has operated a PO/SM plant
in Chiba, Japan.

RESEARCH AND DEVELOPMENT

The Company has its principal research and development facility at Newtown
Square, Pennsylvania, technical centers in Villers Saint Paul, France and
Singapore, and a technical facility in South Charleston, West Virginia.

The Company's research and development expenditures for 1996, 1995, and 1994
were $81 million, $79 million, and $76 million, respectively.

RAW MATERIALS

The principal hydrocarbon raw materials purchased by the Company are
propylene, butanes, ethylene, benzene and methanol. The market prices of these
raw materials historically have been related to the price of crude oil and its
principal refinery derivatives and natural gas liquids. These materials are
available in bulk quantities via pipeline or marine vessels. The Company's raw
material requirements are purchased from numerous suppliers in the United
States and Europe, with which the Company has established contractual
relationships, and in the spot market. The Company receives a portion of its
methanol requirements under a cost-based supply arrangement with a third
party. See Item 13 and Note 3 of Notes to Consolidated Financial Statements.

The Company is a large volume consumer of isobutane for chemical production.
The Company has invested in facilities, or entered into processing agreements
with unrelated third parties, to convert the widely available commodity normal
butane to isobutane. The Company is also a large consumer of oxygen for its
PO/TBA plants at Bayport, Texas; Rotterdam, the Netherlands; and Fos-sur-Mer,
France.

In order to assure adequate and reliable sources of supply at competitive
prices and rates, the Company has entered into long-term agreements and other
arrangements with suppliers of raw materials, products, industrial gas and
other utilities. See Note 11 of Notes to Consolidated Financial Statements.

COMPETITION

Competition within the Company's segment of the chemical industry is
significant and is affected by a variety of factors, including quality,
product price, reliability of supply, technical support, customer service, and
potential substitute materials. Capacity share figures for the Company and its
competitors, disclosed below, are based on completed production facilities and
include the full capacity of joint-venture facilities and certain long-term
supply agreements.

The Company's major worldwide PO competitor is Dow Chemical Company (Dow).
Dow's operations are based on chlorohydrin technology, and Dow is integrated
upstream from chlorine and

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propylene and downstream into a variety of PO derivatives. Based on published
data relating to the PO market, the Company believes that it has 38 percent
and Dow has 31 percent of the total worldwide capacity for PO. No other
producer is believed to have more than 4 percent of worldwide PO capacity.

Dow is in the process of completing expansions of annual PO capacity at
existing facilities, which, in total, are equivalent to the addition of a
world-scale PO plant, and has announced plans for similar capacity expansions
in the 1998-1999 time frame. In late 1994, Texaco Chemical Company completed
and brought on stream a PO/MTBE plant in Texas. Huntsman Corporation recently
announced that it is buying Texaco Chemical's PO/MTBE plant, including the
right to license the underlying technology. Shell has announced the
construction of a PO/SM plant in Singapore, which is scheduled for completion
in 1997. In 1996, Shell and BASF AG announced plans for a joint venture to
construct a PO/SM plant in Europe, using Shell technology, with a target
completion date in the 1999 time frame. In addition, Repsol Quimica, S.A.
(Quimica) announced plans to build a PO/SM plant in Tarragona, Spain, using
technology for the production of PO and SM licensed from the Company under
agreements entered into in conjunction with the dissolution in 1986 of a
Spanish joint venture called Montoro. The Company believes that such action by
Quimica would contravene the terms of the license. See Item 3, "Legal
Proceedings". Several other companies have been attempting to develop or
license commercial PO processes, and additional PO plants may be built by
competitors.

On April 12, 1996, the Company's Board of Directors gave final approval for
the expansion of the PO/SM complex in Channelview, Texas, and the construction
of a new world-scale PO/SM plant in Rotterdam, the Netherlands. The
Channelview PO/SM expansion will add annual PO and SM capacity of 110 million
and 248 million pounds, respectively, in early 1998. The new PO/SM plant is
expected to be completed in the fourth quarter 1999, adding annual PO and SM
capacity of 625 million and 1,400 million pounds, respectively, upon start up.

The Company competes with many polyols producers worldwide, including Dow
and Bayer AG. Based on published data, Dow is believed to have 26 percent of
worldwide polyols capacity while the Company is believed to have 15 percent
and Bayer AG is believed to have 10 percent. No other polyols producer is
believed to have more than 7 percent of worldwide polyols capacity.

The Company has long-term supply agreements for TDI, an isocyanate, which is
reacted with polyols to produce flexible foams. With the acquisition of Olin's
production facilities, the Company also manufactures TDI. TDI enables the
Company to compete more effectively with other suppliers to the flexible foam
market who offer both polyols and TDI to customers. In the majority of
flexible foam applications, such as furniture, bedding and automotive seating,
there is some competition for foams from substitute materials. The Company
competes with many TDI producers worldwide including Bayer AG and BASF AG.
Based on published data, Bayer AG is believed to have 25 percent of worldwide
TDI capacity while the Company is believed to have 19 percent and BASF AG is
believed to have 10 percent. No other TDI producer is believed to have more
than 7 percent of worldwide TDI capacity.

The Company competes with many MTBE producers worldwide; the most
significant is Ibn Zahr (a joint venture 70 percent owned by Saudi Basic
Industries Corp.). Based on published data, the Company believes that it has
12 percent of the total worldwide capacity for MTBE while Ibn Zahr is believed
to have 11 percent. No other producer is believed to have more than 6 percent
of worldwide MTBE capacity. MTBE also faces potential competition from
substitute products such as ethanol.

The Company competes with several SM producers worldwide; among them are Dow
and Shell. Based on published data, Dow is believed to have 10 percent of the
total worldwide SM capacity while Shell and the Company are believed to have 9
percent and 8 percent, respectively. No other producer is believed to have
more than 6 percent of worldwide SM capacity.

There can be no assurance that the Company will not face additional
competition in the future.

6
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PROPERTIES AND PRODUCTION FACILITIES

The Company's corporate and executive headquarters and its principal
research operations are located at Newtown Square, Pennsylvania. The Company
leases the Newtown Square property from ARCO. See Item 13. The Company's
European headquarters are located in leased facilities in Maidenhead, England,
and the Company's Asia Pacific headquarters are located in leased facilities
in Hong Kong.

Depending on location and market needs, the Company's production facilities
can receive primary raw materials by pipeline, rail car, truck, barge, or ship
and can deliver finished products by pipeline, rail car, truck, barge,
isotank, ship, or in drums. The Company charters ships, owns and charters
barges, and leases isotanks and rail cars for the dedicated movement of
interplant products, products to customers or terminals, or raw materials to
plants, as necessary. The Company leases liquid and bulk storage and warehouse
facilities at terminals in the Americas, in Europe, and in the Asia Pacific
region. In the Rotterdam outer harbor area, the Company operates an on-site
butane storage tank, propylene spheres, pipeline connections, and a jetty that
accommodates deep-draft vessels.

In the United States, the Company produces PO, TBA, PG, and PGE at the
Bayport, Texas plants and PO, SM, MTBE, polyols, and butanediol at the
Channelview, Texas plants. The Channelview plant has the capability to produce
either MTBE or ETBE. Polyols are also produced at the Company's plants in
South Charleston and Institute, West Virginia, which are situated on leased
land. With the acquisition of Olin's TDI and ADI businesses, the Company now
has isocyanate production facilities in Lake Charles, Louisiana.

In Europe, the Company produces PO, TBA, MTBE, and PG at plants located in
Rotterdam, the Netherlands and Fos-sur-Mer, France. In addition, polyols are
produced at plants located in Rieme, Belgium and Fos-sur-Mer, France. The
Rotterdam plant also produces PGE.

In the Asia Pacific region, the Company's PO/SM plant, owned by Nihon
Oxirane, is located in Chiba, Japan. Polyols plants are located in Kaohsiung,
Taiwan and Anyer, West Java, Indonesia. The Anyer plant is owned by P.T. ARCO
Chemical Indonesia, an Indonesian joint venture with P.T. Gema Supra Abadi in
which the Company, through a subsidiary, has a majority interest.

The following table shows the Company's worldwide production capacity (in
millions of pounds per year, except where otherwise noted) for certain key
products. The Company has committed 800 million pounds of the indicated
domestic SM capacity through long-term processing arrangements. See Item 7 for
additional discussion.

<TABLE>
<CAPTION>
PRODUCT DOMESTIC FOREIGN TOTAL
------- -------- ------- ------
<S> <C> <C> <C>
PO 2,335 1,360 3,695
Polyols 725 590 1,315
PG 565 345 910
PGE 120 155 275
Butanediol 75 -- 75
TDI 250 -- 250
MTBE--Bbls/day 30,000 28,500 58,500
SM 2,570 790 3,360
</TABLE>

Capacities shown are the production capacities that the Company believes
could be obtained, as of December 31, 1996, based upon plant design and
subject to certain on-stream factors, product mix, and other variable factors.
Capacities shown include the full capacity of joint-venture facilities. Plants
can and have exceeded these capacities for extended periods of time.

7
<PAGE>

The Company also contracts for the manufacture of certain of its products,
from time to time, at third party facilities under supply and processing
agreements. The Company has long-term supply agreements with Rhone-Poulenc for
TDI. These agreements entitle the Company to all of the TDI output of the
supplier's two plants in France with a combined capacity of approximately 264
million pounds per year. Under a processing agreement with a producer located
in Corpus Christi, Texas, the Company has secured additional MTBE capacity
totaling 12,000 bbls/day. The production facility at Corpus Christi, Texas has
the capability for either MTBE or ETBE production.

PATENTS, TRADE NAMES, AND TRADEMARKS

ARCO has granted the Company a license to use "ARCO" in its name and the
ARCO spark design as a logo. This license by ARCO has been granted on a
royalty-free basis, which is consistent with ARCO's practice of licensing its
name and design to its subsidiaries and affiliates. The Company owns and has
licensed from ARCO various domestic and foreign trademarks.

The Company possesses a body of patented and unpatented technology and trade
secrets relating to its products, processes and the design and operation of
its plants, all of which are valuable to the Company. The Company does not
believe that the loss of any individual patent or trade secret would have a
material adverse effect on its business. The basic patents relating to the
Company's PO/SM and PO/TBA process technologies have expired.

ENVIRONMENTAL MATTERS

The Company (together with the industry in which it operates) is subject to
federal, state, local, and foreign environmental laws and regulations
concerning emissions to the air, discharges to surface and subsurface waters,
and the generation, handling, storage, transportation, treatment, and disposal
of waste materials. The Company and the industry are also subject to other
federal, state, local, and foreign environmental laws and regulations,
including those that require the Company to remove or mitigate the effects of
the disposal or release of certain chemical substances at various sites. It is
impossible to predict precisely what effect these laws and regulations will
have on the Company in the future. Compliance with environmental laws and
regulations could result in significant capital expenditure requirements as
well as other costs and liabilities. Management believes, based upon its past
experience and best assessment of future events, that these environmental
liabilities and costs will be determined and incurred over an extended period
of time, allowing the Company to fund such liabilities and costs in the
ordinary course of business. See Item 3, "Legal Proceedings" and Note 11 of
Notes to Consolidated Financial Statements.

It is the Company's policy to comply with all environmental laws and
regulations. In some cases, compliance can be achieved only by capital
expenditures. The Company's annual environmental-related capital expenditures
for 1996, 1995, and 1994 were $24 million, $27 million, and $29 million,
respectively. For the years 1997 and 1998, the Company anticipates annual
environmental-related capital expenditures to range from $34 million to $37
million. These figures do not include any environmental-related capital
expenditures associated with construction of new facilities. Environmental-
related capital expenditures include the cost of projects to reduce and/or
eliminate pollution and contamination in the future and the cost of
modifications to the Company's manufacturing facilities necessary to comply
with environmental laws and regulations.

In 1996, 1995 and 1994, the Company's charges for estimated future expenses
for remediation were $4 million, $12 million and $13 million, respectively,
while actual expenditures for the past three years have averaged $6 million
per year. The Company's operating expenses also include ongoing costs of
controlling or disposing of pollutants. The Company estimates that its
operating expenses related to these ongoing costs were approximately $33
million, $31 million and $36 million for 1996, 1995 and 1994, respectively.

8
<PAGE>

HUMAN RESOURCES

At December 31, 1996, the Company employed approximately 4,000 people
(exclusive of employees of unconsolidated joint ventures). The Company added
approximately 500 former Olin employees to the payroll as of January 1, 1997.
The Company believes its relationships with its employees are satisfactory.
Approximately 23 percent of the Company's domestic employees, including former
Olin employees, are represented by labor unions.

ITEM 3. LEGAL PROCEEDINGS

ENVIRONMENTAL MATTERS AND RELATED LITIGATION

In December 1993, the U.S. Environmental Protection Agency (the EPA) issued
a Unilateral Administrative Order (the Order) to the Company and other
potentially responsible parties requiring implementation of a remedial
design/remedial action for the Turtle Bayou, Texas site under the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended (Superfund). The Company has raised certain legal defenses against the
enforcement of the Order. In January 1994, the EPA filed a complaint against
the Company and certain other defendants, including ARCO, in the United States
District Court for the Eastern District of Texas seeking recovery of costs of
removal and/or remedial action allegedly incurred or to be incurred by the
federal government. In 1994, the Company reached an agreement in principle
with the EPA to settle the cost recovery lawsuit under which the Company and
ARCO agreed (i) to pay $1.1 million in reimbursement of past costs incurred by
the federal government and (ii) to perform remedial activities with respect to
a portion of the site. In late 1996, the agreement in principle was modified
to provide that the Company and ARCO will perform remedial activities with
respect to certain additional portions of the site in lieu of reimbursing the
federal government for past costs. Site remediation is expected to take at
least five years. The parties have substantially agreed to the terms of a
consent decree to embody the settlement. After the consent decree becomes
effective, it is expected that the Order will be rescinded with respect to the
Company.

The Company is currently involved in administrative proceedings or lawsuits
relating to eight other Superfund sites. Based on currently available
information, the Company does not believe that the potential cost associated
with these sites, individually or in the aggregate, will be significant. The
Company may in the future be involved in additional assessments and clean-ups
under environmental laws. The future costs in connection with such matters
will be affected by such factors as the unknown magnitude of clean-up costs,
the unknown timing and extent of the remedial actions that may be required,
the determination of the Company's liability in proportion to other
potentially responsible parties, and the extent, if any, to which such costs
are recoverable from insurance.

Certain organic waste material is contained in the soil and ground water at
the site of the Company's former Monaca, Pennsylvania (Beaver Valley) plant.
In 1994, the Company entered into a Consent Order and Agreement (the Consent
Agreement) with the Pennsylvania Department of Environmental Protection
(PADEP) pursuant to which the Company and PADEP agreed upon a work plan for
testing and remedial process design with regard to the conditions at the
Beaver Valley site. Under the terms of the Consent Agreement, the Company paid
civil penalties totalling $363,000 in 1994. In addition, the Company is paying
a penalty of $63,000 each year until the commencement of active remediation at
the Beaver Valley site, after which the amount of such annual penalty shall be
reduced based on the extent of remediation commenced at the site. The Company
sold the Beaver Valley plant assets to NOVA Chemicals Inc. (NOVA) as of
September 30, 1996, but currently retains ownership of the Beaver Valley land,
substantial portions of which are being leased to NOVA. NOVA will assume
ownership of such portions of the Beaver Valley land after the occurrence of
certain defined events. The Company has retained responsibility for the work
plan and for certain additional remediation of the Beaver Valley land that may
be required by PADEP pursuant to the Pennsylvania Land Recycling and
Environmental Remediation Standards Act. The Company has an agreement with

9
<PAGE>

Beazer East, Inc. (Beazer), the successor to Koppers Inc. (the previous owner
of the Beaver Valley plant), whereby Beazer agreed to pay for approximately 50
percent of the cost of the remediation. The Company and Beazer have reached an
agreement with the U.S. government pursuant to which the government will pay
28.5 percent of the costs incurred by the Company and Beazer for remediation
of substantial portions of the Beaver Valley site.

In addition to the matters reported herein, from time to time the Company
and its subsidiaries become aware of compliance matters relating to, or
receive notices from federal, state or local governmental entities of alleged
violations of, environmental, health and/or safety laws and regulations
pertaining to, among other things, the disposal or discharge of chemical
substances (including hazardous wastes). In some instances, these matters may
become the subject of administrative proceedings or lawsuits and may involve
monetary sanctions of $100,000 or more (exclusive of interest and costs). See
Items 1 and 2, "Business and Properties--Environmental Matters" and Note 11 of
Notes to Consolidated Financial Statements.

OTHER LITIGATION

On October 15, 1996, the Company commenced an arbitration proceeding in the
International Chamber of Commerce Court of Arbitration in Paris, France
against Repsol, S.A. (Repsol), Repsol Quimica, S.A. (Quimica) and Repsol
Petroleo, S.A. (Petroleo). The dispute concerns technology for the production
of PO and SM licensed to Quimica by the Company under agreements entered into
in conjunction with the dissolution in 1986 of a Spanish joint venture called
Montoro. The Company seeks in the arbitration to enforce the Company's rights
under the 1986 agreements and to protect the licensed technology.
Subsequently, pursuant to an agreement among the parties, Repsol was permitted
to withdraw as a party to the arbitration. On October 15, 1996, the Company
also formally notified the European Commission of the 1986 agreements, because
Quimica and its affiliates take the position that those agreements are not
enforceable under European law. Quimica and Petroleo concurrently filed a
complaint with the European Commission in which they seek to have the 1986
agreements declared to be contrary to Articles 85 and 86 of the Treaty of Rome
and therefore unenforceable. Quimica and Petroleo also filed a complaint with
the Spanish Bureau for the Protection of Competition seeking relief under
Spanish competition law. The Company believes that these complaints are not
well founded and that the 1986 agreements are valid and enforceable.

In addition, the Company and its subsidiaries are involved in a number of
lawsuits, all of which have arisen in the ordinary course of the Company's
business.

The Company is unable to predict the outcome of the foregoing matters, but
does not believe that the ultimate resolution of such matters will have a
material adverse effect on the consolidated financial statements of the
Company.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of 1996.

10
<PAGE>

EXECUTIVE OFFICERS OF THE COMPANY

Set forth below are the executive officers of the Company as of January 30,
1997.

<TABLE>
<CAPTION>
NAME, AGE, AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH THE COMPANY FIVE YEARS AND PERIOD SERVED AS OFFICER(A)
------------------------- ------------------------------------------
<S> <C>
Alan R. Hirsig, 57 Mr. Hirsig was elected President and Chief Executive Officer
President, Chief on January 1, 1991. He was elected an officer of the Company
Executive Officer, and on June 22, 1987 and a Director of the Company on November
Director 14, 1989. Previously, Mr. Hirsig was President of the
Company's European operations from July 1984 to December 1990
and a Senior Vice President of the Company from July 1988 to
December 1990.

Morris Gelb, 50 Mr. Gelb was elected an officer of the Company on June 22,
Vice President, 1987. He assumed his current position in September 1991. Pre-
Environmental, viously, he was Vice President, Research and Engineering from
Engineering and September 1986 to September 1991.
Manufacturing Programs

Michael G. Griffith, 55 Mr. Griffith was elected an officer of the Company on May 9,
Vice President, Research 1990. He assumed his current position on that date. Prior to
and Development joining the Company, he was Vice President, Technology of Ow-
ens-Corning Fiberglas Corp. (building products and reinforce-
ments) from January 1989 to May 1990 and Vice President, Re-
search and Development of Owens-Corning Fiberglas Corp. from
1983 to January 1989.

Robert J. Millstone, 53 Mr. Millstone was elected Vice President and General Counsel
Vice President, General of the Company, effective January 1, 1995. Previously, he was
Counsel, and Secretary Associate General Counsel from January 1989 to December 1994.
He has been Secretary of the Company since October 1990.

Marvin O. Schlanger, 48 Mr. Schlanger was elected an officer of the Company on Septem-
Executive Vice ber 1, 1987 and a Director of the Company on November 14,
President, Chief 1989. He assumed his current position in November 1994. Pre-
Operating Officer, and viously, he was Senior Vice President of the Company and
Director President of ARCO Chemical Americas Company from August 1992
to November 1994, Senior Vice President and Chief Financial
Officer from October 1989 to August 1992 and Vice President,
Worldwide Business Management from September 1988 to Septem-
ber 1989.

John A. Shaw, 48 Mr. Shaw was elected an officer of the Company on May 13,
Vice President and 1993. He assumed his current position in January 1995. Previ-
Controller ously, he was Vice President and Treasurer of ARCO Chemical
Company from July 1993 to January 1995 and Vice President,
Planning and Control of the Company's European operations
from July 1987 to July 1993.

Walter J. Tusinski, 49 Mr. Tusinski was elected an officer and a Director of the Com-
Senior Vice President, pany on September 1, 1992. He assumed his current position on
Chief Financial Officer, that date. Previously, he served as Vice President, New Busi-
and Director ness Ventures of ARCO International Oil and Gas Company from
September 1990 to August 1992 and Vice President, Planning
and Control of ARCO Products Company from October 1986 to Au-
gust 1990.
</TABLE>

11
<PAGE>

<TABLE>
<CAPTION>
NAME, AGE, AND PRESENT BUSINESS EXPERIENCE DURING PAST
POSITION WITH THE COMPANY FIVE YEARS AND PERIOD SERVED AS OFFICER(A)
------------------------- ------------------------------------------
<S> <C>
Francis W. Welsh, 53 Mr. Welsh was elected an officer of the Company on June 22,
Vice President, Human 1987. He has held his current position since August 1983.
Resources Previously, he was Manager of Compensation and Manager of
Personnel Resources and Development, Corporate Employee Rela-
tions of ARCO from September 1980 to May 1983.
</TABLE>
- --------
(a) The By-Laws of the Company provide that each officer shall hold office
until his successor is elected or appointed and qualified, or until his
death or resignation, or his removal by the Board of Directors.

12
<PAGE>

PART II

ITEM 5.MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The common stock is listed on the New York Stock Exchange. The reported high
and low sales prices of the common stock on the New York Stock Exchange (New
York Stock Exchange Composite Tape) from January 1, 1995 through January 30,
1997, inclusive, were:

<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ---- ---
<S> <C> <C>
1995
First Quarter.............................................. 45 41 3/8
Second Quarter............................................. 47 7/8 44
Third Quarter.............................................. 50 1/8 45 1/2
Fourth Quarter............................................. 50 1/2 47 5/8
1996
First Quarter.............................................. 52 7/8 48 1/2
Second Quarter............................................. 54 50 1/2
Third Quarter.............................................. 52 1/2 47 1/8
Fourth Quarter............................................. 50 3/4 47 1/2
1997
First Quarter (through January 30)......................... 47 3/4 47 1/2
</TABLE>

On January 30, 1997, the closing price of the common stock was $47 5/8.

As of December 31, 1996, the number of holders of record of common stock of
the Company was 2,014.

The Company has paid quarterly cash dividends as follows:

<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1995............................ $0.625 $0.625 $0.700 $0.700
1996............................ $0.700 $0.700 $0.700 $0.700
1997............................ $0.700*
</TABLE>
- --------
* On January 23, 1997, a dividend of $0.70 per share was declared on the
common stock, payable on March 7, 1997 to stockholders of record on February
14, 1997.

The current quarterly dividend rate for the common stock is $0.70 per share.
The declaration and payment of future dividends and the amount thereof will be
dependent on the Company's results of operations, financial condition, cash
requirements, and future prospects as well as on other factors deemed relevant
by the Board of Directors. It is the current intention of the Company to
declare and pay quarterly cash dividends on its common stock.

13
<PAGE>

ITEM 6.SELECTED FINANCIAL DATA

The following table sets forth selected financial information for the
Company:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Sales and other operating reve-
nues............................. $3,955 $4,282 $3,423 $3,192 $3,100
Costs and other operating ex-
penses........................... 3,067 3,102 2,586 2,453 2,343
Income before changes in account-
ing principles................... 348 508 269 214 197
Net income(1)..................... 348 508 269 214 195
Total assets...................... 4,394 4,135 3,737 3,502 3,599
Long-term debt, including current
portion.......................... 869 912 913 905 1,102
Dividends per common share........ 2.80 2.65 2.50 2.50 2.50
Earnings per share before changes
in accounting principles......... 3.60 5.28 2.80 2.23 2.05
Earnings per share(1)............. 3.60 5.28 2.80 2.23 2.03
</TABLE>
- --------
(1) Net income in 1992 includes a charge of $2 million, or $.02 per share, for
the net cumulative effect of changes in accounting principles, and a $56
million charge, or $.58 per share, related to the divestiture of a joint
venture in Korea.

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This discussion should be read in connection with the information contained
in the Consolidated Financial Statements and the Notes thereto.

OVERVIEW

The Company manufactures and markets intermediate chemicals and specialty
products, operating in a single industry segment. It conducts business
primarily in the Americas, Europe, and the Asia Pacific region.

Each of the Company's two principal manufacturing processes yields its key
product, propylene oxide (PO), and one of two co-products, styrene monomer
(SM) or tertiary butyl alcohol (TBA). The Company also manufactures numerous
derivatives of PO and TBA. Among these are polyols, a key derivative of PO,
and methyl tertiary butyl ether (MTBE), a principal derivative of TBA. MTBE is
used in oxygenated fuels and as an octane additive.

On September 30, 1996, the Company sold its plastics business to NOVA
Chemicals Inc. (NOVA). As a result of the sale of the plastics business, the
Company no longer manufactures or sells SM derivatives, but will continue to
manufacture and market SM.

Net income for 1996 was $348 million compared with $508 million in 1995 and
$269 million in 1994. Net income in 1996 decreased versus 1995 primarily due
to significantly lower SM margins and, to a lesser extent, lower PO and
derivatives volumes and lower MTBE margins. Net income for 1995 increased over
1994 primarily due to improved margins for PO and derivatives and a
significant improvement in SM margins.

14
<PAGE>

RESULTS OF OPERATIONS

Product Volumes

Sales and other operating revenues include the sales and processing volumes
of PO, TBA, SM and their derivatives as set forth below for the years
indicated. As a result of the sale of the plastics business on September 30,
1996, the Company no longer manufactures or sells SM derivatives, but will
continue to manufacture and market SM.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
(MILLIONS)
<S> <C> <C> <C>
PO and derivatives (pounds)....................... 3,351 3,476 3,699
Co-products:
SM and derivatives (pounds)..................... 2,647 2,579 2,496
TBA and derivatives (gallons)................... 1,107 1,140 1,004
</TABLE>

The reported SM volumes include quantities processed for PO/SM II equity
partners (SM equity volumes) under long-term processing arrangements. The SM
equity volumes were 748 million, 609 million and 577 million pounds in 1996,
1995 and 1994, respectively.

Revenues

Revenues decreased eight percent to $3,955 million in 1996 from $4,282
million in 1995 primarily reflecting lower SM prices and, to a lesser extent,
lower volumes for PO and derivatives. SM sales prices decreased significantly
versus the 1995 period as increased industry capacity depressed SM market
prices. For example, based on domestic market quotations, average 1996 SM
contract and spot prices decreased more than 30 percent and 40 percent,
respectively, versus 1995. SM capacity increases are expected to continue to
impact SM prices and margins in the near term. PO and derivatives volumes in
1996 decreased four percent compared to 1995 due to increased availability of
PO supplies in 1996 and slower growth in demand. PO industry capacity
increased in 1996, following the addition of a new competitive facility in
1994, which operated at reduced rates in 1995, and a significant competitor's
debottleneck in 1995. Conversely, the Company estimates that worldwide market
demand for PO, in 1996 and 1995, slowed to less than half of its historical
five percent long-term annual rate of growth. SM and derivatives volumes
increased three percent, primarily due to increased SM equity volumes, as
noted above.

Revenues increased 25 percent to $4,282 million in 1995 from $3,423 million
in 1994 primarily due to higher sales prices. While sales prices were
generally higher for all products, average SM sales prices increased
significantly versus the 1994 period as a result of higher worldwide demand
during the early part of 1995. Volume benefits from higher domestic MTBE
volumes and first-time sales of TDI were substantially offset by lower volumes
for PO and derivatives. Domestic MTBE volumes increased versus 1994 primarily
due to increased demand, which resulted from implementation of the
reformulated gasoline phase of the Clean Air Act in 1995. PO and derivatives
volumes in 1995 decreased six percent compared to 1994 primarily due to the
addition of a new competitive facility in the U.S. in late 1994, as well as
lower Asia Pacific sales, which were affected by a slowdown in China markets.

15
<PAGE>

Gross Profit

Gross profit decreased 25 percent to $888 million in 1996 from $1,180
million in 1995. The gross profit decrease was primarily attributable to lower
SM margins and, to a lesser extent, lower PO and derivatives volumes and lower
MTBE margins. These were partly offset by higher PO and derivatives margins.
Overall gross profit was 22.5 percent of sales in 1996 compared to 27.6
percent in 1995. SM margins were significantly lower versus 1995 as prices
decreased substantially more than raw material costs. MTBE margins primarily
decreased due to increases in feedstock and other costs as MTBE prices were
relatively flat year to year.

Gross profit increased 41 percent to $1,180 million in 1995 from $837
million in 1994, reflecting the 25 percent increase in revenues as well as
higher margins. Overall gross profit was 27.6 percent of sales in 1995
compared to 24.5 percent in 1994 as higher sales prices more than offset net
increases in raw materials costs. The margin improvements were seen in PO and
derivatives, especially in the fourth quarter, and in SM margins during the
first half of the year. Average SM margins improved significantly in 1995 as
evidenced by industry raw material margins, which doubled, on average,
compared to 1994. SM prices and margins increased substantially during the
first half of 1995, but declined over the second half as worldwide demand
declined. Raw material cost comparisons, 1995 versus 1994, were mixed, with
substantial increases in average propylene costs, more moderate increases in
average butane and ethylene costs and a decrease in average benzene and
methanol costs.

Other

In 1994, management adopted a corporate restructuring program, resulting in
a pretax charge of $30 million, primarily for costs associated with personnel
reductions. This item was reported as restructuring costs in 1994.

Other income (expense), net, was $33 million in 1996, $22 million in 1995
and $26 million in 1994. The increase in 1996 primarily reflects benefits from
insurance proceeds and higher interest income, partly offset by lower equity
earnings from the Company's PO/SM joint venture in Japan. The 1995 period
included higher equity earnings from the Japanese joint venture, while 1994
included an $18 million pretax benefit from an insurance settlement related to
the 1990 Channelview plant incident.

Income Taxes

The Company's effective income tax rate was 28.5 percent in 1996, 32.8
percent in 1995, and 35.3 percent in 1994. The decrease in the 1996 rate
versus 1995 is due to the utilization of capital loss carryforwards,
utilization of foreign tax credits pursuant to the tax sharing agreement with
ARCO, and lower state income taxes in 1996. The decrease in 1995 versus 1994
reflected benefits from higher export income and increased utilization of
foreign tax credits due to higher foreign earnings.

16
<PAGE>

FINANCIAL CONDITION

Liquidity and Capital Resources

As of December 31, 1996, the Company had $70 million in cash and cash
equivalents and short-term investments compared with $260 million at December
31, 1995. The Consolidated Statement of Cash Flows for the year ended December
31, 1996 shows that net cash flows provided by operating activities were $562
million, whereas net cash flows used by investment and financing activities
were $589 million and $133 million, respectively.

On December 4, 1996, the Company purchased substantially all of the assets
of Olin's TDI and ADI businesses for approximately $571 million. The purchase
included Olin's TDI and ADI production facilities at Lake Charles, Louisiana,
working capital of approximately $94 million and certain related assets,
including trademarks, patents and technology. The Company financed the
acquisition through a combination of cash on hand and short-term borrowing.

Investment activities in 1996 included expenditures for plant and equipment,
excluding the Olin acquisition, of $244 million. A significant portion of the
1996 capital program was devoted to environmental, health and safety projects
as well as PO derivative capacity expansions at existing facilities. Minority
interest includes equity contributions designated for specific capital
projects. At December 31, 1996, the unexpended amounts were classified as
long-term other assets in the balance sheet. The Company's 1997 capital budget
for plant and equipment is $453 million.

On October 4, 1996, the Company announced the start of engineering on a 250
million pound-per-year butanediol (BDO) plant to be built in Rotterdam, the
Netherlands, by the year 2001, and plans to expand existing BDO capacity in
Channelview, Texas, from 75 million to 120 million pounds per year in late
1997.

On September 30, 1996, the Company sold its plastics business to NOVA. The
sale proceeds were approximately $160 million. As part of the transaction, the
Company entered into a long-term sales agreement to supply NOVA with
approximately the same amount of SM as had been consumed by the plastics
business. The sale of the plastics business did not have a material effect on
the Company's consolidated financial statements.

In connection with the sale of the plastics business, the Company
implemented a stock repurchase program for up to 320,000 shares of the
Company's common stock held in certain employee benefit plans by former
employees associated with the plastics business. Through December 31, 1996,
the Company repurchased 72,445 shares.

On April 12, 1996, the Board of Directors gave final approval for the
expansion of the PO/SM complex in Channelview, Texas, and the construction of
a new world-scale PO/SM plant in Rotterdam, the Netherlands. The Channelview
PO/SM expansion will add annual PO and SM capacity of 110 million and 248
million pounds, respectively, in early 1998. The new PO/SM plant is expected
to be completed in the fourth quarter 1999, adding annual PO and SM capacity
of 625 million and 1,400 million pounds, respectively, upon start up. The
Company plans to finance portions of the Channelview PO/SM expansion and the
new Rotterdam PO/SM plant through limited partners who will have a minority
equity interest in the completed facilities. The Company also plans to commit
substantial portions of the increased SM capacity from these projects, as well
as additional SM capacity at existing PO/SM facilities, under long-term
processing arrangements.

The Company paid dividends totalling $271 million in 1996, including a $.70
per share dividend, totalling $68 million, during the quarter ended December
31, 1996. On January 23, 1997, the Board of Directors declared a dividend of
$.70 per share on the Company's common stock, payable March 7, 1997.

The Company maintains a credit agreement under which it can borrow amounts
of up to $300 million. At December 31, 1996, the Company had no outstanding
borrowings against the credit agreement, which is used to back up the
Company's commercial paper borrowing.

17
<PAGE>

It is expected that future cash requirements for capital expenditures,
dividends and debt repayments will be met by cash generated from operating
activities and additional borrowing.

Effects of Inflation

Based on the age of the Company's fixed assets, it is estimated that the
replacement cost of those assets is greater than the historical cost reflected
in the Company's financial statements. Accordingly, the Company's depreciation
and amortization expense for the three years ended December 31, 1996, would be
greater if the expense were stated on a current cost basis.

Risk Management

The Company uses derivative financial instruments to reduce certain types of
financial risk. Use of derivatives is limited to simple, non-leveraged
instruments placed with major financial institutions whose creditworthiness is
monitored. Company policy provides restrictions on concentrating credit risk
in any one institution. Hedging strategies and transactions are reviewed and
approved by management before being implemented. Monthly market valuations and
quarterly sensitivity analyses are performed to monitor the effectiveness of
the Company's risk management program.

The Company enters into the following activities using derivative financial
instruments: (1) foreign currency forward contracts, option contracts and swap
contracts to reduce the risk of foreign currency fluctuations on future cash
flows, and, to a lesser extent, (2) interest rate swaps to minimize the impact
of fluctuating interest rates on the Company's outstanding floating rate debt.

Feedstock Costs

See "Raw Materials" included in Items 1 and 2.

Environmental

The Company is subject to loss contingencies pursuant to federal, state,
local, and foreign environmental laws and regulations. These contingencies
include possible obligations to remove or mitigate the effects on the
environment of the past disposal or release of certain chemical substances at
various sites (remediation costs). The Company continues to evaluate the
amount of these remediation costs and periodically adjusts its reserve for
remediation costs and its estimate of additional environmental loss
contingencies based on progress made in determining the magnitude, method and
timing of the remedial actions that may be required by government authorities
and an evaluation of the Company's potential liability in relation to the
liability and financial resources of any other potentially responsible
parties. Reflected in costs and other operating expenses for 1996 is a $4
million pretax charge for estimated future remediation costs compared with $12
million in 1995 and $13 million in 1994. These charges do not reflect any
potential benefit from insurance proceeds.

At December 31, 1996, the Company's environmental reserve totaled $53
million, which reflected the Company's latest assessment of potential future
remediation costs associated with existing sites. A significant portion of the
reserve is related to the Beaver Valley plant site, located in Monaca,
Pennsylvania. The reserve gives recognition to a work plan, between the
Company and the Pennsylvania Department of Environmental Protection (PADEP),
for testing, risk assessment, remedial process design and remediation of
conditions at the Beaver Valley plant. The reserve also reflects an agreement
between the Company and another responsible party whereby that party has
agreed to pay for approximately 50 percent of the costs associated with the
Beaver Valley plant work plan. The Company sold the Beaver Valley plant assets
to NOVA as of September 30, 1996, see Note 21 of Notes to Consolidated
FInancial Statements, but currently retains ownership of the land at the
Beaver Valley plant site, substantial portions of which are being leased to
NOVA. The Company has retained

18
<PAGE>

responsibility for certain remediation of the land at the Beaver Valley plant
site under the work plan and for certain additional remediation that may be
required by PADEP pursuant to the Pennsylvania Land Recycling and
Environmental Remediation Standards Act.

The remainder of the reserve is related to four other plant sites and one
federal Superfund site for amounts ranging from $2 million to $16 million per
site. The Company is involved in administrative proceedings or lawsuits
relating to eight other Superfund sites. However, the Company estimates, based
on currently available information, that potential loss contingencies
associated with these sites, individually and in the aggregate, are not
significant. Substantially all amounts reserved are expected to be paid out
over the next five to ten years.

The Company relies upon remedial investigation/feasibility studies (RI/FS)
at each site as a basis for estimating remediation costs at the site. The
Company has completed RI/FS or preliminary assessments at most of its sites.
However, selection of the remediation method and the cleanup standard to be
applied are, in most cases, subject to approval by the appropriate government
authority. Accordingly, the Company may have possible loss contingencies in
excess of the amounts reserved to the extent that the scope of remediation
required, the final remediation method selected and the cleanup standard
applied vary from the assumptions used in estimating the reserve. The Company
estimates that the upper range of these possible loss contingencies should not
exceed the amount accrued by more than $65 million.

The extent of loss related to environmental matters ultimately depends upon
a number of factors, including technological developments, changes in
environmental laws, the number and ability to pay of other parties involved at
a particular site and the Company's potential involvement in additional
environmental assessments and cleanups. Based upon currently known facts,
management believes that any remediation costs the Company may incur in excess
of the amounts reserved or disclosed above would not have a material adverse
impact on the Company's consolidated financial statements.

The Company and the other principal responsible party (PRP) at the Beaver
Valley site have reached an agreement with the U.S. government whereby the
government will pay 28.5 percent of the costs incurred by the Company and the
PRP for remediation of substantial portions of the Beaver Valley site. The
Company has neither recorded an asset nor reduced any liability as of December
31, 1996 as a result of this agreement.

19
<PAGE>

ITEM 8.FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

ARCO CHEMICAL COMPANY
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants...................................... 21
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995, and 1994........................................................ 22
Consolidated Balance Sheets as of December 31, 1996 and 1995........... 23
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995, and 1994.................................................. 24
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995, and 1994..................................... 25
Notes to Consolidated Financial Statements............................. 26
</TABLE>

20
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of ARCO Chemical Company

We have audited the consolidated financial statements of ARCO Chemical
Company and Subsidiaries listed in the index on page 20 of this Form 10-K.
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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ARCO Chemical
Company and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.

Coopers & Lybrand L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 12, 1997

21
<PAGE>

ARCO CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994

(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Sales and other operating revenues:
Unrelated parties.................................... $3,775 $4,085 $3,267
Related parties...................................... 180 197 156
------ ------ ------
Total revenues....................................... 3,955 4,282 3,423
Costs and other operating expenses (includes costs of
$132 in 1996, $134 in 1995, and $85 in 1994, of
related parties sales)................................ 3,067 3,102 2,586
------ ------ ------
Gross profit......................................... 888 1,180 837
Selling, general and administrative expenses........... 267 278 256
Research and development............................... 81 79 76
Restructuring costs.................................... -- -- 30
------ ------ ------
Operating income..................................... 540 823 475
Interest expense....................................... (86) (89) (85)
Other income (expense), net............................ 33 22 26
------ ------ ------
Income before income taxes........................... 487 756 416
Provision for income taxes............................. 139 248 147
------ ------ ------
Net income........................................... $ 348 $ 508 $ 269
====== ====== ======
Earnings per common share.............................. $ 3.60 $ 5.28 $ 2.80
====== ====== ======
</TABLE>

See accompanying notes.

22
<PAGE>

ARCO CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

(MILLIONS OF DOLLARS)

ASSETS

<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................... $ 70 $ 235
Short-term investments....................................... -- 25
Accounts receivable.......................................... 623 630
Accounts receivable--related parties......................... 6 1
Inventories.................................................. 536 472
Prepaid expenses and other current assets.................... 37 19
------ ------
Total current assets......................................... 1,272 1,382
Investments and long-term receivables.......................... 71 90
Property, plant and equipment, net............................. 2,622 2,293
Deferred charges and other assets (net of accumulated amortiza-
tion of $312 in 1996 and $285 in 1995)........................ 429 370
------ ------
Total assets................................................. $4,394 $4,135
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................................ $ 150 $ --
Long-term debt due within one year........................... 25 25
Accounts payable............................................. 330 228
Accounts payable--related parties............................ 19 25
Taxes payable................................................ 19 94
Other accrued liabilities.................................... 229 217
------ ------
Total current liabilities.................................... 772 589
------ ------
Long-term debt................................................. 844 887
Other liabilities and deferred credits......................... 171 158
Deferred income taxes.......................................... 408 409
Minority interest.............................................. 185 123
Stockholders' equity:
Common stock, $1 par value; authorized 250,000,000 shares;
99,550,001 issued; outstanding 96,759,317 (1996), 96,488,880
(1995)...................................................... 100 100
Additional paid-in capital................................... 875 869
Retained earnings............................................ 1,062 985
Foreign currency translation................................. 64 110
Treasury stock, at cost (shares: 2,790,684, 1996; 3,061,121,
1995)....................................................... (87) (95)
------ ------
Total stockholders' equity................................... 2,014 1,969
------ ------
Total liabilities and stockholders' equity................... $4,394 $4,135
====== ======
</TABLE>

See accompanying notes.

23
<PAGE>

ARCO CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994

(MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Cash flows from operating activities
Net income.............................................. $ 348 $ 508 $ 269
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 222 233 235
Deferred income taxes................................. 50 15 27
Restructuring costs................................... -- -- 30
Provision for environmental liabilities............... 4 12 13
Equity in net loss (income) of affiliate.............. 1 (14) (2)
Dividends received from affiliate..................... 12 17 --
Changes in working capital accounts................... (37) (76) 36
Other................................................. (38) (18) (43)
----- ----- -----
Net cash provided by operating activities............... 562 677 565
----- ----- -----
Cash flows from investment activities
Purchase of business.................................... (568) -- --
Capital expenditures.................................... (244) (195) (186)
Proceeds from asset sales............................... 179 6 22
Increase in deferred charges............................ (10) (82) (9)
Net proceeds from (purchases of) short-term investments. 25 (25) --
Other................................................... 29 (5) (3)
----- ----- -----
Net cash used in investment activities.................. (589) (301) (176)
----- ----- -----
Cash flows from financing activities
Dividends paid.......................................... (271) (255) (240)
Net proceeds from (repayment of) notes payable ......... 149 (24) (33)
Repayment of long-term debt............................. (24) (23) (18)
Other................................................... 13 17 3
----- ----- -----
Net cash used in financing activities................... (133) (285) (288)
----- ----- -----
Effect of exchange rate changes on cash................... (5) -- 1
----- ----- -----
Net (decrease) increase in cash and cash equivalents...... (165) 91 102
Cash and cash equivalents at beginning of year............ 235 144 42
----- ----- -----
Cash and cash equivalents at end of year.................. $ 70 $ 235 $ 144
===== ===== =====
</TABLE>

See accompanying notes.

24
<PAGE>

ARCO CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994

(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
ADDITIONAL FOREIGN
COMMON STOCK PAID-IN RETAINED CURRENCY
ISSUED TREASURY CAPITAL EARNINGS TRANSLATION
------ -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1993
(99,550,001 shares issued;
3,551,300 treasury shares).... $100 $(110) $864 $ 703 $ 19
Net income................... -- -- -- 269 --
Cash dividends ($2.50 per
share)...................... -- -- -- (240) --
Foreign currency translation. -- -- -- -- 51
Reissuance of 86,500 treasury
shares upon exercise of
stock options............... -- 3 -- -- --
---- ----- ---- ------ ----
Balance December 31, 1994
(99,550,001 shares issued;
3,464,800 treasury shares).... 100 (107) 864 732 70
Net income................... -- -- -- 508 --
Cash dividends ($2.65 per
share)...................... -- -- -- (255) --
Foreign currency translation. -- -- -- -- 40
Reissuance of 403,679 trea-
sury shares in connection
with purchases by employee
benefit plan and upon
exercise of stock options... -- 12 5 -- --
---- ----- ---- ------ ----
Balance December 31, 1995
(99,550,001 shares issued;
3,061,121 treasury shares).... 100 (95) 869 985 110
Net income................... -- -- -- 348 --
Cash dividends ($2.80 per
share)...................... -- -- -- (271) --
Foreign currency translation. -- -- -- -- (46)
Reissuance of 342,882 trea-
sury shares in connection
with purchases by employee
benefit plan and upon exer-
cise of stock options....... -- 11 6 -- --
Repurchase of 72,445 shares
from former employees....... -- (3) -- -- --
---- ----- ---- ------ ----
Balance December 31, 1996
(99,550,001 shares issued;
2,790,684 treasury shares).... $100 $ (87) $875 $1,062 $ 64
==== ===== ==== ====== ====
</TABLE>

See accompanying notes.

25
<PAGE>

ARCO CHEMICAL COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.FORMATION OF THE COMPANY

On June 9, 1987, Atlantic Richfield Company (ARCO) transferred substantially
all the assets and liabilities of the oxygenates and polystyrenics businesses
of the then ARCO Chemical Division to ARCO Chemical Company (the Company) in
exchange for 80,000,001 shares of common stock. On October 5, 1987, the
Company completed an initial public offering of 19,550,000 shares of common
stock. ARCO's 80,000,001 shares represented approximately 82.7 percent of the
outstanding shares of common stock at December 31, 1996.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries and partnerships.
Investments in affiliates (20 percent to 50 percent owned) are accounted for
under the equity method. All significant intercompany transactions have been
eliminated in consolidation. Certain amounts in 1995 and 1994 have been
reclassified for comparative purposes.

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. See
Note 11.

Cash Equivalents; Short-Term Investments--Cash equivalents consist of highly
liquid investments, such as time deposits, certificates of deposit and
marketable securities other than equity securities, maturing within three
months from the date of purchase. Short-term investments consist of similar
investments maturing in more than three months from the date of purchase. Cash
equivalents and short-term investments are carried at cost, which approximates
market.

Property, Plant and Equipment--Property, plant and equipment are depreciated
on a straight-line method over their estimated useful lives. Upon disposition,
residual cost less salvage is included in current income. Maintenance and
repairs are expensed and betterments are capitalized.

Deferred Charges--Deferred charges are carried at cost and consist primarily
of the value assigned to acquired technology, capacity reservation fees and
other long-term processing rights and costs. These assets are being amortized
on a straight-line method over their estimated useful lives or the term of the
related agreement, if shorter.

Environmental Expenditures--Environmental expenditures that relate to
current operations are expensed or capitalized, depending upon their future
economic benefit. Expenditures that result from the remediation of an existing
condition caused by past operations are expensed. Liabilities are recognized
for remedial activities when remediation is probable and the costs can be
reasonably estimated.

Income Taxes--The Company's results of operations are included in the
consolidated federal income tax return, and certain consolidated, combined, or
unitary state returns of ARCO. The Company's income tax expense in the
consolidated financial statements is computed on a modified stand-alone basis
pursuant to a tax sharing agreement, with any resulting liability or refund
settled with ARCO. The agreement, as modified effective January 1, 1995,
permits the Company to reduce its federal income tax liability through the use
of certain tax attributes that produce a benefit to the ARCO affiliated group,
but would not otherwise benefit the Company on a stand-alone basis. Income tax
expense also reflects the Company's liability under separate company returns
filed with certain states.

26
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)

Long-Lived Asset Impairment--Effective January 1, 1995, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The provisions of SFAS No. 121 require the Company to review its long-
lived assets for impairment on an exception basis whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be
recoverable through future cash flows. If it is determined that an impairment
loss has occurred based on expected future cash flows, then the loss is
recognized in the income statement and certain disclosures regarding the
impairment are made in the financial statements. The adoption of the
provisions of SFAS No. 121 did not have an effect on the Company's 1995
consolidated financial statements.

Stock-Based Compensation--Employee stock options are accounted for under the
intrinsic-value-based method prescribed by Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees". See Note 14.

3.RELATED PARTY TRANSACTIONS AND COST ALLOCATIONS

Effective July 1, 1987, the Company and ARCO (including ARCO subsidiaries)
entered into a series of agreements that included, among other things,
purchase, exchange and processing agreements, product sales agreements,
operational services agreements, and an administrative services agreement.

Certain of these agreements are between the Company and Lyondell
Petrochemical Company (Lyondell). Currently, ARCO's interest in Lyondell is
49.9 percent. In 1994, ARCO issued Exchangeable Notes due 1997, which, at
ARCO's option, can be exchanged at maturity into Lyondell common stock or cash
of equal value. If ARCO elects to deliver shares of Lyondell common stock at
maturity, ARCO's equity interest in Lyondell will be substantially reduced or
eliminated. Lyondell is treated by the Company as a related party.

The purchase, exchange, and processing agreements are principally for
methanol, benzene, ethylene, propylene, and MTBE. Other purchases from ARCO
and Lyondell principally include normal butane, isobutane, isobutylene,
nonenes and tetramers, natural gas and certain butanediol feedstocks. Product
sales include sales by the Company to ARCO and Lyondell of MTBE and propane.
The Company has entered into long-term sales agreements with ARCO providing
for delivery of fixed quantities of MTBE. The operational services agreements
are for various plant services performed by ARCO and Lyondell. The
administrative services agreement provides that beginning October 1, 1987,
ARCO provides the Company with certain leased office space, insurance and
other financial, internal audit, legal, aviation and administrative services,
and the Company provides ARCO with various technical and legal services. These
agreements have various durations, ranging from monthly renewals to a term
extending to 2017.

An analysis of the aggregate transactions for the years ended December 31,
1996, 1995, and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Purchases..................................................... $274 $344 $332
Product sales................................................. 180 197 156
Processing fees and operational services...................... 10 11 16
Administrative services:
For ARCO.................................................... 1 1 1
By ARCO..................................................... 30 32 34
</TABLE>

27
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3.RELATED PARTY TRANSACTIONS AND COST ALLOCATIONS--(CONTINUED)

Outstanding balances under these agreements at December 31, 1996 and 1995,
are included in "Accounts receivable--related parties" and "Accounts payable--
related parties."

4. GEOGRAPHIC INFORMATION

The Company is an international manufacturer of intermediate chemicals and
specialty chemical products which it principally markets to other industrial
concerns. The Company operates in one industry segment. The geographic
distribution of the Company's markets and assets is indicated by the table
below.

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Total revenues (by destination)
United States.................................... $ 2,112 $ 2,181 $ 1,911
Europe........................................... 1,058 1,178 868
Other foreign.................................... 785 923 644
------- ------- -------
Total.......................................... $ 3,955 $ 4,282 $ 3,423
======= ======= =======
Total revenues (by origin)
United States.................................... $ 2,363 $ 2,505 $2,213
Europe........................................... 1,236 1,465 909
Other foreign.................................... 356 312 301
------- ------- -------
Total.......................................... $ 3,955 $ 4,282 $3,423
======= ======= =======
Pretax earnings
United States.................................... $ 480 $ 748 $ 494
Europe........................................... 96 76 3
Other foreign.................................... (3) 21 4
Interest expense................................. (86) (89) (85)
------- ------- -------
Total.......................................... $ 487 $ 756 $ 416
======= ======= =======
Total assets
United States.................................... $ 2,985 $ 2,610 $2,462
Europe........................................... 1,393 1,530 1,298
Other foreign.................................... 289 315 283
Eliminations..................................... (273) (320) (306)
------- ------- -------
Total.......................................... $ 4,394 $ 4,135 $3,737
======= ======= =======
United States export sales
Asia Pacific..................................... $ 189 $ 294 $ 206
Canada and Latin America......................... 127 115 114
Europe and other foreign......................... 5 11 9
------- ------- -------
Total.......................................... $ 321 $ 420 $ 329
======= ======= =======
</TABLE>

28
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. GEOGRAPHIC INFORMATION--(CONTINUED)

Intercompany sales are made at prices approximating current market values.
The amounts of intercompany sales that are eliminated from total revenues are
as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
United States........................................ $ 280 $373 $ 218
Europe............................................... 117 32 34
Other foreign........................................ 1 1 1
------- ------- -------
Total.............................................. $ 398 $406 $ 253
======= ======= =======
</TABLE>

Included in pretax earnings are royalty charges made to foreign operations
for the use of Company technology. Eliminations principally include
intercompany receivables.

5.INVENTORIES

Inventories are stated at the lower of cost or market. In 1996,
approximately 94 percent of inventories, excluding materials and supplies,
were determined by the last-in, first-out (LIFO) method. Materials and
supplies and other non-LIFO inventories are valued using either the first-in,
first-out (FIFO) or the average cost methods.

Inventories at December 31, 1996 and 1995, comprised the following
categories:

<TABLE>
<CAPTION>
1996 1995
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Finished goods......................................... $ 392 $338
Work-in-process........................................ 38 38
Raw materials.......................................... 62 51
Materials and supplies................................. 44 45
---------- ----------
Total................................................ $ 536 $472
---------- ----------
========== ==========
</TABLE>

If the FIFO inventory valuation method had been used exclusively,
inventories would have been higher than the book value of such inventories by
approximately $17 million and $9 million at December 31, 1996 and 1995,
respectively.

6.PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, at cost, and related accumulated depreciation
at December 31, 1996 and 1995, were as follows:

<TABLE>
<CAPTION>
1996 1995
------ ------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Land.......................................................... $ 23 $ 18
Buildings and equipment....................................... 3,941 3,670
Construction in progress...................................... 188 124
------ ------
4,152 3,812
Less: Accumulated depreciation................................ 1,530 1,519
------ ------
Total....................................................... $2,622 $2,293
====== ======
</TABLE>

Depreciation expense for the years ended December 31, 1996, 1995 and 1994
was $184 million, $192 million, and $193 million, respectively. Expenses for
maintenance and repairs, including costs associated with plant maintenance
turnarounds, for the years ended December 31, 1996, 1995, and 1994 were $113
million, $97 million, and $105 million, respectively.

29
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7.BANK CREDIT FACILITIES

In April 1996, the Company executed an amendment of the existing credit
agreement extending the term to 2001. The existing credit agreement, as
amended, allows the Company to borrow a total amount of up to $300 million and
has a restrictive financial covenant which requires that the Company maintain
a minimum net worth, as defined, of $1 billion. At December 31, 1996, the
Company had no outstanding borrowings against the credit agreement.

Notes payable at December 31, 1996 consisted primarily of short-term bank
borrowings and commercial paper issued to a variety of financial investors and
institutions at various interest rates and maturities of up to 270 days. The
weighted average effective interest rate for these borrowings at December 31,
1996 was 5.6 percent. As a condition of the sale of commercial paper, the
Company is required to maintain a back-up credit facility at least equal to
the amount of the outstanding commercial paper. The Company uses the credit
agreement for this purpose.

8.OTHER ACCRUED LIABILITIES

Other accrued liabilities at December 31, 1996 and 1995, were as follows:

<TABLE>
<CAPTION>
1996 1995
---- ----
(MILLIONS
OF
DOLLARS)
<S> <C> <C>
Payroll and benefits............................................... $ 81 $ 79
Contractual obligations............................................ 30 26
Interest........................................................... 18 20
Restructuring costs................................................ -- 6
Other.............................................................. 100 86
---- ----
Total............................................................ $229 $217
==== ====
</TABLE>

9.TAXES

The components of the provision for income taxes for the years ended
December 31, 1996, 1995, and 1994 were as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Federal:
Current.......................................... $ 73 $ 202 $123
Deferred......................................... 17 6 21
------- ------- -------
Total.......................................... 90 208 144
------- ------- -------
Foreign:
Current.......................................... 15 21 (6)
Deferred......................................... 34 9 12
------- ------- -------
Total.......................................... 49 30 6
------- ------- -------
State:
Current.......................................... 1 10 3
Deferred......................................... (1) -- (6)
------- ------- -------
Total.......................................... -- 10 (3)
------- ------- -------
$ 139 $248 $147
======= ======= =======
</TABLE>

30
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

9.TAXES--(CONTINUED)

Deferred tax liabilities and assets are comprised of the following at
December 31, 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
------- --------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Deferred tax liabilities:

Depreciation and amortization............... $457 $435
Other....................................... 30 47
---- ----
Gross deferred tax liabilities............. 487 482
---- ----
Deferred tax assets:

Loss carryforwards.......................... 162 167
Tax basis in excess of book................. 10 31
Provisions for benefit plans and estimated
expenses................................... 76 74
---- ----
Gross deferred tax assets.................. 248 272
---- ----
Deferred tax asset valuation allowance..... 140 138
---- ----
Net deferred tax liability. $379 $348
==== ====
</TABLE>

During 1996, the valuation allowance was increased for certain foreign tax
loss carryforwards and reduced with respect to federal capital loss
carryforwards. The valuation allowance was $101 million at December 31, 1994.

A reconciliation of the federal statutory rate to the effective tax rate for
the years ended December 31, 1996, 1995, and 1994 is as follows:

<TABLE>
<CAPTION>
PERCENT OF PRETAX INCOME
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate........................ 35.0 35.0 35.0
Increase (reduction) in taxes resulting
from:
State income taxes (net of federal ef-
fect).................................... -- 0.9 (0.5)
Utilization of capital loss carryforward.. (3.0) -- --
Foreign tax credits pursuant to tax shar-
ing agreement............................ (1.6) -- --
Other..................................... (1.9) (3.1) 0.8
-------- -------- --------
Effective tax rate............................ 28.5 32.8 35.3
======== ======== ========
</TABLE>

At December 31, 1996, the Company had federal capital loss carryforwards of
$36 million, foreign tax loss carryforwards of $383 million, and state tax
loss carryforwards of $114 million. These carryforwards begin expiring in
1997. Existing foreign tax credits are sufficient to offset any tax on
undistributed earnings of foreign subsidiaries.

31
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10.LONG-TERM DEBT

Long-term debt at December 31, 1996 and 1995, comprised the following:

<TABLE>
<CAPTION>
1996 1995
---- ----
(MILLIONS
OF
DOLLARS)
<S> <C> <C>
9.9% debentures due in 2000........................................$200 $200
9.375% debentures due in 2005..................................... 100 100
10.25% debentures due in 2010..................................... 100 100
9.8% debentures due in 2020....................................... 224 224
Dutch bank loans.................................................. 173 187
French bank loans................................................. 55 76
Other............................................................. 17 25
---- ----
Total........................................................... 869 912
Debt due within one year.......................................... 25 25
---- ----
Long-term debt.................................................. $844 $887
==== ====
</TABLE>

The Dutch bank loans, entered into by the Company's wholly owned subsidiary,
ARCO Chemie Nederland, Ltd. (ACNL), consisted of two borrowings, both due in
1997. In February 1997, the Company executed an agreement to refinance the
Dutch bank loans on a long-term basis. As part of the agreement, one loan, due
in 2002, will replace the two borrowings due in 1997. Accordingly, the Dutch
bank loans were classified as long-term debt at December 31, 1996. At December
31, 1996, ACNL had outstanding interest rate swaps on both of its bank loans,
totalling 300 million Dutch guilders, or approximately $173 million. The swaps
mature in 1997. The swaps effectively changed both loans' floating rates,
which were based on the Amsterdam Interbank Offer Rate ("AIBOR"), to fixed
rates of 5.7 percent and 6.7 percent. See Note 19.

The French bank loans, entered into by the Company's wholly owned affiliate,
ARCO Chimie France, SNC, mature at various dates through 2006. The weighted
average effective interest rate for these borrowings was approximately 7.3
percent and 7.4 percent in 1996 and 1995, respectively.

Aggregate maturities of all long-term debt during the next five years are
$25 million in 1997, $25 million in 1998, $18 million in 1999, $201 million in
2000, $1 million in 2001, and $599 million thereafter.

11.OTHER COMMITMENTS AND CONTINGENCIES

COMMITMENTS

In January 1995, the Company entered into a long-term supply arrangement for
toluene diisocyanate (TDI). Initial payments of $80 million were made at
closing for capacity reservation fees, related inventory and other rights and
costs. Effective January 1, 1995, the Company was entitled to all of the TDI
output of the supplier's two plants in France, which have a combined rated
capacity of approximately 264 million pounds per year. Under the arrangement,
the Company is required to purchase a minimum of 216 million pounds of TDI per
year for up to 15 years. The aggregate purchase price is a combination of
plant cost and market price. The Company is further obligated to pay
additional capacity reservation fees based upon plant output factors.

To assure itself of reliable, long-term supplies of utilities at favorable
rates for its Rotterdam plant, the Company entered into a 15-year utility
cogeneration joint venture as a limited partner. The joint venture operates a
cogeneration plant, primarily funded through nonrecourse debt. The Company is
obligated to take or pay for minimum quantities of steam and electricity in
support of the joint venture's

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11.OTHER COMMITMENTS AND CONTINGENCIES--(CONTINUED)

financing arrangement. The Company pays for actual quantities of steam and
electricity taken based on the joint venture's actual cost plus a specified
return on the partners' investment. The Company also has a long-term purchase
agreement for ethylene which requires the Company to take or pay for 143
million pounds annually at prevailing market prices for a remaining term of
four years. Purchases under the cogeneration and the ethylene agreements
during 1996, 1995 and 1994 were $43 million, $50 million and $30 million,
respectively.

The Company has commitments, including those related to capital
expenditures, all made in the normal course of business. At December 31, 1996,
there were commitments associated with various capital projects which were not
significant either individually or in the aggregate.

CONTINGENCIES

The Company and its subsidiaries are involved in a number of lawsuits,
claims and assessments, all of which have arisen in the ordinary course of the
Company's business. The Company is unable to predict the outcome of these
matters, but does not believe, based upon currently available facts, that the
ultimate resolution of such matters will have a material adverse effect on the
consolidated financial statements of the Company.

The Company is subject to other loss contingencies pursuant to federal,
state, local, and foreign environmental laws and regulations. These
contingencies include possible obligations to remove or mitigate the effects
on the environment of the past disposal or release of certain chemical
substances at various sites (remediation costs). The Company continues to
evaluate the amount of these remediation costs and periodically adjusts its
reserve for remediation costs and its estimate of additional environmental
loss contingencies based on progress made in determining the magnitude, method
and timing of the remedial actions that may be required by government
authorities and an evaluation of the Company's potential liability in relation
to the liability and financial resources of any other potentially responsible
parties.

At December 31, 1996, the Company's environmental reserve totaled $53
million, which reflected the Company's latest assessment of potential future
remediation costs associated with existing sites. A significant portion of the
reserve is related to the Beaver Valley plant site, located in Monaca,
Pennsylvania. The reserve gives recognition to a work plan, between the
Company and the Pennsylvania Department of Environmental Protection (PADEP),
for testing, risk assessment, remedial process design and remediation of
conditions at the Beaver Valley plant. The reserve also reflects an agreement
between the Company and another responsible party whereby that party has
agreed to pay for approximately 50 percent of the costs associated with the
Beaver Valley plant work plan. The Company sold the Beaver Valley plant assets
to NOVA Chemicals Inc. (NOVA) as of September 30, 1996, see Note 21, but
currently retains ownership of the land at the Beaver Valley plant site,
substantial portions of which are being leased to NOVA. The Company has
retained responsibility for certain remediation of the land at the Beaver
Valley plant site under the work plan and for certain additional remediation
that may be required by PADEP pursuant to the Pennsylvania Land Recycling and
Environmental Remediation Standards Act.

33
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11.OTHER COMMITMENTS AND CONTINGENCIES--(CONTINUED)

based on currently available information, that potential loss contingencies
associated with these sites, individually and in the aggregate, are not
significant. Substantially all amounts reserved are expected to be paid out
over the next five to ten years.

The Company and ARCO are parties to an agreement whereby the Company has
indemnified ARCO against certain claims or liabilities that ARCO may incur
relating to ARCO's former ownership and operation of the oxygenates and
polystyrenics businesses of the Company, including liabilities under laws
relating to the protection of the environment and the workplace and
liabilities arising out of certain litigation. ARCO has indemnified the
Company with respect to claims or liabilities and other matters of litigation
not related to the assets or businesses reflected in the consolidated
financial statements. ARCO has also indemnified the Company for certain
federal, foreign, state, and local taxes that might be assessed upon audit of
the operations of the Company included in its consolidated financial
statements for periods prior to the July 1, 1987 formation of the Company.

12.RETIREMENT PLANS

Substantially all employees are covered by various pension plans. The ARCO
Chemical Retirement Plan (ACRP), a defined benefit plan, provides pension
benefits to all of the Company's employees in the United States and certain
employees in foreign countries. In addition to the ACRP, the Company also
maintains defined benefit pension plans for former hourly employees at the
Beaver Valley plant in Monaca, Pennsylvania, as well as several plans covering
certain employees throughout its European and Asia Pacific operations.

Retirement benefits under the ACRP are based on years of participation
service and the employee's compensation primarily during the last three years
of service. Retirement benefits for the Beaver Valley Hourly Retirement Plan
are primarily based on years of service and on the employee's career average
earnings and, accordingly, the final liability was determined as of September
30, 1996, the date of sale of the plastics business to NOVA. European and Asia
Pacific plans vary by country, but are primarily based on years of service and
compensation during the last year of service. The

34
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12.RETIREMENT PLANS--(CONTINUED)

funding policy for these plans consists of annual contributions as required by
applicable regulations. The Company charges pension costs as accrued, based on
an actuarial valuation, and funds the plans through contributions to separate
trust funds that are kept apart from Company funds.

The following tables set forth the plans' funded status and amounts
recognized in the Company's balance sheets at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
1996
---------------------------
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
------------- -------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation..................... $161 $ 18
==== ====
Accumulated benefit obligation................ $182 $ 19
==== ====
Projected benefit obligation.................. $246 $ 34
Plan assets at fair value, primarily stocks and
bonds.......................................... 311 --
---- ----
Projected benefit obligation less than (in
excess of) plan assets......................... 65 (34)
Unrecognized net (gain) loss.................... (6) 14
Prior service cost not yet recognized in
net periodic pension cost...................... 5 2
Unrecognized net liability at January 1, 1996... 3 --
Adjustment required to recognize minimum liabil-
ity............................................ -- (2)
---- ----
Prepaid pension cost (liability) recognized in
the balance sheet..............................
$ 67 $(20)
==== ====
</TABLE>

<TABLE>
<CAPTION>
1995
---------------------------
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS
------------- -------------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation..................... $171 $ 20
==== ====
Accumulated benefit obligation................ $194 $ 20
==== ====
Projected benefit obligation.................. $261 $ 32
Plan assets at fair value, primarily stocks and
bonds.......................................... 258 --
---- ----
Projected benefit obligation in excess of plan
assets......................................... (3) (32)
Unrecognized net loss........................... 32 15
Prior service cost not yet recognized in
net periodic pension cost...................... 6 2
Unrecognized net liability at January 1, 1995... 4 --
Adjustment required to recognize minimum liabil-
ity............................................ -- (6)
---- ----
Prepaid pension cost (liability) recognized in
the balance sheet.............................. $ 39 $(21)
==== ====
</TABLE>

The above tables for plans with assets exceeding accumulated benefits
include foreign pension plans. These foreign plans constituted approximately
27 percent and 21 percent of the projected benefit obligation and 23 percent
and 24 percent of the plan assets in the table at December 31, 1996 and 1995,
respectively. The plans for which accumulated benefits exceed assets represent
supplemental retirement benefits for executives and expatriated employees.

35
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12.RETIREMENT PLANS--(CONTINUED)

Components of net pension cost related to Company-sponsored plans for the
years ended December 31, 1996, 1995, and 1994 were as follows:

<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Service cost...................................... $ 16 $ 13 $ 15
Interest cost..................................... 19 19 15
Actual return on plan assets...................... (42) (44) 1
Net amortization and deferral..................... 18 25 (18)
------- ------- -------
Net periodic pension cost....................... $ 11 $ 13 $ 13
======= ======= =======
</TABLE>

In addition to the pension cost above, in 1994 the Company recorded additional
pension expense of $13 million pretax in connection with work force reductions
resulting from the corporate restructuring program.

Foreign pension plans comprised $3 million, $3 million and $5 million of net
periodic pension cost for the years 1996, 1995 and 1994, respectively.

The assumptions used as of December 31, 1996, 1995, and 1994 in determining
the domestic net pension cost and net pension liability were as follows:

<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Discount rate......................................... 7.25% 7.0% 8.25%
Rate of salary progression............................ 5.0 5.0 5.0
Long-term rate of return on assets.................... 10.25 10.25 10.25
</TABLE>

The assumptions used in determining the net pension cost and pension
liability for foreign pension plans were based on the economic environment of
each applicable country. The range of assumptions used as of December 31, 1996
was as follows: discount rates, 6.5 to 8.05 percent; rate of salary
progression, 4.0 to 6.5 percent; long-term rate of return on assets, 7.0 to
9.0 percent.

13.OTHER POSTRETIREMENT BENEFITS

The Company provides medical and life insurance benefits for retired
employees and covered dependents. Substantially all U.S. employees of the
Company may become eligible for these benefits if they remain employed until
normal retirement age or fulfill other eligibility requirements. Retiree
contribution levels to the medical benefit plan are determined annually by the
Company; the life insurance plan is noncontributory. The underlying plans are
not funded.

The following reconciles the unfunded accumulated obligation to the
Company's balance sheet as of December 31, 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
---------- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees............................................ $17 $ 20
Fully eligible active plan participants............. 6 8
Other active plan participants...................... 26 31
---------- ----------
Total APBO........................................ 49 59
Unrecognized net gain (loss)........................ 12 (1)
Unrecognized prior service cost..................... (5) --
---------- ----------
Accrued postretirement benefit liability.............. $56 $ 58
========== ==========
</TABLE>

36
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

13.OTHER POSTRETIREMENT BENEFITS--(CONTINUED)

Net periodic postretirement benefit cost for the years ended December 31,
1996, 1995 and 1994 included the following components:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Service cost.................................................. $2 $2 $4
Interest cost................................................. 3 3 4
--- --- ---
Net periodic postretirement benefit cost...................... $5 $5 $8
=== === ===
</TABLE>

The medical cost trend inflation rate assumption was changed during 1995,
based on cumulative experience, from 10 percent to 9 percent annually for the
period 1993 to 1996, from 8 percent to 7 percent annually for the period 1997
to 2001, and from 6 percent to 5 percent annually thereafter. Increasing the
health care cost trend rate by one percentage point in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1996 by $7 million and increase net periodic postretirement benefit cost for
1996 by $1 million. The discount rate used was 7.25 percent.

14.STOCK OPTION AND EMPLOYEE BENEFIT PLANS

In November 1989, the Board of Directors adopted the 1990 Long-Term
Incentive Plan (the 1990 Plan). The 1990 Plan, which became effective January
1, 1990, provided, among other things, for the granting to officers and other
key management employees of nonqualified stock options for the purchase of up
to two million shares of the Company's common stock. During 1996, the Board of
Directors authorized an additional 200,000 shares of common stock for granting
under the 1990 Plan. The option price per share is fixed by the Long-Term
Incentive Plan Administration Subcommittee (the subcommittee) of the Board of
Directors, which administers the 1990 Plan, but may not be less than the fair
market value of the Company's common stock on the date the option is granted.
The maximum option period is ten years. Options granted before January 1, 1996
may be exercised after one year of continuous service with ARCO, the Company,
or any of their subsidiaries immediately following the date of the grant.
Options granted after January 1, 1996 may be exercised after four years of
continuous service. The subcommittee may, at its discretion, establish a
longer waiting period.

In July 1987, ARCO, the Company's sole stockholder at the time, approved the
1987 Executive Long-Term Incentive Plan (the 1987 Plan). The 1987 Plan, which
became effective September 1, 1987, provided, among other things, for the
granting to officers and other key management employees of non-qualified stock
options for the purchase of up to 290,000 shares of the Company's common stock
at $32 per share. The options are currently exercisable through October 1997.
No additional options will be granted under the 1987 Plan.

Dividend share credits accrue on options granted under both the 1990 Plan
and the 1987 Plan. Dividend share credits are allocated to officers and other
key management employees holding stock options (optionees) whenever dividends
are declared on shares of common stock. Upon the exercise, expiration or
surrender of an option, an optionee may receive a cash payment in respect of
the dividend share credits attributable to such option provided that certain
performance-based conditions are satisfied.

37
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14.STOCK OPTION AND EMPLOYEE BENEFIT PLANS--(CONTINUED)

The following table summarizes the activity relating to the Company's stock
option plans:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
PRICE
--------
<S> <C> <C>
Balance, January 1, 1994................................. 1,280,806 $37.23
Granted................................................ 250,000 48.56
Exercised.............................................. (86,500) 35.02
Forfeited.............................................. (1,200) 48.56
---------
Balance, December 31, 1994............................... 1,443,106 39.31
Granted................................................ 339,200 42.44
Exercised.............................................. (100,133) 34.87
Forfeited.............................................. (800) 42.44
---------
Balance, December 31, 1995............................... 1,681,373 40.21
Granted................................................ 292,800 50.63
Exercised.............................................. (61,627) 34.83
Forfeited.............................................. -- --
---------
Balance, December 31, 1996............................... 1,912,546 41.97
=========
</TABLE>

The Company issues treasury shares upon exercise of stock options.

A summary of the Company's stock options as of December 31, 1996 and 1995
was as follows:

<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Shares available for option.............................. 181,110 273,910
Options exercisable...................................... 1,619,746 1,342,973
Weighted average exercise price of options exercisable... $40.41 $39.64
Fair value per share of options granted during the year.. $23.90 $22.60
</TABLE>

At December 31, 1996, exercise prices for options outstanding ranged from
$32 to $50.63 and the weighted average remaining option period was 6 years.

The Company applies APB No. 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized in connection
with stock option grants under the plans. The pro forma impact to both net
income and earnings per share from calculating compensation expense consistent
with SFAS No. 123, "Accounting for Stock-Based Compensation", was immaterial
for the years ended December 31, 1996 and 1995.

Effective January 1, 1995, the Company began issuing treasury shares in
connection with purchases of the Company's common stock made by the ARCO
Chemical Company Capital Accumulation Plan (the CAP Plan), a defined
contribution plan for current and former employees of the Company.
Participants' contributions to the CAP Plan through payroll deductions may be
used to purchase the Company's common stock, among other investment
alternatives. The Company makes matching contributions which are used solely
to purchase the Company's common stock. Prior to January 1, 1995, purchases of
the Company's common stock by the CAP Plan were made on the open market.

In connection with the sale of the plastics business on September 30, 1996,
the Company implemented a stock repurchase program for up to 320,000 shares of
the Company's common stock held in certain employee benefit plans by former
employees associated with the plastics business. The Company repurchased
72,445 shares through December 31, 1996.

38
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

15.EARNINGS PER COMMON SHARE

Earnings per common share are computed based on the weighted average number
of shares outstanding during the year. For 1996, 1995 and 1994, the weighted
average number of shares was 96,660,715, 96,294,810 and 96,059,348 shares,
respectively. The effect of stock options issued under the 1987 Executive
Long-Term Incentive Plan and the 1990 Long-Term Incentive Plan (see Note 14)
on the computation of primary and fully diluted earnings per common share was
not material.

16.SUPPLEMENTAL CASH FLOW INFORMATION

Following is supplemental cash flow information provided for the years ended
December 31, 1996, 1995, and 1994:

<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Changes in working capital-increase (decrease)
to cash:
Accounts receivable........................... $ (9) $ (43) $ (88)
Inventories................................... (50) (64) 28
Prepaid expense and other current assets...... (3) (4) 7
Accounts payable.............................. 98 (5) 34
Taxes payable................................. (77) 28 38
Other accrued liabilities..................... 4 12 17
------ -------- ------
Changes in working capital accounts........... $ (37) $ (76) $ 36
====== ======== ======

The above changes exclude the effects of a business purchase (see Note 20), a
sale of assets (see Note 21), and foreign exchange rate changes.

Short-term investments:
Gross proceeds from maturities................ $ 139 $ 30 $ --
Gross purchases............................... (114) (55) --
------ -------- ------
Net proceeds (purchases)...................... $ 25 $ (25) $ --
====== ======== ======
Notes payable:
Gross proceeds from issuances................. $ 382 $ 1,484 $ 724
Gross repayments.............................. (233) (1,508) (757)
------ -------- ------
Net proceeds (repayments)..................... $ 149 $ (24) $ (33)
====== ======== ======
Cash paid during the year for:
Interest (net of amount capitalized).......... $ 83 $ 87 $ 82
Income taxes.................................. 165 213 93
</TABLE>

17.LEASE COMMITMENTS

The Company leases various facilities and equipment under noncancelable
lease arrangements for varying periods. At December 31, 1996, future minimum
lease payments for all noncancelable operating leases with lease terms in
excess of one year were as follows:

<TABLE>
<CAPTION>
(MILLIONS
OF DOLLARS)
<S> <C>
1997.......................................................... $ 53
1998.......................................................... 42
1999.......................................................... 29
2000.......................................................... 23
2001.......................................................... 20
Later years................................................... 197
----
Total minimum lease payments................................ $364
====
</TABLE>

Rental expense for the years ended December 31, 1996, 1995, and 1994 was
$107 million, $100 million and $88 million, respectively.

39
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

18.FOREIGN CURRENCY TRANSACTIONS

For the years ended December 31, 1996, 1995, and 1994, losses on foreign
exchange transactions, including foreign currency derivative instruments, were
$11 million, $13 million, and $2 million, respectively. See Note 19.

19.FINANCIAL INSTRUMENTS

The Company does not hold or issue financial instruments for speculative
trading purposes.

Various types of foreign currency forward, option and swap contracts are
used to minimize foreign exchange exposures. Foreign exchange exposures result
from cash flows between U.S. and international operations and transactions
denominated in currencies other than the local currency of an operating
entity. Swap contracts are used predominantly to minimize intercompany debt
exposures with maturities exceeding one year, while forward and option
contracts are used for other types of foreign exchange exposures. During 1995,
the Company announced plans to commence engineering studies for the
construction of a new world scale PO/SM plant in Rotterdam, the Netherlands.
In connection with this project, the Company anticipated that it would be
making capital commitments denominated in a foreign currency for a period
extending through 2000. During 1995, the Company entered into foreign currency
forward and purchased option contracts to minimize the foreign exchange
exposures associated with these anticipated commitments. The notional amounts
of foreign currency contracts outstanding, principally involving European
currencies, were $371 million at December 31, 1996, with various maturity
dates ranging from 1997 to 2000. At December 31, 1995, the notional amounts of
foreign currency contracts outstanding were $442 million.

Interest rate swap contracts are used to minimize interest rate exposures on
foreign bank loans due in 1997. The interest rate swap contracts mature in
1997.

Gains and losses, realized and unrealized, on foreign currency forward
contracts covering anticipatory cash flows are recognized currently as other
income or expense in the results of operations. Gains and losses on foreign
currency swaps are recognized currently in income to the extent of offsetting
foreign exchange gains and losses on the underlying intercompany loans. Gains
and losses on interest rate swap contracts are accrued for each annual period
to yield an effective fixed rate of interest on the related debt. Net gains
and losses associated with derivative contracts for 1996, 1995 and 1994 were
not material. Gains on the purchased options related to the new PO/SM plant
project are deferred and will be used in the measurement of the plant
construction costs. There were no deferred hedging gains as of December 31,
1996.

40
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

19.FINANCIAL INSTRUMENTS--(CONTINUED)

The carrying value and the estimated fair value of the Company's derivative
instruments as of December 31, 1996 and 1995 are shown as assets (liabilities)
in the table below. The carrying value of the purchased options represents the
unamortized balance of the option premium.

<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------ -------- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Nonderivatives:
Short-term investments..................... $ -- $ -- $ 25 $ 25
Investments and long-term receivables...... 71 71 90 90
Notes payable.............................. 150 150 -- --
Long-term debt (including current maturi-
ties)..................................... 869 1,001 912 1,095
Derivatives:
Foreign currency forwards.................. (14) (14) (5) (5)
Foreign currency options................... 6 6 7 7
Foreign currency swaps .................... (4) (4) (6) (6)
Interest rate swaps........................ (1) (3) (1) (5)
</TABLE>

The carrying amounts of nonderivative financial instruments are reported on
the balance sheet under the indicated captions. All derivative instruments are
off-balance-sheet instruments, however net receivable or payable positions
related to derivative instruments are carried on the balance sheet.

Short-term investments consist of highly liquid investments, such as time
deposits, certificates of deposit and marketable securities other than equity
securities, maturing in more than three months from the date of purchase.
Short-term investments are carried at cost, which approximates fair value.
Investments and long-term receivables, which consist primarily of equity
investments in affiliated companies, were valued using current financial and
other available information. The fair value of notes payable approximates
carrying value due to the relatively short-term maturities of such
instruments. Long-term debt was valued based on quoted market prices for the
same or similar issues or on the current rates offered to the Company for debt
of the same remaining maturities. The fair value of derivative financial
instruments represents the amount to be exchanged if the existing contracts
were settled at year end and are based on market quotes.

The Company is exposed to credit risk related to its financial instruments
in the event of nonperformance by the counterparties. The Company does not
generally require collateral or other security to support these financial
instruments. However, the counterparties to these transactions are major
institutions deemed creditworthy by the Company; the Company does not
anticipate nonperformance by the counterparties.

20.BUSINESS ACQUISITION

On December 4, 1996, the Company purchased substantially all of the assets
of Olin Corporation's (Olin) toluene diisocyanate (TDI) and aliphatic
diisocyanate (ADI) businesses. The purchase included Olin's TDI and ADI
production facilities in Lake Charles, Louisiana, and certain related assets,
including trademarks, patents, and technology. Effective December 1, 1996, the
Company has accounted for the acquired business under the purchase method of
accounting and, accordingly, the results of operations of the acquired
business are included in the Company's consolidated results of operations
prospectively from that date. The acquisition cost of approximately

41
<PAGE>

20.Business Acquisition--(Continued)

$571 million has been allocated to the assets acquired and liabilities
assumed, including approximately $94 million of working capital, based on the
fair value of such assets and liabilities at the date of acquisition. Based on
preliminary appraisals, the fair value of the net assets acquired approximates
the acquisition cost, and no goodwill has been recorded. Had the acquired
business been accounted for under the purchase method as of January 1, 1995,
consolidated results of operations for the years 1995 and 1996 would not have
been materially affected.

21.ASSET SALE

On September 30, 1996, the Company sold its plastics business to NOVA. The
sale proceeds were approximately $160 million. As part of the transaction, the
Company entered into a long-term sales agreement to supply NOVA with
approximately the same amount of styrene monomer as had been consumed by the
plastics business. The sale of the plastics business did not have a material
effect on the Company's consolidated financial statements.

22.CORPORATE RESTRUCTURING PROGRAM

In November 1994, the Company announced a worldwide corporate restructuring
program to reorganize its workforce on a global basis. In connection with the
restructuring, approximately 130 positions in the Company were eliminated. The
Company accrued $30 million before tax in the fourth quarter of 1994,
consisting primarily of personnel costs (pension enhancements, severance and
other ancillary costs) associated with personnel reductions. Of the total
accrued, approximately $15 million was primarily related to enhanced pension
benefits, the majority of which will be paid from the assets of qualified
pension plans. An additional $15 million was related to severance and other
ancillary costs to be paid from Company funds. Through the end of 1995, the
program was substantially completed. The accrual balance at December 31, 1995
was $6 million, which primarily consisted of severance payments that were
deferred by employees and which were paid in 1996.

23.SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

<TABLE>
<CAPTION>
MARCH JUNE SEPTEMBER DECEMBER
31 30 30 31
----------- ----------- ------------- ------------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE DATA)
1996
----
<S> <C> <C> <C> <C>
Net sales.................... $ 982 $ 959 $1,035 $ 979
Gross profit................. 252 216 235 185
Net income................... 106 81 97 64
Earnings per common share
(1)......................... 1.10 .84 1.00 .66
<CAPTION>
1995
----
<S> <C> <C> <C> <C>
Net sales.................... $ 1,141 $ 1,149 $ 999 $ 993
Gross profit................. 297 327 270 286
Net income................... 126 150 117 115
Earnings per common share
(1)......................... 1.31 1.56 1.21 1.19
</TABLE>
- --------
(1) Earnings per common share calculations for each of the quarters are based
on the weighted average number of shares outstanding for each period. The
sum of the quarters may not necessarily be equal to the full year earnings
per share amount.

42
<PAGE>

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

PART III

ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11.EXECUTIVE COMPENSATION

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding executive officers of the company is included in Part
I. For the other information called for by Items 10, 11, 12, and 13, reference
is made to the Company's definitive proxy statement for its Annual Meeting of
Stockholders, to be held on May 8, 1997, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1996,
and which is incorporated herein by reference.

PART IV

ITEM 14.EXHIBITS AND REPORTS ON FORM 8-K

(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:

<TABLE>
<S> <C>
1. and 2. Financial Statements: These documents are listed in the Index to Consolidated
Financial Statements. See Item 8.
3. Exhibits:
2.1 Asset Purchase Agreement, dated October 9, 1996, between ARCO Chemical Com-
pany and Olin Corporation, filed as Exhibit 2.1 to the Company's Current Re-
port on Form 8-K, dated December 17, 1996, and incorporated herein by refer-
ence.
2.2 Amendment No. 1, dated December 4, 1996, to the Asset Purchase Agreement be-
tween ARCO Chemical Company and Olin Corporation, filed as Exhibit 2.2 to the
Company's Current Report on Form 8-K, dated December 17, 1996, and incorpo-
rated herein by reference.
3.1 Certificate of Amendment and Restated Certificate of Incorporation of ARCO
Chemical Company, filed as an Exhibit bearing the same number to the
Company's Registration Statement on Form S-1 (No. 33-15930), filed on July
28, 1987, and incorporated herein by reference.
3.2 By-Laws of ARCO Chemical Company, filed as an Exhibit bearing the same number
to the Company's Registration Statement on Form S-1 (No. 33-15930), filed on
July 28, 1987, and incorporated herein by reference.
4.1 Indenture, dated as of June 15, 1988, between ARCO Chemical Company and The
Bank of New York as Trustee, filed as Exhibit 4.2 to the Company's Registra-
tion Statement on Form S-3 (No. 33-23340), filed on July 27, 1988, and incor-
porated herein by reference.
4.2 Forms of Debt Securities issuable under the Indenture referred to in Exhibit
4.1, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-3
(No. 33-23340), filed on July 27, 1988, and incorporated herein by reference.
</TABLE>

43
<PAGE>

<TABLE>
<S> <C>
4.3 Form of Debt Security issuable under the Indenture referred to in Exhibit
4.1, filed as Exhibit 4 to the Company's Current Report on Form 8-K dated
January 30, 1990, and incorporated herein by reference.
4.4 Forms of Debt Securities issuable under the Indenture referred to in Exhibit
4.1, filed as Exhibits 4.1 and 4.2 to the Company's Current Report on Form 8-
K dated October 31, 1990, and incorporated herein by reference.
4.5 Form of Debt Security issuable under the Indenture referred to in Exhibit
4.1, filed as Exhibit 4 to the Company's Current Report on Form 8-K dated De-
cember 7, 1990, and incorporated herein by reference.
4.6 Credit Agreement, dated as of November 19, 1993, between ARCO Chemical Com-
pany and The First National Bank of Chicago, as Agent for the banks listed
therein, filed as an Exhibit bearing the same number to the Company's Annual
Report on Form 10-K for 1993, and incorporated herein by reference.
4.7 Amendment No. 1 to the Credit Agreement, dated as of October 14, 1994, be-
tween ARCO Chemical Company and The First National Bank of Chicago, as Agent
for the banks listed therein, filed as an Exhibit bearing the same number to
the Company's Annual Report on Form 10-K for 1994, and incorporated herein by
reference.
4.8 Amendment No. 2 to the Credit Agreement, dated as of April 3, 1996, between
ARCO Chemical Company and The First National Bank of Chicago, as Agent for
the banks listed therein.
4.9 Instruments defining the rights of holders of long-term debt not registered
under the Securities Exchange Act of 1934 (other than long-term debt issued
pursuant to the Credit Agreement) are not filed because the total amount of
securities authorized under any such instrument does not exceed 10 percent of
the consolidated total assets of the company. The Company agrees to furnish a
copy of any such instrument to the Securities and Exchange Commission upon
request.
10.1 ARCO Chemical Company Annual Incentive Plan, effective January 1, 1988, filed
as an Exhibit bearing the same number to the Company's Annual Report on Form
10-K for 1993, and incorporated herein by reference.
10.2 Resolutions relating to Amendment No. 1 to ARCO Chemical Company Annual In-
centive Plan, as adopted February 15, 1989, filed as an Exhibit bearing the
same number to the Company's Annual Report on Form 10-K for 1990, and incor-
porated herein by reference.
10.3 Resolutions relating to Amendment No. 2 to ARCO Chemical Company Annual In-
centive Plan, as adopted July 17, 1990, effective September 1, 1990, filed as
an Exhibit bearing the same number to the Company's Annual Report on Form 10-
K for 1990, and incorporated herein by reference.
10.4 Amendment and Restatement of ARCO Chemical Company Executive Supplementary
Savings Plan, effective January 1, 1995.
10.5 ARCO Chemical Company 1987 Executive Long-Term Incentive Plan, filed as Ex-
hibit 10.12 to the Company's Registration Statement on Form S-1 (No. 33-
15930), filed on July 28, 1987, and incorporated herein by reference.
10.6 Amendment No. 1 to the ARCO Chemical Company 1987 Executive Long-Term Incen-
tive Plan.
10.7 ARCO Chemical Company 1990 Long-Term Incentive Plan, restated as amended
through July 20, 1995, filed as Exhibit 10.7 to the Company's Annual Report
on Form 10-K for 1995, and incorporated herein by reference.
10.8 Amendment No. 5 to the ARCO Chemical Company 1990 Long-Term Incentive Plan,
filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996, and incorporated herein by reference.
</TABLE>

44
<PAGE>

<TABLE>
<S> <C>
10.9 ARCO Chemical Company Supplementary Executive Retirement Plan, effective
October 1, 1990, filed as Exhibit 10.12 to the Company's Annual Report on
Form 10-K for 1992, and incorporated herein by reference.
10.10 ARCO Chemical Company Financial Counseling Policy, effective January 1, 1988,
filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for 1993,
and incorporated herein by reference.
10.11 ARCO Chemical Company Executive Medical Insurance Plan (Summary Plan Descrip-
tion), effective January 1, 1988, filed as Exhibit 10.14 to the Company's An-
nual Report on Form 10-K for 1993, and incorporated herein by reference.
10.12 ARCO Chemical Company Key Management Deferral Plan, effective October 1,
1990, filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for
1990, and incorporated herein by reference.
10.13 Amendment No. 1 to the Key Management Deferral Plan, effective as of October
22, 1992, filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K
for 1995, and incorporated herein by reference.
10.14 ARCO Chemical Company Key Management Long-Term Disability Plan, effective Oc-
tober 1, 1990, filed as Exhibit 10.16 to the Company's Annual Report on Form
10-K for 1992, and incorporated herein by reference.
10.15 Resolutions relating to ARCO Chemical Company Key Management Life Insurance
Plan, as adopted July 17, 1990, effective August 1, 1990, filed as Exhibit
10.21 to the Company's Annual Report on Form 10-K for 1990, and incorporated
herein by reference.
10.16 ARCO Chemical Company Retirement Plan for Outside Directors, as amended and
restated effective October 1, 1990, filed as Exhibit 10.18 to the Company's
Annual Report on Form 10-K for 1992, and incorporated herein by reference.
10.17 ARCO Chemical Company Deferral Plan for Outside Directors, effective October
1, 1990, filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K
for 1992, and incorporated herein by reference.
10.18 Cross-Indemnification Agreement, dated as of June 1, 1987, between ARCO Chem-
ical Company and Atlantic Richfield Company, filed as Exhibit 10.2(a) to the
Company's Registration Statement on Form S-1 (No. 33-15930), filed on July
28, 1987, and incorporated herein by reference.
10.19 Amendment No. 1 to Cross-Indemnification Agreement, dated as of June 30,
1987, between ARCO Chemical Company and Atlantic Richfield Company, filed as
Exhibit 10.2(b) to the Company's Registration Statement on Form S-1 (No. 33-
15930), filed on July 28, 1987, and incorporated herein by reference.
10.20 Amendment No. 2 to Cross-Indemnification Agreement, dated as of July 1, 1987,
between ARCO Chemical Company and Atlantic Richfield Company, filed as Ex-
hibit 10.2(c) to Amendment No. 1 to the Company's Registration Statement on
Form S-1 (No. 33-15930), filed on August 21, 1987, and incorporated herein by
reference.
10.21 Amended and Restated Tax Sharing Agreement, effective as of January 1, 1995,
between ARCO Chemical Company and Atlantic Richfield Company, filed as Ex-
hibit 10 to the Company's Quarterly Report on Form 10-Q for the quarterly pe-
riod ended June 30, 1995, and incorporated herein by reference.
10.22 LPC/ACC Services Agreement, dated as of June 30, 1987, between ARCO Chemical
Company and Lyondell Petrochemical Company, filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (No. 33-15930), filed on July
28, 1987, and incorporated herein by reference.
</TABLE>

45
<PAGE>

<TABLE>
<S> <C>
10.23 Services Agreement, dated as of July 18, 1987, between ARCO Chemical Company
and Atlantic Richfield Company, filed as Exhibit 10.5 to the Company's Regis-
tration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987, and in-
corporated herein by reference.
10.24 Amendment No. 1 to Services Agreement, dated as of March 30, 1990, between
ARCO Chemical Company and Atlantic Richfield Company, filed as Exhibit 10.29
to the Company's Annual Report on Form 10-K for 1990, and incorporated herein
by reference.
10.25 Shareholder Agreement, dated as of June 30, 1987, between ARCO Chemical Com-
pany and Atlantic Richfield Company, filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (No. 33-15930), filed on July 28, 1987,
and incorporated herein by reference.
10.26 Form of ARCO Chemical Company Indemnity Agreement with officers and direc-
tors, filed as Exhibit 10.8 to the Company's Registration Statement on Form
S-1 (No. 33-15930), filed on July 28, 1987, and incorporated herein by refer-
ence.
12 Statement re computation of the ratio of earnings to fixed charges.
21 Subsidiaries of ARCO Chemical Company.
23 Consent of Independent Accountants.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>

All documents incorporated herein by reference to any Annual Report on Form
10-K, Quarterly Report on Form 10-Q or Current Report on Form 8-K previously
filed by the Company relate to Commission File No. 1-9678.

Copies of exhibits will be furnished upon prepayment of 25 cents per page.
Requests should be addressed to the Corporate Secretary.

(B) REPORTS ON FORM 8-K:

The Company filed a Current Report on Form 8-K, dated October 10, 1996,
which contained a press release, dated October 1, 1996, announcing the sale of
its worldwide plastics business to NOVA Chemicals Inc. on September 30, 1996.

The Company filed a Current Report on Form 8-K, dated October 24, 1996,
which contained a press release, dated October 10, 1996, announcing the
Company's agreement to purchase Olin Corporation's (Olin) toluene diisocyanate
(TDI) and aliphatic diisocyanate (ADI) businesses.

The Company filed a Current Report on Form 8-K, dated December 17, 1996,
which contained a copy of the Asset Purchase Agreement, dated October 9, 1996,
and Amendment No. 1 thereto, dated December 4, 1996, between the Company and
Olin pursuant to which the Company purchased substantially all of the assets
of Olin's TDI and ADI businesses, and a press release, dated December 4, 1996,
announcing the consummation of the transaction.

46
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in Newtown Square, Commonwealth of
Pennsylvania, on February 25, 1997.

ARCO Chemical Company

By: ALAN R. HIRSIG
---------------------------------
Alan R. Hirsig
President and Chief Executive
Officer

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

SIGNATURE TITLE DATE

MIKE R. BOWLIN* Chairman of the
- ------------------------------------- Board and Director
Mike R. Bowlin

ALAN R. HIRSIG President, Chief
- ------------------------------------- Executive Officer
Alan R. Hirsig and Director

MARVIN O. SCHLANGER* Executive Vice
- ------------------------------------- President, Chief
Marvin O. Schlanger Operating Officer
and Director

WALTER J. TUSINSKI* Senior Vice
- ------------------------------------- President, Chief
Walter J. Tusinski Financial Officer
and Director

WALTER F. BERAN* Director February 25, 1997
- -------------------------------------
Walter F. Beran

ANTHONY G. FERNANDES* Director
- -------------------------------------
Anthony G. Fernandes

MARIE L. KNOWLES* Director
- -------------------------------------
Marie L. Knowles

JAMES A. MIDDLETON* Director
- -------------------------------------
James A. Middleton

STEPHEN R. MUT* Director
- -------------------------------------
Stephen R. Mut

FRANK SAVAGE* Director
- -------------------------------------
Frank Savage

47
<PAGE>

SIGNATURE TITLE DATE

ROBERT H. STEWART, III*
- ------------------------------------- Director
Robert H. Stewart, III

JOHN A. SHAW
- ------------------------------------- Vice President and
John A. Shaw Controller
(principal February 25, 1997
accounting officer)

JOHN A. SHAW
*By:_________________________________
John A. Shaw

(Attorney in fact)

48
<PAGE>

EXHIBITS
TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-9678
ARCO CHEMICAL COMPANY

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S> <C>
2.1 Asset Purchase Agreement, dated October 9, 1996, between ARCO
Chemical Company and Olin Corporation, filed as Exhibit 2.1 to
the Company's Current Report on Form 8-K, dated December 17,
1996, and incorporated herein by reference......................
2.2 Amendment No. 1, dated December 4, 1996, to the Asset Purchase
Agreement between ARCO Chemical Company and Olin Corporation,
filed as Exhibit 2.2 to the Company's Current Report on Form 8-
K, dated December 17, 1996, and incorporated herein by refer-
ence............................................................
3.1 Certificate of Amendment and Restated Certificate of Incorpora-
tion of ARCO Chemical Company, filed as an Exhibit bearing the
same number to the Company's Registration Statement on Form S-1
(No. 33-15930), filed on July 28, 1987, and incorporated herein
by reference....................................................
3.2 By-Laws of ARCO Chemical Company, filed as an Exhibit bearing
the same number to the Company's Registration Statement on Form
S-1 (No. 33-15930), filed on July 28, 1987, and incorporated
herein by reference.............................................
4.1 Indenture, dated as of June 15, 1988, between ARCO Chemical Com-
pany and The Bank of New York as Trustee, filed as Exhibit 4.2
to the Company's Registration Statement on Form S-3 (No. 33-
23340), filed on July 27, 1988, and incorporated herein by ref-
erence..........................................................
4.2 Forms of Debt Securities issuable under the Indenture referred
to in Exhibit 4.1, filed as Exhibit 4.1 to the Company's Regis-
tration Statement on Form S-3 (No. 33-23340), filed on July 27,
1988, and incorporated herein by reference......................
4.3 Form of Debt Security issuable under the Indenture referred to
in Exhibit 4.1, filed as Exhibit 4 to the Company's Current Re-
port on Form 8-K dated January 30, 1990, and incorporated herein
by reference....................................................
4.4 Forms of Debt Securities issuable under the Indenture referred
to in Exhibit 4.1, filed as Exhibits 4.1 and 4.2 to the
Company's Current Report on Form 8-K dated October 31, 1990, and
incorporated herein by reference................................
4.5 Form of Debt Security issuable under the Indenture referred to
in Exhibit 4.1, filed as Exhibit 4 to the Company's Current Re-
port on Form 8-K dated December 7, 1990, and incorporated herein
by reference....................................................
4.6 Credit Agreement, dated as of November 19, 1993, between ARCO
Chemical Company and The First National Bank of Chicago, as
Agent for the banks listed therein, filed as an Exhibit bearing
the same number to the Company's Annual Report on Form 10-K for
1993, and incorporated herein by reference......................
</TABLE>

1
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S> <C>
4.7 Amendment No. 1 to the Credit Agreement, dated as of October 14,
1994, between ARCO Chemical Company and The First National Bank
of Chicago, as Agent for the banks listed therein, filed as an
Exhibit bearing the same number to the Company's Annual Report
on Form 10-K for 1994, and incorporated herein by reference.....
4.8 Amendment No. 2 to the Credit Agreement, dated as of April 3,
1996, between ARCO Chemical Company and The First National Bank
of Chicago, as Agent for the banks listed therein...............
4.9 Instruments defining the rights of holders of long-term debt not
registered under the Securities Exchange Act of 1934 (other than
long-term debt issued pursuant to the Credit Agreement) are not
filed because the total amount of securities authorized under
any such instrument does not exceed 10 percent of the consoli-
dated total assets of the Company. The Company agrees to furnish
a copy of any such instrument to the Securities and Exchange
Commission upon request.........................................
10.1 ARCO Chemical Company Annual Incentive Plan, effective January
1, 1988, filed as an Exhibit bearing the same number to the
Company's Annual Report on Form 10-K for 1993, and incorporated
herein by reference ............................................
10.2 Resolutions relating to Amendment No. 1 to ARCO Chemical Company
Annual Incentive Plan, as adopted February 15, 1989, filed as an
Exhibit bearing the same number to the Company's Annual Report
on Form 10-K for 1990, and incorporated herein by reference.....
10.3 Resolutions relating to Amendment No. 2 to ARCO Chemical Company
Annual Incentive Plan, as adopted July 17, 1990, effective Sep-
tember 1, 1990, filed as an Exhibit bearing the same number to
the Company's Annual Report on Form 10-K for 1990, and incorpo-
rated herein by reference ......................................
10.4 Amendment and Restatement of ARCO Chemical Company Executive
Supplementary Savings Plan, effective January 1, 1995...........
10.5 ARCO Chemical Company 1987 Executive Long-Term Incentive Plan,
filed as Exhibit 10.12 to the Company's Registration Statement
on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorpo-
rated herein by reference.......................................
10.6 Amendment No. 1 to the ARCO Chemical Company 1987 Executive
Long-Term Incentive Plan........................................
10.7 ARCO Chemical Company 1990 Long-Term Incentive Plan, restated as
amended through July 20, 1995, filed as Exhibit 10.7 to the
Company's Annual Report on Form 10-K for 1995, and incorporated
herein by reference.............................................
10.8 Amendment No. 5 to the ARCO Chemical Company 1990 Long-Term In-
centive Plan, filed as Exhibit 10 to the Company's Quarterly Re-
port on Form 10-Q for the quarterly period ended June 30, 1996,
and incorporated herein by reference............................
10.9 ARCO Chemical Company Supplementary Executive Retirement Plan,
effective October 1, 1990, filed as Exhibit 10.12 to the
Company's Annual Report on Form 10-K for 1992, and incorporated
herein by reference.............................................
10.10 ARCO Chemical Company Financial Counseling Policy, effective
January 1, 1988, filed as Exhibit 10.13 to the Company's Annual
Report on Form 10-K for 1993, and incorporated herein by refer-
ence............................................................
10.11 ARCO Chemical Company Executive Medical Insurance Plan (Summary
Plan Description), effective January 1, 1988, filed as Exhibit
10.14 to the Company's Annual Report on Form 10-K for 1993, and
incorporated herein by reference................................
10.12 ARCO Chemical Company Key Management Deferral Plan, effective
October 1, 1990, filed as Exhibit 10.19 to the Company's Annual
Report on Form 10-K for 1990, and incorporated herein by refer-
ence............................................................
</TABLE>

2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S> <C>
10.13 Amendment No. 1 to the Key Management Deferral Plan, effective
as of October 22, 1992, filed as Exhibit 10.14 to the Company's
Annual Report on Form 10-K for 1995, and incorporated herein by
reference.......................................................
10.14 ARCO Chemical Company Key Management Long-Term Disability Plan,
effective October 1, 1990, filed as Exhibit 10.16 to the
Company's Annual Report on Form 10-K for 1992, and incorporated
herein by reference ............................................
10.15 Resolutions relating to ARCO Chemical Company Key Management
Life Insurance Plan, as adopted July 17, 1990, effective August
1, 1990, filed as Exhibit 10.21 to the Company's Annual Report
on Form 10-K for 1990, and incorporated herein by reference.....
10.16 ARCO Chemical Company Retirement Plan for Outside Directors, as
amended and restated effective October 1,1990, filed as Exhibit
10.18 to the Company's Annual Report on Form 10-K for 1992, and
incorporated herein by reference. ..............................
10.17 ARCO Chemical Company Deferral Plan for Outside Directors, ef-
fective October 1, 1990, filed as Exhibit 10.19 to the Company's
Annual Report on Form 10-K for 1992, and incorporated herein by
reference.......................................................
10.18 Cross-Indemnification Agreement, dated as of June 1, 1987, be-
tween ARCO Chemical Company and Atlantic Richfield Company,
filed as Exhibit 10.2(a) to the Company's Registration Statement
on Form S-1 (No. 33-15930), filed on July 28, 1987, and incorpo-
rated herein by reference.......................................
10.19 Amendment No. 1 to Cross-Indemnification Agreement, dated as of
June 30, 1987, between ARCO Chemical Company and Atlantic Rich-
field Company, filed as Exhibit 10.2(b) to the Company's Regis-
tration Statement on Form S-1 (No. 33-15930), filed on July 28,
1987, and incorporated herein by reference......................
10.20 Amendment No. 2 to Cross-Indemnification Agreement, dated as of
July 1, 1987, between ARCO Chemical Company and Atlantic Rich-
field Company, filed as Exhibit 10.2(c) to Amendment No. 1 to
the Company's Registration Statement on Form S-1 (No. 33-15930),
filed on August 21, 1987, and incorporated herein by reference..
10.21 Amended and Restated Tax Sharing Agreement, effective as of Jan-
uary 1, 1995, between ARCO Chemical Company and Atlantic Rich-
field Company, filed as Exhibit 10 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1995, and incorporated herein by reference......................
10.22 LPC/ACC Services Agreement, dated as of June 30, 1987, between
ARCO Chemical Company and Lyondell Petrochemical Company, filed
as Exhibit 10.4 to the Company's Registration Statement on Form
S-1 (No. 33-15930), filed on July 28, 1987, and incorporated
herein by reference.............................................
10.23 Services Agreement, dated as of July 18, 1987, between ARCO
Chemical Company and Atlantic Richfield Company, filed as Ex-
hibit 10.5 to the Company's Registration Statement on Form S-1
(No. 33-15930), filed on July 28, 1987, and incorporated herein
by reference....................................................
10.24 Amendment No. 1 to Services Agreement, dated as of March 30,
1990, between ARCO Chemical Company and Atlantic Richfield Com-
pany, filed as Exhibit 10.29 to the Company's Annual Report on
Form 10-K for 1990, and incorporated herein by reference........
10.25 Shareholder Agreement, dated as of June 30, 1987, between ARCO
Chemical Company and Atlantic Richfield Company, filed as Ex-
hibit 10.6 to the Company's Registration Statement on Form S-1
(No. 33-15930), filed on July 28, 1987, and incorporated herein
by reference....................................................
10.26 Form of ARCO Chemical Company Indemnity Agreement with officers
and directors, filed as Exhibit 10.8 to the Company's Registra-
tion Statement on Form S-1 (No. 33-15930), filed on July 28,
1987, and incorporated herein by reference......................
</TABLE>

3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S> <C>
12 Statement re computation of the ratio of earnings to fixed
charges..........................................................
21 Subsidiaries of ARCO Chemical Company............................
23 Consent of Independent Accountants...............................
24 Power of Attorney................................................
27 Financial Data Schedule..........................................
</TABLE>

<PAGE>

EXHIBIT 4.8

AMENDMENT NO. 2

AMENDMENT NO. 2 dated as of April 3, 1996 (this "Amendment") to that
certain Credit Agreement dated as of November 19, 1993, as amended by Amendment
No. 1 dated as of October 14, 1994 (as so amended, the "Credit Agreement") among
ARCO Chemical Company, a Delaware corporation, the Banks party thereto and The
First National Bank of Chicago, as Agent for such Banks.

WHEREAS, the parties hereto desire to amend the Credit Agreement to, among
other things, (i) release each of Toronto Dominion (Texas), Inc., Credit Suisse
and Texas Commerce Bank National Association, (collectively, the "Withdrawing
Banks") from all of their respective rights and obligations as "Banks" under and
as defined in the Credit Agreement, (ii) add ABN AMRO Bank N.V., Deutsche Bank
AG and Rabobank Nederland (collectively, the "New Banks") as new Banks party to
the Credit Agreement, (iii) increase the respective Commitments under and as
defined in the Credit Agreement of certain other Banks (collectively, with the
New Banks, the "Increasing Banks") as herein provided, (iv) amend the facility
fee and interest rate payable under the Credit Agreement and (v) amend the
Credit Agreement in certain other respects;

NOW THEREFORE, in consideration of the premises and other valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto hereby agree as follows:

1. Definitions. Unless the context otherwise requires, all capitalized
-----------
terms used but not otherwise defined herein shall have the meanings assigned to
them in the Credit Agreement.

2. Amendments. Upon the Closing Date (as defined in Section 6 of this
----------
Amendment) and effective as of the Effective Date (also as defined in Section 6
of this Amendment), the Credit Agreement shall be amended as follows:

(a) The definition of "Facility Fee Percentage" contained in Section 1.01
of the Credit Agreement shall be amended and restated in its entirety as
follows:

"Facility Fee Percentage" shall mean, with respect to each payment of
the facility fee pursuant to Section 2.08(b), the percentage rate per annum
set forth below opposite the ratings on the Borrower's senior unsecured
long-term public debt issued by both Moody's Investor Service, Inc. (or its
successor) and Standard & Poor's Corporation (or its successor) in effect
on the applicable date of determination:

<PAGE>

<TABLE>
<CAPTION>
Facility Fee
S & P Rating Moody's Rating Percentage
------------ -------------- ----------
<S> <C> <C>

A- or higher A3 or higher .075%
BBB+ Baa1 .10%
BBB Baa2 .125%
BBB- Baa3 .150%
Below BBB- Below Baa3 .20%
</TABLE>
For each facility fee payment pursuant to Section 2.08(b) , the applicable
Facility Fee Percentage shall be determined as of the Quarterly Date, or
date of termination of the Commitments in their entirety, as the case may
be, which is five Domestic Business Days preceding the date such payment is
due pursuant to Section 2.08(b). In the event of a split rating, the
Borrower shall be entitled to the benefit of the higher rating, unless
either rating is below BBB- or Baa3 (in which case the lower rating shall
control). In the event that a rating is available from only one rating
agency, such rating shall control. In the event that a rating is not
available from either rating agency, the applicable Facility Fee Percentage
shall be .20%.

(b) The definition of "CD Reference Banks" contained in Section 1.01 of
the Credit Agreement shall be amended and restated in its entirety as follows:

"'CD Reference Banks' shall mean Bank of America NT & SA, The Chase
Manhattan Bank, N.A. and The First National Bank of Chicago, and each such
other bank as may be appointed pursuant to Section 9.07(f)."

(c) The definition of "Euro-Currency Reference Banks" contained in Section
1.01 of the Credit Agreement shall be amended and restated in its entirety as
follows:

"'Euro-Currency Reference Banks' shall mean the principal London
offices of Bank of America NT & SA, The Chase Manhattan Bank, N.A. and The
First National Bank of Chicago, and each such other bank as may be
appointed pursuant to Section 9.07(f)."

(d) The definition of "Syndicated Margin" contained in Section 1.01 of the
Credit Agreement shall be amended and restated in its entirety as follows:

"Syndicated Margin" shall mean, with respect to a Syndicated Loan
outstanding on the applicable date of determination, the applicable
Syndicated Margin set forth below (i) beneath the interest rate option
applicable to such Syndicated Loan and (ii) opposite the ratings on the
Borrower's senior unsecured long-term public debt issued

Page 2
<PAGE>

by both Moody's Investor Service, Inc. (or its successor) and Standard &
Poor's Corporation (or its successor) in effect on such date of
determination:
<TABLE>
<CAPTION>

S & P Rating Moody's Rating Euro-Currency Fixed CD Base Rate
------------- -------------- ------------- -------- ---------
<S> <C> <C> <C> <C>

A- or higher A3 or higher .15% .275% 0.0%
BBB+ Baa1 .20% .325% 0.0%
BBB Baa2 .225% .35% 0.0%
BBB- Baa3 .30% .425% 0.0%
Below BBB- Below Baa3 .45% .575% 0.0%
</TABLE>

The rate of interest applicable to any outstanding Syndicated Loan shall
change simultaneously with, and to the extent that, the applicable
Syndicated Margin changes (as a result of a rating change). In the event
of a split rating, the Borrower shall be entitled to the benefit of the
higher rating, unless either rating is below BBB- or Baa3 (in which case
the lower rating shall control). In the event that a rating is available
from only one rating agency, such rating shall control. In the event that
a rating is not available from either rating agency, the applicable
Syndicated Margin shall be that which would be applicable in the case of a
rating below BBB- or Baa3.

(e) The definition of "Termination Date" contained in Section 1.01 of the
Credit Agreement shall be amended and restated in its entirety as follows:

"'Termination Date' shall mean April 3, 2001 or, if such day is not a
Euro-Currency Business Day, the next preceding Euro-Currency Business Day."

(f) The signature pages and Commitments set forth following Section 9.13
of the Credit Agreement shall be amended by (i) deleting the signature line and
Commitment amount for each of the Withdrawing Banks, (ii) adding a new signature
line and Commitment amount for each of the New Banks in the same form and
position as set forth for each such New Bank on the signature pages to this
Amendment and (iii) replacing the respective Commitment amounts set forth next
to the name of each Increasing Bank (other than the New Banks) with the
respective Commitment amount set forth next to the name of each such Increasing
Bank on the signature pages to this Amendment.

3. Release of Withdrawing Banks; Provision for Facility Fee Accrued
----------------------------------------------------------------
Through Effective Date. Upon the Closing Date (as defined in Section 6 of this
- ----------------------
Amendment) and effective as of the Effective Date (also as defined in Section 6
of this Amendment), each of the Withdrawing Banks shall cease to have any rights
or obligations under the Credit Agreement and shall cease to be a "Bank" for all
purposes thereunder; provided, however, that to the extent that the facility fee
-------- -------
payable pursuant to Section 2.08(b) of the Credit Agreement on April 8, 1996 has
accrued for the period prior to the Effective Date, such fee

Page 3
<PAGE>

shall be promptly distributed by the Agent to each of the Withdrawing Banks
according to their respective Commitments as in effect prior to the Effective
Date and the Withdrawing Banks shall remain "Banks" party to the Credit
Agreement for the sole purpose of collecting said facility fee until such time
as such facility fee has been paid in full with respect to such period ending on
the Effective Date. Promptly upon the Closing Date, each Withdrawing Bank
hereby agrees to promptly mark "Cancelled" the Note held by it pursuant to the
Credit Agreement and return the same to the Agent (who shall promptly forward
the same to the Borrower).

4. Assumption by the New Banks. By its execution and delivery of this
---------------------------
Amendment and in consideration of the undertakings set forth herein and in the
Credit Agreement and other good and valuable consideration, the receipt of which
is hereby acknowledged, each of the New Banks hereby assumes and covenants and
agrees fully, completely and timely to perform, comply with, and discharge each
and all of the obligations, duties, and liabilities of a Bank under the Credit
Agreement, which assumption includes, without limitation, the obligation to fund
its respective Commitment, subject to the terms and conditions of the Credit
Agreement. Each New Bank hereby agrees to be bound by all provisions relating
to Banks under and as defined in the Credit Agreement and shall, upon the
Closing Date and effective as of the Effective Date, be deemed a Bank for all
purposes hereunder and under the Credit Agreement.

5. Representations and Warranties. The Borrower hereby confirms,
------------------------------
reaffirms and restates as of the date hereof the representations and warranties
set forth in Article IV of the Credit Agreement except to the extent such
representations and warranties relate to a specific date, provided that such
representations and warranties shall be and hereby are amended as follows: each
reference therein to "this Agreement", including, without limitation, such a
reference included in the term "Bank Credit Documents", shall be deemed to be a
collective reference to the Credit Agreement, this Amendment and the Credit
Agreement as amended by this Amendment. An Event of Default under and as
defined in the Credit Agreement as amended by this Amendment shall be deemed to
have occurred if any representation or warranty made pursuant to the foregoing
sentence of this Section 5 shall be materially false as of the date on which
made or, to the extent such representations and warranties relate to a specific
date, as of such date.

6. Effectiveness; Additional Conditions Precedent. (a) This Amendment and
----------------------------------------------
the amendments to the Credit Agreement provided for herein shall become
effective as of April 3, 1996 (the "Effective Date") on the date, not later than
April 30, 1996, on which all of the following conditions precedent shall have
been satisfied (the "Closing Date"):

(i) This Amendment shall have been duly executed and delivered by
the Agent and the Borrower on one counterpart and each of the Banks
(including each of the Withdrawing Banks and each of the Increasing Banks)
shall have signed a

Page 4
<PAGE>

counterpart or counterparts hereof and notified the Agent by facsimile or
telephone that such action has been taken and that such executed
counterpart or counterparts will be mailed or otherwise delivered to the
Agent.

(ii) No Default or Event of Default shall have occurred and be
continuing.

(iii) No Loans shall be outstanding on either the Effective Date or
the Closing Date, or on any date between the Effective Date and the Closing
Date.

(iv) The Borrower shall have duly executed and delivered to the Agent
(who shall promptly forward the same to the respective New Banks), for the
account of each New Bank, a Note payable to the order of such New Bank,
which new Note shall thereupon become the Note of such New Bank for all
purposes under the Credit Agreement.

(b) Upon the Closing Date and effective as of the Effective Date, all
references to the Credit Agreement in the conditions precedent to the initial
Borrowing set forth in Sections 3.01(i), (ii), and (iii) of the Credit Agreement
shall be deemed to refer to the Credit Agreement, this Amendment, and the Credit
Agreement as amended by this Amendment.

7. Effect on the Existing Agreement. Except as expressly amended hereby,
--------------------------------
all of the representations, warranties, terms, covenants and conditions of the
Credit Agreement and the other Bank Credit Documents (a) shall remain unaltered,
(b) shall continue to be, and shall remain, in full force and effect in
accordance with their respective terms, and (c) are hereby ratified and
confirmed in all respects. Upon the effectiveness of this Amendment, all
references in the Credit Agreement (including references in the Credit Agreement
as amended by this Amendment) to "this Agreement" (and all indirect references
such as "hereby", "herein", "hereof" and "hereunder") shall be deemed to be
references to the Credit Agreement as amended by this Amendment.

8. Expenses. The Borrower shall reimburse the Agent for any and all
--------
reasonable costs, internal charges and out-of-pocket expenses (including
reasonable attorneys' fees and time charges of attorneys for the Agent, which
attorneys may be employees of the Agent) paid or incurred by the Agent in
connection with the preparation, review, execution and delivery of this
Amendment.

9. Entire Agreement. This Amendment, the Credit Agreement as amended by
----------------
this Amendment and the other Bank Credit Documents embody the entire agreement
and understanding between the parties hereto and supersede any and all prior
agreements and understandings between the parties hereto relating to the subject
matter hereof.

Page 5
<PAGE>

10. Governing Law. This Amendment shall be construed in accordance with
-------------
the internal laws (and not the law of conflicts) of the State of Illinois, but
giving effect to federal laws applicable to a national banking association
located in the State of Illinois.

11. Counterparts. This Amendment may be executed in any number of
------------
counterparts, all of which taken together shall constitute one agreement, and
any of the parties hereto may execute this Amendment by signing any such
counterpart.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed effective as of the Effective Date.

THE BORROWER

ARCO CHEMICAL COMPANY

By /s/ R. Remick
-----------------------------------
Ronald R. Remick
Vice President, Treasury and Planning

Address for Notices:

3801 West Chester Pike
Newtown Square, Pennsylvania 19073
Attn: Manager of Banking

Telex No.: 99-0756
(answerback ARCO CHEM NS1)
Telephone No.: 610-359-3362
Telecopier No.: 610-359-3322

Page 6
<PAGE>

THE AGENT

THE FIRST NATIONAL BANK OF CHICAGO

By /s/ Barbara C. Chapman
------------------------------------
Title Corporate Banking Officer
---------------------------------

Address for Notices:

The First National Bank of Chicago
One First National Plaza
Chicago, Illinois 60670
Attention: William P. Laird
Mail Suite 0464
Telex No.: 4330253 (answerback FNBCUI)
Telephone No.: 312-732-5635
Telecopier No.: 312-732-3055

cc: W. Walter Green, III
Mail Suite 0363
Telex No.: 4330253 (answerback FNBCUI)
Telephone No.: 312-732-7235
Telecopier No.: 312-732-3055

THE BANKS

Commitment
- ----------

$50,000,000 THE FIRST NATIONAL BANK OF CHICAGO

By /s/ Barbara C. Chapman
------------------------------------
Title Corporate Banking Officer
---------------------------------

$45,000,000 THE CHASE MANHATTAN BANK, N.A.

By [SIGNATURE APPEARS HERE]
------------------------------------
Title Vice President
---------------------------------
[NAME APPEARS HERE]

Page 7
<PAGE>

$40,000,000 BANK OF AMERICA NT & SA

By [SIGNATURE APPEARS HERE]
----------------------------
Title MANAGING DIRECTOR
----------------------------

$35,000,000 CREDIT LYONNAIS
NEW YORK BRANCH

By [SIGNATURE APPEARS HERE]
----------------------------
Title
----------------------------

CREDIT LYONNAIS
CAYMAN ISLANDS BRANCH

By [SIGNATURE APPEARS HERE]
----------------------------
Title
----------------------------

$30,000,000 DEUTSCHE BANK AG
NEW YORK BRANCH

By [SIGNATURE APPEARS HERE] /s/ J. Augsburger
----------------------------
Title Vice President Vice President
----------------------------

DEUTSCHE BANK AG
CAYMAN ISLANDS BRANCH

By [SIGNATURE APPEARS HERE] /s/ J. Augsburger
----------------------------
Title Vice President Vice President
----------------------------

Page 8
<PAGE>

$25,000,000 PNC BANK, NATIONAL ASSOCIATION

By [SIGNATURE APPEARS HERE]
-----------------------------
Title Banking Officer
-----------------------------

$15,000,000 ABN AMRO BANK N.V.
NEW YORK BRANCH

By /s/ George M. Dugan /s/ David W. Stack
-----------------------------
Title George M. Dugan, VP David W. Stack, AVP
-----------------------------

$15,000,000 BANK OF TOKYO - MITSUBISHI
TRUST COMPANY

By [SIGNATURE APPEARS HERE]
-----------------------------
Title Vice President
-----------------------------

$15,000,000 CITIBANK, N.A.

By [SIGNATURE APPEARS HERE]
-----------------------------
Title [NAME APPEARS HERE]
-----------------------------
Vice President

$15,000,000 CORESTATES BANK, N.A.

By [SIGNATURE APPEARS HERE]
-----------------------------
Title V P
-----------------------------

Page 9
<PAGE>

$15,000,000 COOPERATIVE CENTRALE RAIFFEISEN-
BOERENLEENBANK, B.A., "RABOBANK
NEDERLAND," NEW YORK BRANCH

By /s/ Dana W. Hemenway
--------------------------------
Title Dana W. Hemenway
-----------------------------
Vice President

By /s/ Ian Reece
--------------------------------
Title Ian Reece
-----------------------------
[TITLE APPEARS HERE]

- -------------------
$300,000,000

THE WITHDRAWING BANKS

CREDIT SUISSE

By /s/ Andrea E. Shkane
--------------------------------
Title Andrea E. Shkane
-----------------------------
MEMBER OF SENIOR
MANAGEMENT

By /s/ Eileen O'Connell Fox
--------------------------------
Title Eileen O'Connell Fox
-----------------------------
MEMBER OF SENIOR
MANAGEMENT

TORONTO DOMINION (TEXAS), INC.

By /s/ Diane Bailey
--------------------------------
Title VP
-----------------------------

TEXAS COMMERCE BANK
NATIONAL ASSOCIATION

By /s/ Mary C. Arnold
--------------------------------
Title VICE PRESIDENT
-----------------------------

Page 10

<PAGE>

ARCO CHEMICAL COMPANY
EXECUTIVE SUPPLEMENTARY SAVINGS PLAN

To record the amendment and restatement of the ARCO Chemical Company Executive
Supplementary Savings Plan, effective January 1, 1995, the undersigned, being
duly authorized to act on behalf of ARCO Chemical Company has executed this plan
document at Newtown Square, Pennsylvania on the 26th day of October, 1994.

ATTEST: ARCO CHEMICAL COMPANY

BY: /s/ Robert J. Millstone BY: /s/ Frank W. Welsh
-------------------------- --------------------------
Frank W. Welsh
Vice President
Human Resources

EXHIBIT 10.4
<PAGE>

ARCO CHEMICAL COMPANY
- --------------------------------------------------------------------------------
Executive Supplementary Savings Plan

As Amended and Restated Effective January 1, 1995

<PAGE>

ARCO CHEMICAL COMPANY
EXECUTIVE SUPPLEMENTARY SAVINGS PLAN

TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
NO

<S> <C> <C>
Section 1 Intent of Plan................................................. 1

Section 2 Effective Date of Plan......................................... 1

Section 3 Definitions.................................................... 1

Section 4 Costs of Plan.................................................. 2

Section 5 Eligibility for Benefits....................................... 2

Section 6 Amount of Benefit.............................................. 2

Section 7 Crediting of Benefit........................................... 3

Section 8 Time of Payment of Benefit..................................... 3

Section 9 Death Benefits................................................. 3

Section 10 Administration................................................. 3

Section 11 Facility of Payment and Lapse of Benefits...................... 4

Section 12 General Provisions............................................. 5

Section 13 Amendments and Discontinuance.................................. 5
</TABLE>
<PAGE>

Section 1. Intent of Plan

1.1 This Plan is intended to provide an annual benefit, in accordance
with the provisions of the Plan contained herein, to that select group of
management or highly compensated employees which has been excluded receiving
Company contributions ARCO Chemical Company Capital Accumulation Plan, due to
the probability that their benefits under one or more qualified employee pension
benefit plans maintained by the Company might be reduced solely by reason of the
maximum annual limitations on contributions and benefits imposed by (S) 415 of
the Internal Revenue Code of 1986, as amended (the "Code").

Section 2. Effective Date of Plan

2.1 This amendment and restatement of the Plan shall be effective as of
January 1, 1995.

Section 3. Definitions

3.1 Administrative Committee or Committee means the Committee
established under Paragraph 10.1 of this Plan.

3.2 Base Salary means the regular wages or salary of an Employee as
determined by the Company, excluding extra pay, such as bonuses, or other
supplementary allowances.

3.3 Company means ARCO Chemical Company and any of its subsidiaries or
affiliates whose employees are included in this Plan upon authorization of the
Board of Directors of ARCO Chemical Company.

3.4 Disability or Disabled means an Employee's total and permanent
disability as determined by the Administrative Committee.

3.5 Employee means any person who:

(a) Is regularly employed by the Company, whether on a full-time or
part-time basis; and

(b) Either:

(i) Is a member of that select group of management or highly
compensated employees in the executive payroll grade of 64C5 or above; or

(ii) Has an annual Base Salary which is not less than $150,000; or

-1-
<PAGE>

(iii) Was an active participant in the Plan as of the December 31,
1994; and

(c) Has been excluded from eligibility to receive Company contributions
under the ARCO Chemical Company Capital Accumulation Plan, on account of a
determination by the Company of potential application of the maximum annual
contribution and benefit limitations imposed by the Code.

3.6 Plan Year means the calendar year.

Section 4. Costs of Plan

4.1 All costs of this Plan, including the administration thereof, shall
be borne by the Company and no contributions from Employees shall be required or
permitted.

Section 5. Eligibility for Benefits

5.1 Each person who qualifies as an Employee, as defined in Paragraph
3.5, for all, or any part, of the Plan Year, shall participate in the Plan for
such portion of the Plan Year.

Section 6. Amount of Benefit

6.1 The amount of an Employee's benefits for each Plan year shall be
equal to either of the following:

(a) With respect to an Employee who makes the maximum permissible
elective deferral under the ARCO Chemical Company Capital Accumulation Plan
during the Plan Year, an amount equal to the maximum percentage of the amount of
such Employee's Base Salary that would have been contributed by the Company
under the ARCO Chemical Company Capital Accumulation Plan assuming that there
were no limitations on such contributions imposed by (S) 415 of the Code during
the Plan Year; or

(b) With respect to an Employee who does not make the maximum
permissible elective deferral under the ARCO Chemical Company Capital
Accumulation Plan during the Plan Year, an amount equal to the product of two
times the amount of elective deferrals made by the Employee under the ARCO
Chemical Company Capital Accumulation Plan during the Plan Year.

-2-
<PAGE>

Section 7. Crediting of Benefits

7.1 The Committee shall determine the amount of benefit to be credited
to an Employee for a Plan Year within 30 days following the end of the Plan
Year, or 30 days following the Employee's termination of employment, whichever
occurs earlier.

Section 8. Time of Payment of Benefit

8.1 Each benefit to which an Employee is entitled for a Plan Year shall
be paid in a single cash payment to the Employee, except as provided in the
following paragraph.

8.2 Prior to the commencement of each Plan Year, prospective
Participants shall be offered the right to elect irrevocably to defer all or a
portion or portions of the payment of their awards for the Plan Year pursuant
to the terms and conditions of the ARCO Chemical Company Key Management Deferral
Plan.

Section 9. Death Benefits

9.1 In the event of an Employee's death prior to payment of the benefit
due such Employee under the Plan, the benefit shall be payable as soon as
practicable following the Employee's death to the beneficiary or beneficiaries
most recently designated by the Employee in writing on a form prescribed by the
Committee. If no such designation shall have been made, or if all designated
beneficiaries shall have died before the Employee, payment shall be made to the
Employee's estate.

Section 10. Administration

10.1 Administrative Committee. The Compensation Committee of the Board
of Directors of ARCO Chemical Company shall act as the Administrative Committee
of this Plan.

10.2 Rules of Conduct. The Administrative Committee shall adopt such
rules for the conduct of its business and administration of this Plan as it
considers desirable, provided they do not conflict with the provisions of this
Plan.

10.3 Legal, Accounting, Clerical and Other Services. The Administrative
Committee may authorize one or more of its members or any agent to act on its
behalf and may contract for legal, accounting, clerical and other services to
carry

-3-
<PAGE>

out this Plan. All expenses of the Administrative Committee shall be paid by the
Company.

10.4 Interpretation of Provisions. The Administrative Committee shall
have the right to interpret the provisions of this Plan and to decide questions
arising in its administration. The decisions and interpretations of the
Administrative Committee shall be final and binding on the Company, its
Employees and all other persons.

10.5 Records of Administration. The Administrative Committee shall
keep records reflecting the administration of this Plan which shall be subject
to audit by the Company.

10.6 Denial of Claim. The Administrative Committee shall provide
adequate notice in writing to any Employee or beneficiary whose claim for
benefits under this Plan has been denied, setting forth the specific reasons for
such denial. The Employee or beneficiary will be given an opportunity for a full
and fair review by the Administrative Committee of the decision denying the
claim. The Employee or beneficiary shall be given 60 days from the date of the
notice denying any such claim within which to request such review.

10.7 Liability of Committee. No member of the Administrative Committee
shall be liable for any action taken in good faith or for the exercise of any
power given the Administrative Committee, or for the actions of other members of
said Committee.

Section 11. Facility of Payment and Lapse of Benefits

11.1 Provisions for incapacity. If the Administrative Committee deems
any person entitled to receive any payment under the provisions of this Plan
incapable of receiving or disbursing the same by reason of minority, illness or
infirmity, mental incompetency, or incapacity of any kind, the Committee may, in
its sole discretion, take any one or more of the following actions: it may apply
such payment directly for the comfort, support and maintenance of such person;
it may reimburse any person for any such support theretofore supplied to the
person entitled to receive any such payment; or it may pay such payment to any
other person selected by the Committee to disburse such payment for the comfort,
support and maintenance of the person entitled thereto including, without
limitation, to any relative who has undertaken, wholly or partially, the expense
of such person's comfort, care and maintenance, or any institution in whose care
or custody the person entitled to the payment may be. The Administrative
Committee may, in its sole discretion, deposit any payment due to a minor to the
minor's credit in any savings or commercial bank of the Committee's choice.

-4-

<PAGE>

11.2 Payments or Deposits. Payment or deposits made pursuant to any
provision of this Section 11 shall be a complete discharge, to the extent
thereof, of all liability under the provisions of this Plan, or otherwise, of
the Administrative Committee, the Company and this Plan, and the receipt by the
person or persons receiving any such payment, distribution or deposit shall be a
complete acquittance therefor, and there shall be no liability to see to the
application of any payments, distributions or deposits so made.

Section 12. General Provisions

12.1 Unfunded Benefit Plan. This Plan is intended to constitute a Plan which
is unfunded and is maintained primarily for the purpose of providing deferred
compensation to a select group of management or highly compensated Employees.

12.2 Grantor Trust. The Company intends to establish a grantor trust to aid
in accumulating the amounts necessary to pay any amount awarded to any
Participant for any Plan Year, or any Award deferred pursuant to Section 8 or
any interest credited thereon. All Awards, and any interest credited thereon,
shall be paid from the general funds of the Company to the extent not paid from
the grantor trust. Under no circumstances shall a Participant or other person
have any interest whatsoever in any particular property or assets of the Company
as a result of this Plan or any Award made thereunder.

12.3 Payments and Benefits Not Assignable. Benefits under this Plan are not
assignable or subject to alienation by Employees. Likewise, such payments shall
not be subject to attachments by creditors of, or through legal process against,
the Company, the Administrative Committee, or any Employee.

12.4 No Right of Employment. The provisions of this Plan shall not give an
Employee the right to be retained in the service of the Company.

12.5 Adjustments. The Administrative Committee may, with respect to an
Employee, adjust such Employee's benefit under this Plan or make such other
adjustments with respect to such Employee as are required to correct
administrative errors or provide uniform treatment of Employees in a manner
consistent with the intent and purpose of this Plan.

Section 13. Amendments and Discontinuance

13.1 Amendment of Plan. This Plan may be amended from time to time by the
Board of Directors of ARCO Chemical Company.

-5-
<PAGE>

13.2 Termination. ARCO Chemical Company intends to continue this Plan
indefinitely, but reserves the right to terminate it at any time.

13.3 Effect of Amendment or Termination. No amendment or termination of
this Plan may adversely affect the benefit payable to any Employee entitled to
receive benefits under this Plan prior to the effective date of the amendment or
termination.

-6-

<PAGE>

AMENDMENT NO. 1 TO THE
ARCO CHEMICAL COMPANY
1987 EXECUTIVE LONG-TERM INCENTIVE PLAN
___________________________________________

The ARCO Chemical Company 1987 Executive Long-Term Incentive Plan, as
amended (the "Plan"), is hereby amended as follows:

1. Article I, Section 2 of the Plan shall be amended by adding the
following definition as new clause (k):

(k) "Sale Price" of any share of Common Stock shall mean the actual
price for which such share of Common Stock shall have been sold by an
Eligible Employee on the date in question as reported on a
confirmation form prepared and furnished to the Company by the broker
effecting the transaction on behalf of such Eligible Employee.

2. Article II, Section 2(g) of the Plan shall be amended and restated in
its entirety as follows:

(g) Dividend Share Credits. Dividend Share Credits shall be credited
----------------------
as provided in Article I, Section 2(i) of the Plan. Upon the exercise,
expiration or surrender of any Stock Option, in whole or in part, the
Dividend Share Credits attributable to the shares of Common Stock
(referred to for purposes of this Section as the "affected shares")
underlying such exercised, expired or surrendered Stock Option shall
be canceled and a cash payment in respect of such canceled Dividend
Share Credits shall be made to the optionee in an amount calculated
pursuant to: X, as stated below, in the case of the exercise of any
Stock Option and sale of the affected shares in a broker-assisted
transaction involving the withholding of a portion of the proceeds
from the sale of the affected shares in payment of the Option Price (a
"cashless exercise"); or Y, as stated below, in any other case,
including, but not limited to, the exercise of any Stock Option
involving the delivery of cash (other than pursuant to a cashless
exercise) or surrender of shares of Common Stock to the Company in
payment of the Option Price, or the expiration or surrender to the
Company of any Stock Option. For purposes of this

EXHIBIT 10.6
<PAGE>

Section, the date of exercise, expiration or surrender of any Stock
Option shall be referred to as the "determination date".

Where:

X = Sale Price of a share of Common Stock
multiplied by the total number of canceled
Dividend Share Credits.

Y = Fair Market Value of a share of Common
Stock multiplied by the total number of
canceled Dividend Share Credits, less the
amount by which the aggregate Option Price
of the affected shares exceeds the aggregate
Fair Market Value of such shares on the
determination date.

3. Except as set forth herein, the Plan shall not be amended or modified
and shall remain in full force and effect. All capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to such terms in the
Plan.

Executed as of this 26th day of July, 1995.

Attest:

By:/s/Robert J. Millstone By:/s/Frank W. Welsh
------------------------- -----------------------
Robert J. Millstone Frank W. Welsh
Secretary Vice President

-2-

<PAGE>

ARCO CHEMICAL COMPANY AND CONSOLIDATED SUBSIDIARIES

COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Pretax income from continuing operations.............. $322 $311 $416 $756 $487
Add:
Interest expense.................................... 91 105 85 89 86
Rental expense factor............................... 26 20 22 25 27
---- ---- ---- ---- ----
Earnings available for fixed charges.................. $439 $436 $523 $870 $600
==== ==== ==== ==== ====
Interest expense...................................... $ 91 $105 $ 85 $ 89 $ 86
Add capitalized interest.............................. 37 -- 3 1 3
Rental expense factor................................. 26 20 22 25 27
---- ---- ---- ---- ----
Fixed charges......................................... $154 $125 $110 $115 $116
==== ==== ==== ==== ====
Ratio of earnings to fixed charges.................... 2.9 3.5 4.8 7.6 5.2
==== ==== ==== ==== ====
</TABLE>

EXHIBIT 12

<PAGE>

ARCO CHEMICAL COMPANY

SUBSIDIARIES

<TABLE>
<CAPTION>
JURISDICTION
NAME ENTITY OF FORMATION
---- ------------------- ------------
<S> <C> <C>
ARCO Chemie Nederland, Ltd. corporation Delaware
ARCO Chimie France SNC partnership France
POSM II Limited Partnership, L.P. limited partnership Delaware
ARCO Chemical Delaware Company corporation Delaware
ARCO Chemical Technology, L.P. limited partnership Delaware
The Meadows Corporation corporation Delaware
</TABLE>

The subsidiaries whose names are not listed above, if considered in the
aggregate as a single subsidiary, would not constitute a significant subsidiary
of the Company.

EXHIBIT 21

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the following registration
statements of ARCO Chemical Company and Subsidiaries: Registration Statement
on Form S-8 (No. 33-17707), Registration Statement on Form S-8 (No. 33-23867),
Registration Statement on Form S-8 (No. 33-38062), Registration Statement on
Form S-8 (No. 33-23241), Registration Statement on Form S-8 (No. 333-16395),
and Registration Statement on Form S-8 (No. 333-19023) of our report dated
February 12, 1997 on our audits of the consolidated financial statements of
ARCO Chemical Company and Subsidiaries as of December 31, 1996 and 1995, and
for each of the three years in the period ended December 31, 1996 which report
is included in this Annual Report on Form 10-K.

Coopers & Lybrand L.L.P.

Philadelphia, Pennsylvania
February 25, 1997

EXHIBIT 23

<PAGE>

ARCO CHEMICAL COMPANY

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints
Alan R. Hirsig, Robert J. Millstone, John A. Shaw, and Walter J. Tusinski, and
each of them, his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to effect the following
acts as necessary or appropriate for the conduct of the business and affairs
of ARCO Chemical Company (the "Company"):

I. In connection with any outstanding security of the Company registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended

(1) to execute any singular or periodic report required or permitted
to be filed under the Securities Exchange Act of 1934, as amended,
including specifically the Company's Annual Report on Form 10-K for the
------------
fiscal year ended December 31, 1996; and

(2) to file or cause to be filed such report with the Securities and
Exchange Commission (the "Commission"), any national or foreign
securities exchange, any securities industry self-regulatory
organization, any state or other jurisdiction of the United States, and
any jurisdiction outside the United States, in each case as required or
permitted by applicable law;

II. In connection with the issuance, offering, or sale of any securities
authorized by the Board of Directors of the Company or by the Executive
Committee thereof pursuant to due authorization by such Board, or in
connection with the issuance, offering or sale of any security,
participation or interest in any employee or executive compensation or
benefit plan authorized and approved by the Board of Directors of the
Company or by the Executive or Compensation Committees thereof pursuant to
due authorization by such Board

(1) to execute and file, or cause to be filed, with the Commission,
(A) Registration Statements and any and all amendments (including post-
effective amendments) thereto, and to file, or cause to be filed, all
exhibits thereto and other documents in connection therewith as
required or permitted by the Commission in connection with such
registration under the Securities Act of 1933, as amended, and (B) any
singular or periodic report or other document required or permitted to
be filed by the Company with the Commission pursuant to the Securities
Exchange Act of 1934, as amended;

(2) to execute and file, or cause to be filed, any application for
registration or exemption therefrom, or any report or any other
document required or permitted to be filed by the Company under the
Blue Sky or securities laws of any state or other jurisdiction of the
United States, and to furnish any other information required in
connection therewith, including any reports or other documents required
or permitted to be filed subsequent to the issuance of such securities;

(3) to execute and file, or cause to be filed, any application for
registration or exemption therefrom under the securities laws of any
jurisdiction outside the United States, including any reports or other
documents required or permitted to be filed subsequent to the issuance
of such securities; and

(4) to execute and file, or cause to be filed, any application for
listing such securities on any national or foreign securities exchange;

granting to such attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act required to be done as he
or she might or could do in person, hereby ratifying and confirming all that
such attorneys-in-fact and agents, and each of them, may lawfully do or cause
to be done by virtue of this Power of Attorney.

EXHIBIT 24
<PAGE>

Each such attorney-in-fact and agent shall have the right to indemnification
for any action taken or omitted pursuant to this Power of Attorney provided in
the By-Laws of the Company to officers and directors for service as such,
including, but not limited to, the non-exclusivity provisions of such By-Laws.

Each person whose signature appears below may at any time revoke this Power
of Attorney, as to himself or herself only, by an instrument in writing
specifying that this Power of Attorney is revoked as to him or her as of the
date of delivery of such revocation to the Secretary of the Company or at a
subsequent specified date. This Power of Attorney shall be revoked
automatically with respect to any person whose signature appears below
effective on the date he or she ceases to be a member of the Board of
Directors, or in the case of Mr. Millstone, on the date he ceases to be Vice
President, General Counsel and Secretary, or in the case of Mr. Shaw, on the
date he ceases to be principal accounting officer of the Company. Any
revocation shall not void or otherwise affect any acts performed by any
attorney-in-fact and agent named herein pursuant to this Power of Attorney
prior to the effective date of such revocation.

This instrument may be executed in multiple counterparts each of which shall
be deemed an original and all of which together shall be deemed one
instrument.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ MIKE R. BOWLIN Chairman of the
- ------------------------------------- Board and Director
Mike R. Bowlin

/s/ ALAN R. HIRSIG President, Chief
- ------------------------------------- Executive Officer
Alan R. Hirsig and Director

/s/ MARVIN O. SCHLANGER Executive Vice
- ------------------------------------- President, Chief
Marvin O. Schlanger Operating Officer
and Director
February 25,1997

/s/ WALTER J. TUSINSKI Senior Vice
- ------------------------------------- President, Chief
Walter J. Tusinski Financial Officer
and Director

/s/ WALTER F. BERAN
- ------------------------------------- Director
Walter F. Beran

/s/ ANTHONY G. FERNANDES
- ------------------------------------- Director
Anthony G. Fernandes

/s/ MARIE L. KNOWLES
- ------------------------------------- Director
Marie L. Knowles

<PAGE>

SIGNATURE TITLE DATE
--------- ----- ----

/s/ JAMES A. MIDDLETON
- ------------------------------------- Director
James A. Middleton

/s/ STEPHEN R. MUT
- ------------------------------------- Director
Stephen R. Mut
February 25, 1997

/s/ FRANK SAVAGE
- ------------------------------------- Director
Frank Savage

/s/ ROBERT H. STEWART, III
- ------------------------------------- Director
Robert H. Stewart, III

<PAGE>

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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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0
0
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</TABLE>