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                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    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 1-82

                            PHELPS DODGE CORPORATION

                            (a New York corporation)

                                   13-1808503
                      (I.R.S. Employer Identification No.)

                 2600 N. Central Avenue, Phoenix, AZ 85004-3089

                  Registrant's telephone number: (602) 234-8100

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

                                                        Name of each exchange
    Title of each class                                  on which registered
    -------------------                                 ---------------------

Common Shares, $6.25 par value per share                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 Common Shares of the issuer held by nonaffiliates
at March 6, 1997, was approximately $4,646,956,000.

Number of Common Shares outstanding at March 6, 1997:  64,429,200 shares.

                      Documents Incorporated by Reference:

                Document                                   Location in 10-K
                --------                                   ----------------
Proxy Statement for 1997 Annual Meeting                        Part III

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<PAGE>
                            PHELPS DODGE CORPORATION

                           Annual Report on Form 10-K
                      For the Year Ended December 31, 1996




                                Table of Contents
                                -----------------

Part I.
      Items 1. and 2. Business and Properties
         Phelps Dodge Mining Company
             Properties, Facilities and Production
                Copper Operations
                      Phelps Dodge Copper Production Data, by Source
                      Phelps Dodge Metal Production and Deliveries
                      Phelps Dodge Smelters and Refinery - Production
                Other Mining Operations and Investments
             Exploration & Development
             Ore Reserves
             Ownership of Real Property
             Sales and Competition
             Prices, Supply and Consumption
             Costs
             Energy Supplies
             Environmental and Other Regulatory Matters
             Labor Matters
         Phelps Dodge Industries
             Operations
             Ownership of Real Property
             Competition and Markets
             Raw Materials
             Energy Supplies
             Environmental Matters
             Labor Matters
         Research and Development
         Other Environmental Matters

      Item 3. Legal Proceedings

      Item 4. Submission of Matters to a Vote of Security Holders

      Executive Officers of Phelps Dodge Corporation

Part II.
      Item 5. Market for the Registrant's Common Equity and Related
        Stockholder Matters

      Item 6. Selected Financial Data

      Item 7. Management's Discussion and Analysis
         Management's Discussion and Analysis
             Results of Phelps Dodge Mining Company
             Results of Phelps Dodge Industries
             Other Matters Relating to the Statement of Consolidated Operations
             Changes in Financial Condition; Capitalization
             Capital Outlays
             Inflation
             Dividends and Market Price Ranges
             Quarterly Financial Data

      Item 8. Financial Statements and Supplementary Data
         Index to Consolidated Financial Statements 
         Report of Independent Accountants on Financial Statement Schedule
         Report of Management
         Report of Independent Accountants 
         Statement of Consolidated Income 
         Consolidated Balance Sheet
         Consolidated Statement of Cash Flows
         Consolidated Statement of Common Shareholders' Equity 
         Notes to Consolidated Financial Statements
         Financial Data by Business Segment 
         Financial Data by Geographic Area

      Item 9. Disagreements on Accounting and Financial Disclosure

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

Part IV.
      Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K

      Valuation and Qualifying Accounts and Reserves

      Signatures
<PAGE>
                            PHELPS DODGE CORPORATION

                         1996 Annual Report on Form 10-K

                                     Part I

Items 1. and 2.  Business and Properties
----------------------------------------

         Phelps Dodge  Corporation,  incorporated  under the laws of New York in
1885, is among the world's largest producers of copper. In 1996, the Corporation
produced  770,400 tons of copper for its own account from its  worldwide  mining
operations and an additional 162,900 tons of copper for the accounts of minority
interest owners.  Gold, silver,  molybdenum,  copper chemicals and sulfuric acid
are also produced as by-products of the Corporation's copper operations.

         Production  of copper for the  Corporation's  own account from its U.S.
operations  constituted  more than 25 percent of the copper  mined in the United
States  in  1996.  Much  of the  Corporation's  U.S.  copper  production,  after
electrowinning  or  smelting  and  refining,  together  with  additional  copper
purchased from others,  is used by the  Corporation  to produce  continuous-cast
copper  rod,  the basic feed for the  electrical  wire and cable  industry.  The
Corporation is the world's largest producer of copper rod.

         Phelps Dodge's  international mining interests include Candelaria,  its
major copper mine in Chile that commenced  operations in October 1994, and other
operations and  investments in Chile,  Peru and South Africa.  These  operations
produce a variety of metals and  minerals  including  copper,  gold,  fluorspar,
silver,  lead and zinc.  Phelps  Dodge also  explores  for  metals and  minerals
throughout the world.

         The Corporation also manufactures  engineered products  principally for
the transportation,  energy and  telecommunications  sectors worldwide through a
group  of  industrial  companies.   Specialty  chemicals  are  produced  through
Columbian  Chemicals  Company  which is among the world's  largest  producers of
carbon black, a reinforcing agent in natural and synthetic rubber that increases
the service life of tires,  hoses,  belting and other  products,  for the rubber
industry.   It  also  produces  specialty  carbon  black  for  other  industrial
applications  such as  pigments  for  printing,  coatings,  plastics  and  other
non-rubber  applications.  Accuride  Corporation  is the largest North  American
manufacturer of steel wheels and rims for medium and heavy trucks,  trailers and
buses. The Corporation produces wire and cable products and specialty conductors
at U.S. and  international  operations  through Phelps Dodge Magnet Wire Company
and Phelps Dodge  International  Corporation.  Phelps Dodge Magnet Wire Company,
the world's largest  manufacturer of magnet wire, produces magnet wire and other
copper products for sale principally to original equipment manufacturers for use
in electrical motors, generators,  transformers and other products. Phelps Dodge
International  Corporation manufactures  telecommunication and energy cables and
specialty conductors.

         The  discussion  of the  business  and  properties  of the  Corporation
contained  below in Items 1 and 2 of this  report is based on the  Corporation's
two business  segments:  (i) Phelps  Dodge Mining  Company and (ii) Phelps Dodge
Industries.  These  are  more  fully  described  in Note 20 to the  Consolidated
Financial  Statements  which also sets forth  financial  information  about such
segments.

      (i)      The  Phelps   Dodge   Mining   Company   segment   includes   the
               Corporation's worldwide copper operations from mining through rod
               production,  marketing  and sales,  other mining  operations  and
               investments,  and worldwide  mineral  exploration and development
               programs.

      (ii)     The Phelps Dodge Industries  segment  includes the  Corporation's
               specialty chemicals operations,  its wheel and rim business,  and
               its wire and cable operations.

         Information about sales and earnings of international operations of the
Corporation  is  also  included  in  Note  20  to  the  Consolidated   Financial
Statements.

         Unless the context otherwise requires, "Corporation" and "Phelps Dodge"
as used in this  report  mean  Phelps  Dodge  Corporation  and its  consolidated
subsidiaries.  In  addition,  all  references  to tons  are to  short  tons  and
references to ounces are to troy ounces.

         The number of persons employed by the Corporation on December 31, 1996,
was 16,033.

PHELPS DODGE MINING COMPANY
---------------------------

         Phelps Dodge Mining Company is an international  business  comprising a
group of companies involved in vertically integrated copper operations including
mining,  concentrating,  electrowinning,  smelting and refining, rod production,
marketing and sales, and related activities.  Copper is sold primarily to others
as rod,  cathode  or  concentrates,  and as rod to the Phelps  Dodge  Industries
segment.  In addition,  Phelps Dodge Mining  Company at times smelts and refines
copper and produces  copper rod for others on a toll basis.  Phelps Dodge Mining
Company  also  produces  gold,  silver,   molybdenum  and  copper  chemicals  as
byproducts,  and  sulfuric acid from its air quality  control  facilities.  This
segment also includes the Corporation's  other mining operations and investments
(including  fluorspar,  silver,  lead and  zinc  operations)  and its  worldwide
mineral exploration and development programs.

Properties, Facilities and Production
-------------------------------------

         Copper Operations
         -----------------

         Phelps Dodge  produces  copper  concentrates  from  open-pit  mines and
concentrators  located in Morenci,  Arizona;  Santa Rita,  New Mexico;  and near
Copiapo,  Chile.  The  Corporation  also produces copper  concentrates  from two
underground  mines and a  concentrator  located  near Copiapo  through  Compania
Contractual  Minera Ojos del Salado  (Ojos del Salado),  a wholly owned  Chilean
subsidiary of Phelps Dodge  Corporation.  Minor amounts of copper  precipitates,
which like concentrates must be smelted and then  electrolytically  refined, are
produced at various locations.  In addition, the Corporation produces electrowon
copper  cathode at  solution  extraction/electrowinning  (SX/EW)  operations  in
Morenci, Arizona; Santa Rita, New Mexico; and Tyrone, New Mexico.

         The Morenci complex in southeastern Arizona comprises an open-pit mine,
two concentrators,  three solution extraction  facilities and two electrowinning
tankhouses, one of which is the largest in the world. The Corporation owns an 85
percent  undivided  interest in the Morenci  complex;  the  remaining 15 percent
interest is owned by Sumitomo Metal Mining Arizona,  Inc. (Sumitomo),  a jointly
owned  subsidiary of Sumitomo  Metal Mining Co., Ltd. and Sumitomo  Corporation.
Phelps Dodge is the operator of the Morenci  properties.  Sumitomo takes in kind
its share of Morenci  production.  The  Morenci  complex is the  largest  copper
producing operation in North America.

         Litigation concerning the allocation of available water supplies,  land
use and other legal  proceedings  could adversely  affect the water supplies for
the  Morenci  operation  and  other  prospective  producing  properties  of  the
Corporation in Arizona.  See "Legal Proceedings" for information  concerning the
status of these proceedings.

         The open-pit  copper  mine,  concentrator  and SX/EW  facility in Santa
Rita, New Mexico,  and a smelter in Hurley, New Mexico, are owned by Chino Mines
Company  (Chino),  a  general  partnership  in  which  the  Corporation  holds a
two-thirds  partnership  interest.   Heisei  Minerals  Corporation  (Heisei),  a
subsidiary of Mitsubishi Corporation and Mitsubishi Materials Corporation,  owns
the  remaining   one-third   interest  in  Chino.  Each  partner  purchases  its
proportionate  share of Chino's  copper  production  each  month.  Phelps  Dodge
manages the Chino operations.

         Candelaria,  Phelps Dodge's newest mine, is located near Copiapo in the
Atacama  Desert  of  northern  Chile.  Phelps  Dodge  Mining  Company  completed
construction  and  commenced  operations  at  Candelaria  in October  1994,  and
achieved full production in 1995. The project presently  consists of an open-pit
mine,  concentrator,  port and  associated  facilities.  Phelps Dodge owns an 80
percent interest in Compania Contractual Minera Candelaria  (Candelaria) through
PD  Candelaria,  Inc.,  a wholly owned  subsidiary  of the  Corporation,  with a
jointly  owned  subsidiary  of Sumitomo  Metal  Mining Co.,  Ltd.  and  Sumitomo
Corporation  owning the  remaining  20  percent  interest.  On May 1, 1996,  the
Corporation announced plans to expand concentrator throughput at Candelaria.  At
full  capacity,  the  $337  million  expansion  will  result  in  annual  copper
production  of 400 million to 450 million  pounds  during the first few years of
the post-expansion  mine life; the average ore grade is expected to drop, with a
corresponding  decrease in production,  in subsequent  years. The expansion will
include increased mining activity,  the installation of a second semi-autogenous
(SAG) mill line and new and expanded concentrating facilities,  and the addition
of more than 200  employees.  Construction  began in the third  quarter of 1996,
with new  production  scheduled  to  commence  by  mid-1998.  As a result of the
expansion,  the estimated mine life of Candelaria  will be reduced from 35 years
of production to 19 years.

         The Tyrone  mine-for-leach  operation near Silver City, New Mexico,  is
wholly owned by Phelps Dodge Corporation. The SX/EW plant at Tyrone is owned and
operated by Burro Chief Copper Company (Burro Chief),  a wholly owned subsidiary
of the Corporation. Burro Chief also operates the SX/EW plant at Santa Rita.

         Phelps Dodge is the leading producer of copper using the SX/EW process.
In 1996, the  Corporation  produced a total of 408,000 tons of cathode copper at
its SX/EW  facilities,  compared  with  364,200 tons in 1995 and 325,800 tons in
1994.  The SX/EW method is a  cost-effective  process of extracting  copper from
certain  types of  ores.  As used by the  Corporation  in  conjunction  with its
conventional  concentrating,  smelting and refining,  SX/EW is a major factor in
its continuing  efforts to maintain  internationally  competitive  costs.  Total
annual  capacity of electrowon  copper cathode  production is currently  250,000
tons at the Morenci complex, 65,000 tons at the Santa Rita plant and 75,000 tons
at the Burro Chief plant near  Tyrone.  The  Corporation  expects to operate the
Burro Chief plant for at least the next 10 years.  Exploration  continues  in an
effort to identify further resources.

         The  Corporation  owns and  operates a smelter in Hidalgo  County,  New
Mexico,  and,  through Chino Mines  Company,  owns a two-thirds  interest in the
Chino smelter in Hurley,  New Mexico.  Phelps Dodge smelts  virtually all of its
share of its U.S.  concentrate  production  and  occasionally  some  concentrate
production  from  Candelaria,  and serves as a custom  smelter for other  mining
companies.  It also  refines  its  share  of its  anode  copper  production.  In
addition,  the Corporation purchases concentrates to keep its smelters operating
at  efficient  levels.  Such  purchases  are  expected to continue  whenever the
smelting  capacity of the Hidalgo and Chino smelters exceeds Phelps Dodge Mining
Company's share of its concentrate production.

         The  Corporation's  refinery in El Paso,  Texas,  is one of the world's
largest  copper  refineries.  During  1996,  the  refinery  operated at capacity
producing  just over  450,000  tons of  electrolytic  copper.  This  capacity is
sufficient to refine all copper  produced by the  Corporation for its account at
its two operating  smelters as well as anodes  refined for other  customers on a
toll basis.  The El Paso refinery also produces gold,  silver and copper sulfate
and recovers small amounts of selenium, platinum and palladium as by-products of
the copper refining process.

         Phelps Dodge is the world's largest producer of continuous-cast  copper
rod,  the basic feed for the  electrical  wire and cable  industry.  Most of the
Corporation's   refined  copper,   and  additional   copper   purchased  by  the
Corporation,  is converted into rod at its continuous-cast copper rod facilities
in El Paso,  Texas, and Norwich,  Connecticut.  The two plants have a collective
annual capacity to convert more than 700,000 tons of refined copper into rod and
other refined copper products. During 1996, combined production of rod and other
refined copper products from the two plants was 711,400 tons.

         The following tables give the Corporation's worldwide copper production
by source for the years 1992 through  1996;  aggregate  production  and delivery
(sales) data for copper,  gold, silver,  molybdenum and sulfuric acid from these
sources for the same years;  annual average copper prices;  and production  from
the Corporation's smelters and refinery.  Major changes in operations during the
five-year  period  included  (1)  increases  in capacity in 1992 and 1995 of the
SX/EW  facilities at Morenci and the 1992  expansion of the Burro Chief plant at
Tyrone;  (2)  indefinite  suspension  of  concentrator  operations  at Tyrone in
February 1992; (3) at Morenci, completion of the Northwest Extension in 1992 and
the startup of the  Southside  project in 1995;  (4)  expansion of Chino's SX/EW
plant at Santa Rita in April  1993;  (5) severe  flooding  problems  at Ojos del
Salado's  Santos  mine in 1993 that  resulted  in reduced  production  of copper
concentrate;  (6) the sale of the Corporation's  interest in the Santa Gertrudis
gold mine in the 1994 second  quarter;  and (7)  commencement  of  operations at
Candelaria  in the 1994 fourth  quarter and  achievement  of full  production in
1995.
<PAGE>
--------------------------------------------------------------------------------
PHELPS DODGE COPPER PRODUCTION DATA, BY SOURCE
----------------------------------------------
(thousand tons)

                                      1996     1995     1994     1993     1992
                                      ----     ----     ----     ----     ----

MATERIAL MINED (a)
 Morenci                             297,688  261,264  240,700  219,032  203,456
 Tyrone                              102,936   83,935   62,067   49,387   32,407
 Chino                               122,939  115,821  105,057  108,568  103,081
 Candelaria                           83,962   72,068   17,842        -        -
 Ojos del Salado                       1,628    1,855    1,712    1,438    1,564
                                     -------  -------  -------  -------  -------
Total material mined                 609,153  534,943  427,378  378,425  340,508
Less minority participants' shares   102,421   92,211   74,692   69,044   64,878
                                     -------  -------  -------  -------  -------
Net Phelps Dodge share               506,732  442,732  352,686  309,381  275,630
                                     =======  =======  =======  =======  =======

MILL ORE MINED
 Morenci                              47,136   44,284   45,240   46,990   46,562
 Tyrone                                    -        -        -        -    1,293
 Chino                                20,061   17,026   17,811   17,436   17,160
 Candelaria                           11,603   11,439    2,685        -        -
 Ojos del Salado                       1,506    1,596    1,536    1,314    1,513
                                     -------  -------  -------  -------  -------
Total mill ore mined                  80,306   74,345   67,272   65,740   66,528
Less minority participants' shares    16,078   14,606   13,260   12,861   12,704
                                     -------  -------  -------  -------  -------
Net Phelps Dodge share                64,228   59,739   54,012   52,879   53,824
                                     =======  =======  =======  =======  =======

GRADE OF ORE MINED - PERCENT COPPER
 Morenci                                0.70     0.64     0.65     0.67     0.67
 Tyrone                                    -        -        -        -     0.69
 Chino                                  0.67     0.76     0.69     0.73     0.68
 Candelaria                             1.40     1.88     1.27        -        -
 Ojos del Salado                        1.57     1.40     1.38     1.43     1.77

RECOVERABLE COPPER (b)
 Morenci:
  Concentrate                          247.1    211.6    217.3    233.3    226.5
  Electrowon                           262.5    225.7    190.1    170.8    162.8
 Tyrone:
  Concentrate and precipitate            3.7      4.3      4.2      6.0      8.5
  Electrowon                            76.0     70.4     68.9     73.5     70.2
 Chino:
  Concentrate and precipitate           99.0    100.6     92.7     95.6     94.9
  Electrowon                            69.5     68.1     66.8     63.9     57.3
 Candelaria:
  Concentrate                          150.8    165.7     31.0        -        -
 Ojos del Salado:
  Concentrate                           21.3     19.6     18.6     16.7     24.4
 Bisbee precipitate and
  miscellaneous                          3.4      1.6      3.6      1.6      1.4
                                     -------  -------  -------  -------  -------
Total recoverable copper               933.3    867.6    693.2    661.4    646.0
Less minority participants' shares     162.9    154.9    120.4    113.7    109.0
                                     -------  -------  -------  -------  -------
Net Phelps Dodge share                 770.4    712.7    572.8    547.7    537.0
                                     =======  =======  =======  =======  =======

--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------

PHELPS DODGE METAL PRODUCTION AND DELIVERIES (b)
------------------------------------------------

                                  1996      1995     1994       1993     1992
                                  ----      ----     ----       ----     ----

COPPER (THOUSAND TONS)
 Total production                  933.3    867.6     693.2     661.4     646.0
 Less minority participants'
  shares                           162.9    154.9     120.4     113.7     109.0
                                 -------  -------   -------   -------   -------
  Net Phelps Dodge share           770.4    712.7     572.8     547.7     537.0
                                 =======  =======   =======   =======   =======

 Deliveries (c)                    771.6    696.6     560.6     543.9     537.7
                                 =======  =======   =======   =======   =======

GOLD (THOUSAND OUNCES) (d)
 Total production                    129      151        93        85       105
 Less partners' shares                26       31        28        29        38
                                 -------  -------   -------   -------   -------
  Net Phelps Dodge share             103      120        65        56        67
                                 =======  =======   =======   =======   =======

 Deliveries (c)                      125      125        47        54        59
                                 =======  =======   =======   =======   =======

SILVER (THOUSAND OUNCES) (d)
 Total production                  2,636    2,739     1,627     1,387     1,403
 Less partners' shares               564      545       360       273       315
                                 -------  -------   -------   -------   -------
  Net Phelps Dodge share           2,072    2,194     1,267     1,114     1,088
                                 =======  =======   =======   =======   =======

 Deliveries (c)                    2,359    1,985     1,039     1,085     1,083
                                 =======  =======   =======   =======   =======

MOLYBDENUM (THOUSAND POUNDS)
 Total production                  2,427    2,024       969     1,200     1,729
 Less minority participants'
  shares                             501      507       226       394       528
                                 -------  -------   -------   -------   -------
  Net Phelps Dodge share           1,926    1,517       743       806     1,201
                                 =======  =======   =======   =======   =======

 Deliveries                        2,141    1,328       698       905     1,129
                                 =======  =======   =======   =======   =======

SULFURIC ACID
 (THOUSAND TONS) (e)
 Total production                1,235.3  1,252.6   1,276.7   1,379.4   1,230.0
 Less minority participant's
  share                            191.8    181.3     191.5     193.9     184.4
                                 -------  -------   -------   -------   -------
  Net Phelps Dodge share         1,043.5  1,071.3   1,085.2   1,185.5   1,045.6
                                 =======  =======   =======   =======   =======

 Deliveries                        464.0    554.3     685.2     718.4     733.7
                                 =======  =======   =======   =======   =======

--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------

                                  1996      1995      1994      1993    1992
                                  ----      ----      ----      ----    ----

COMEX COPPER PRICE (f)       $    1.06      1.35      1.07      0.85    1.03

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

PHELPS DODGE SMELTERS AND REFINERY - PRODUCTION
-----------------------------------------------

Smelters (g)
  Total copper (thousand
    tons)                        428.8     422.5     411.7     376.7    329.2
  Less minority
  participant's share             62.9      58.6      60.0      51.0     49.3
                               -------   -------   -------   -------  -------
    Net Phelps Dodge share       365.9     363.9     351.7     325.7    279.9
                               =======   =======   =======   =======  =======
Refinery (h)
  Copper (thousand tons)         450.1     453.0     453.8     432.4    388.1
  Gold (thousand ounces)         114.4     145.4     118.0      85.8     78.8
  Silver (thousand ounces)     3,142.5   3,441.5   2,672.3   3,144.7  2,377.0

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

Footnotes to the preceding tables:
      (a)      Includes material mined for leach operations.
      (b)      Includes  smelter  production  from custom receipts and fluxes as
               well as tolling gains or losses.
      (c)      Excludes sales of purchased copper, silver and gold.
      (d)      Includes the Santa Gertrudis gold project,  which was operated by
               Phelps Dodge from 1991 through the 1994 second quarter.
      (e)      Sulfuric acid production results from smelter air quality control
               operations; deliveries do not include internal usage.
      (f)      New York Commodity Exchange annual average spot price per pound -
               cathodes.
      (g)      Includes  production  from  purchased   concentrates  and  copper
               smelted for others on toll.
      (h)      Includes  production  from purchased  material and copper refined
               for others on toll.

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

         Other Mining Operations and Investments
         ---------------------------------------

         Phelps Dodge Mining (Pty.) Limited, a wholly owned subsidiary of Phelps
Dodge  Corporation,  operates the Witkop  fluorspar mine and mill in the western
Transvaal,   South  Africa.   The  operation   produces   acid-grade   fluorspar
concentrates for customers in South Africa, the United States, Europe, Australia
and Asia.  During 1996,  the plant  expanded its  metallurgical-grade  flotation
capacity,  increasing  metallurgical-grade  production  by  15,000  metric  tons
annually.

         Black Mountain  Mineral  Development  Company (Pty.) Limited operates a
lead-silver-zinc-copper  mine and  concentrator  in the Cape  Province  of South
Africa.  The operation is owned 44.6 percent by Phelps Dodge and 55.4 percent by
the Gold Fields of South Africa group,  who manages the operation.  Phelps Dodge
accounts for its investment in Black Mountain on the equity basis.  Phelps Dodge
received $6.0 million,  $5.7 million and $2.9 million in dividend  payments from
Black Mountain in 1996, 1995 and 1994,  respectively.  The 1994 dividend was the
first received by the Corporation from Black Mountain since 1991.

         Phelps  Dodge owns a 13.9  percent  interest  in  Southern  Peru Copper
Corporation (SPCC), which operates two copper mines, two concentrators, an SX/EW
facility,  a smelter and a refinery in Peru. The Corporation's  interest in SPCC
decreased  from the 16.25  percent  it held at the end of 1994 as a result of an
exchange  offering of SPCC  common  shares  consummated  in 1996.  SPCC's  other
shareholders are ASARCO  Incorporated with a 54.1 percent interest and the Cerro
Trading  Company with a 17.8 percent  interest.  The common stock held by Phelps
Dodge,  ASARCO and Cerro Trading  Company is closely held and is not  registered
for trading.  The  remaining  14.2  percent  interest is publicly  held.  SPCC's
results are not  included in Phelps  Dodge's  earnings  because the  Corporation
accounts for its investment in SPCC on the cost basis. During 1996, Phelps Dodge
received  dividend  payments of $16.4  million  from SPCC,  compared  with $13.6
million in 1995 and $3.5 million in 1994.

Exploration & Development
-------------------------

         Phelps  Dodge  Exploration  Corporation's  primary  objectives  are  to
increase copper reserves  through  discoveries,  acquisitions and joint ventures
and, where appropriate,  to diversify into other metals, minerals and geographic
areas.  Phelps Dodge  Exploration  Corporation  operates  offices in  Australia,
Canada, Chile, Indonesia, Mexico, Peru, the Philippines, South Africa, Thailand,
the United  States and Zambia.  During  1996,  a new office was  established  in
Brazil.

         The 1996 exploration  program continued to place emphasis on the search
for and  delineation of large scale copper,  gold and other base metal deposits.
Phelps  Dodge  expended  $70.7  million on  worldwide  exploration  during 1996,
compared with $60.3 million in 1995 and $40.0 million in 1994.  Approximately 47
percent of the 1996 expenditures occurred in the United States, compared with 32
percent in 1995 and 55 percent in 1994. The balance of exploration  expenditures
was spent principally in Chile, Canada, Peru, Mexico, Australasia and Zambia.

         During 1996,  continuing  exploration  efforts at existing Phelps Dodge
copper operations  outlined  significant  additional  copper  resources.  In the
Morenci area,  exploration and definition  drilling continued during the year at
the Garfield deposit.  The Garfield  resource  currently is estimated to contain
approximately  1  billion  tons of leach  material  at a grade  of 0.27  percent
copper.

         Other developments in Arizona included the completion of a resource and
feasibility  study  that  evaluated  the  re-opening  of the Ajo  property  that
discontinued  operations  in  1985.  Studies  incorporating  the use of  current
technologies for a new concentrator facility indicate that the property may have
significant  economic potential.  This 150 million ton sulfide resource contains
1.5 billion pounds of copper.

         In New Mexico,  additional  mine-for-leach ore reserves were delineated
in the Tyrone area during 1996. The leachable material is both oxide and sulfide
copper  mineral  and is  estimated  to total 300  million  tons at 0.32  percent
copper.

         A feasibility  study and  environmental  permitting  were  initiated to
advance development of the Dos Pobres deposit in the Safford District in eastern
Arizona.  The Dos Pobres  deposit  contains a total of 285 million tons of leach
material  with a grade of 0.39  percent  copper.  Additionally,  the Dos  Pobres
deposit contains 330 million tons of concentrator  material with a grade of 0.65
percent copper.

         Project  permitting  continued  at the  Seven-Up  Pete joint  venture's
McDonald gold project near Lincoln,  Montana, with the regulatory review process
expected to be complete in 1998.  Phelps Dodge  Corporation owns a 72.25 percent
interest in the Seven-Up Pete joint venture and Canyon Resources  Corporation of
Golden, Colorado, holds the remaining 27.75 percent interest.

         Internationally,  Phelps  Dodge  Exploration  Corporation  is examining
mine-for-leach  opportunities  in Peru and is earning  its way into a 55 percent
interest  at the  Cerro  Lindo  project  in that  country  (through  exploration
expenditures)  where a geologic  resource of  approximately  60 million  tons of
massive  sulfide  grading  1.5  percent  copper  and 2  percent  zinc  has  been
identified.

         Phelps  Dodge  continues  to evaluate  the Piedras  Verdes  property in
Sonora,  Mexico.  In Zambia,  the Corporation  continues to evaluate the Lumwana
region.
<PAGE>
Ore Reserves
------------

         Ore reserves at each of Phelps Dodge's active copper  operations and at
Dos Pobres have been estimated as follows:

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

                                    Estimated at December 31, 1996
                                    ------------------------------
                         Milling                Leaching
                         Reserves               Reserves            Phelps
                     -----------------       -----------------       Dodge
                     Million      %          Million      %         Interest
                      Tons      Copper        Tons      Copper        (%)
                      ----      ------        ----      ------       -----

Morenci               406.9      0.68       1,364.2     0.27          85.0
Chino                 389.1      0.62         560.5     0.30          66.7
Tyrone                    -         -         413.3     0.34         100.0
Candelaria *          441.4      0.95             -        -          80.0
Dos Pobres            330.0      0.65         285.0     0.39         100.0
Ojos del Salado *      13.4      1.30             -        -         100.0

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

         *     The  Candelaria  and Ojos del  Salado  deposits  also  contained,
               respectively,  0.006  ounces and 0.008  ounces of gold per ton in
               1996  and  0.007  ounces  and  0.008  ounces  of  gold  per  ton,
               respectively, in 1995.


                                    Estimated at December 31, 1995
                                    ------------------------------
                          Milling                Leaching
                         Reserves                Reserves            Phelps
                     ----------------        ----------------        Dodge
                     Million      %          Million      %         Interest
                      Tons      Copper        Tons      Copper        (%)
                      ----      ------        ----      ------       -----

Morenci               430.5      0.72       1,094.5     0.31          85.0
Chino                 297.5      0.67         662.6     0.24          66.7
Tyrone                    -         -         170.6     0.36         100.0
Candelaria *          384.4      1.07             -        -          80.0
Dos Pobres            330.0      0.65         285.0     0.39         100.0
Ojos del Salado *      13.7      1.32             -        -         100.0

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

         *     The  Candelaria  and Ojos del  Salado  deposits  also  contained,
               respectively,  0.006  ounces and 0.008  ounces of gold per ton in
               1996  and  0.007  ounces  and  0.008  ounces  of  gold  per  ton,
               respectively, in 1995.

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

         The  Corporation's  estimated  share of  aggregate  ore reserves at the
above named properties at December 31 is as follows:

--------------------------------------------------------------------------------
                                        1996     1995     1994     1993     1992
                                        ----     ----     ----     ----     ----

Milling reserves (billion tons)          1.3      1.2      1.0      0.9      1.0

Leaching reserves (billion tons)         2.2      1.8      1.7      1.2      1.0

Commercially recoverable copper
  (million tons)                        12.1     12.3     10.6     10.1     10.5

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

         Ore  reserves at each of Phelps  Dodge's  other mining  operations  and
investments at year-end 1996 are estimated as follows:

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

                     Ore                                                  Phelps
                   Reserves   Silver                              %       Dodge
                   Million    Ounces       %       %     %     Calcium     Int.
                     Tons     Per Ton   Copper   Lead   Zinc   Fluoride    (%)
                    ------    --------  ------   ----   ----    -------   ----

Black Mountain
  Broken Hill
   deposit             10.1      2.4      0.53    5.9    2.9        -    44.60

Southern Peru
  Copper
   Corporation *    1,731.9        -      0.68      -      -        -    13.90

Phelps Dodge
  Mining Limited       20.0        -         -      -      -    17.30   100.00

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

*        Southern Peru Copper  Corporation  deposits also contain  approximately
         665 million tons of leach material at a grade of 0.22 percent copper.

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

         Ore  reserves  are  those  estimated  quantities  of  ore  that,  under
conditions anticipated by the Corporation, may be profitably mined and processed
for  extraction  of their  constituent  values.  Estimates of the  Corporation's
reserves  are based  upon the  Corporation's  engineering  evaluations  of assay
values  derived  from  samplings  of drill  holes  and  other  openings.  In the
Corporation's  opinion,  the sites for such  samplings  are spaced  sufficiently
close and the geologic  characteristics  of the deposits are  sufficiently  well
defined to render the estimates  reliable.  Stated tonnages and grades of ore do
not reflect waste dilution in mining or losses in processing.  Leaching reserves
include copper estimated to be recoverable  from leach reserves  remaining to be
mined at Morenci, Chino, Tyrone and Dos Pobres.  Commercially recoverable copper
includes copper estimated to be recoverable  from milling and leaching  reserves
and from existing stockpiles of leach material at Morenci, Chino, Tyrone and Dos
Pobres.
<PAGE>
         The  Corporation  holds various  other  properties  containing  mineral
deposits  that it  believes  could be  brought  into  production  should  market
conditions  warrant.  Permitting and significant  capital  expenditures would be
required before operations could commence at these properties.  The deposits are
estimated to contain the following mineralization as of December 31, 1996:

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

                              Sulfide Material  Leach Material           Phelps
                              ----------------  --------------   Gold     Dodge
                              Million     %     Million    %    Ounces  Interest
                  Location      Tons    Copper    Tons   Copper Per Ton   (%)
                  --------     -----    ------   -----   ------ -------   ---

Ajo               Arizona       150     0.56        -        -      -   100.00

Cochise           Arizona         -        -      210     0.40      -   100.00

Copper Basin      Arizona        70     0.53        -        -      -   100.00

Coronado          Arizona       180     0.69      310     0.29      -    85.00

Garfield          Arizona         -        -    1,000     0.27      -    85.00

Lone Star         Arizona         -        -    1,600     0.38      -   100.00

Sanchez           Arizona         -        -      230     0.29      -   100.00

San Juan          Arizona         -        -      270     0.28      -   100.00

Western Copper    Arizona       530     0.55      500     0.31      -    85.00

McDonald          Montana         -        -      205        -  0.025    72.25

Piedras Verdes    Mexico          -        -      150     0.41      -    70.00

Black Mountain *  South Africa   20        -        -        -      -    44.60

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

         *    The Black Mountain deposit contains an estimated 6.3 percent lead,
              1.16 percent zinc, 0.71 percent copper and  1.81 ounces  of silver
              per ton.

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

Ownership of Real Property
--------------------------

         The Corporation  owns  substantially  all the lands on which its copper
mines,  concentrators,  SX/EW facilities,  smelters,  refinery and rod mills are
located  and holds  the rest  under  lease.  The Chino  Mines  partnership  owns
substantially  all the  lands on which  its  copper  mine,  concentrator,  SX/EW
facility and smelter are located and holds the rest under lease.

Sales and Competition
---------------------

         A majority of Phelps Dodge's copper, and additional copper purchased by
the  Corporation,  is cast  into  rod.  Rod  sales to  outside  wire  and  cable
manufacturers  constituted  approximately  56  percent  of Phelps  Dodge  Mining
Company's  sales in 1996.  Phelps Dodge also sells its copper as concentrate and
cathode.  Sales  of rod  and  cathode  are  made  directly  to  wire  and  cable
fabricators and brass mills under contracts  principally of a one-year duration.
Phelps Dodge rod also is used by the  Corporation's  magnet wire,  bare wire and
specialty conductor operations.

         The  Corporation  sells  its  copper  rod and  cathode  on the basis of
premiums,  which are announced  from time to time by the  Corporation,  over New
York Commodity Exchange (COMEX) prices. It also sells copper  concentrates based
on the  prices on the COMEX or the London  Metal  Exchange  (LME).  From time to
time,   Phelps  Dodge  engages  in  hedging  programs  designed  to  enable  the
Corporation to realize  current  average prices for metal delivered or committed
to be delivered.  Other price protection  arrangements  also may be entered into
from time to time, depending on market circumstances,  to ensure a minimum price
for a  portion  of  the  Corporation's  expected  future  mine  production  (see
Management's  Discussion  and  Analysis  and Notes 1 and 19 to the  Consolidated
Financial Statements for a further discussion of such arrangements).

         Most of the refined  copper sold by Phelps Dodge is  incorporated  into
electrical  wire  and  cable  products  worldwide  for use in the  construction,
electric utility,  communications and transportation industries. It is also used
in industrial machinery and equipment,  consumer products and a variety of other
electrical and electronic applications.

         In the sale of copper as rod, cathode and concentrates, the Corporation
competes,  directly or indirectly,  with many other sellers,  including at least
four other U.S. primary producers, as well as numerous foreign producers,  metal
merchants,  custom refiners and scrap dealers.  Some major producers outside the
United States have cost advantages resulting from richer ore grades, lower labor
costs  and  in  some  cases  a  lack  of  strict  regulatory  requirements.  The
Corporation  believes  that its ongoing  programs  to contain  costs and improve
productivity  in its copper  operations have  significantly  narrowed these cost
advantages and have placed the Corporation in a favorable  competitive  position
with respect to a number of its international competitors.

         The  Corporation's  copper also competes with other materials,  such as
aluminum,  plastics,  stainless steel and fiber optics,  that can be substituted
for copper in certain applications.

         The  Corporation's  principal  methods of  competing  include  pricing,
product quality, customer service and dependability of supply.

Prices, Supply and Consumption
------------------------------

         Copper is an  internationally  traded  commodity,  and its  prices  are
effectively  determined  by the two  major  metals  exchanges  -- the  New  York
Commodity  Exchange  (COMEX) and the London Metal Exchange (LME).  The prices on
these  exchanges  generally  reflect the worldwide  balance of copper supply and
demand,  but are also influenced  significantly from time to time by speculative
actions and by currency exchange values.

         A slowing  world  economy and higher  exports from  formerly  socialist
countries  resulted in a modest  surplus in 1992.  As a result,  the COMEX price
decreased  in 1992  resulting  in an  annual  average  price per pound of $1.03.
Excess inventories caused average copper prices to decline to 85 cents per pound
in 1993. In 1994, excess inventories that accumulated after 1992 were liquidated
as copper consumption  increased  reflecting solid economic growth in the United
States,  the beginning of an economic  recovery in Europe and  continued  strong
demand  from the  Pacific Rim region,  excluding  Japan.  As a result,  the 1994
annual average price per pound  increased to $1.07. In 1995, the price of copper
as reported on COMEX averaged $1.35 per pound of copper  cathode,  28 cents more
than the 1994 average price.  The price increase was  attributable to the strong
growth in demand during 1994, which reduced copper  inventories to low levels in
1995.

         In 1996,  the COMEX  copper  price  averaged  $1.06 per pound of copper
cathode,   29  cents  less  than  the  1995  average  price.  The  decrease  was
attributable  primarily  to the  market's  reaction  to more than $2  billion in
losses from unauthorized transactions by a Japanese company's copper trader. The
price also was influenced by false rumors regarding excess inventories of copper
in the market.

         While  the  market  anticipated  a  copper  supply  increase  in  1996,
worldwide copper  inventories  remained in the low four-week  level,  consistent
with  1995  levels.  The  stability  was  due  to  continued  growth  in  copper
consumption,  slightly  reduced output of smelters and lack of available  scrap,
which  forced brass mills to purchase  cathode as a  substitute.  Western  world
copper  consumption  increased  by more than 3  percent.  The  ongoing  economic
expansion in the United  States  fueled  strong  demand in all copper  consuming
sectors.  In Europe,  growth  was flat when  compared  to 1995 due to  depressed
economic conditions. While Japan emerged from a recession, the country continued
to export its manufacturing  capabilities  resulting in weak copper  consumption
growth.  Strong  fundamental growth continued  throughout  Southeast Asia, while
China imported large quantities of copper to increase strategic inventories.

Costs
-----

         Unit  production  costs of copper in 1996 were slightly  higher than in
1995,  principally  as a result of  increased  depreciation  charges from recent
capital  projects,  increased  mining  expenses  and  costs  associated  with  a
maintenance  overhaul at the Hidalgo  smelter.  Unit production  costs of copper
generally  continued  to  reflect  high  levels  of  production,   ongoing  cost
containment programs and increasing amounts of copper obtained through the SX/EW
process,  including the start-up of the  Southside  SX/EW project at the Morenci
mine in the 1995 third quarter, at favorable incremental costs.

Energy Supplies
---------------

         The principal sources of energy for the Corporation's copper operations
are natural  gas,  petroleum  products,  waste heat  generated  in the  smelting
processes  and  electricity  purchased  from  public  utilities.   Each  of  the
Corporation's  mine power  plants and  smelters  uses natural gas as its primary
fuel,  and each is capable of being  converted to use oil as a substitute  fuel.
The  Corporation  has  experienced  no  difficulty  in recent years in obtaining
adequate fuel to maintain production.

Environmental and Other Regulatory Matters
------------------------------------------

         Federal  and  state  environmental  laws and  regulations  affect  many
aspects of the  Corporation's  mining  operations.  The federal Clean Air Act of
1970, as amended (the Clean Air Act),  and  regulations  thereunder to date have
had the most significant impact, particularly on the Corporation's smelters.

         The  "solid  wastes"  of the  Corporation's  copper  operations  may be
subject to regulation under the federal  Resource  Conservation and Recovery Act
(RCRA) and related  state laws and, to the extent  these wastes  affect  surface
waters, under the federal Clean Water Act and relevant state water quality laws.
Formerly,  mining  wastes  were  exempted  from the  federal  "hazardous  waste"
regulations  under RCRA. As a result of subsequent  actions by the Environmental
Protection  Agency (EPA),  all "extraction"  and  "beneficiation"  wastes and 20
mineral  "processing"  wastes retain the  exemption,  and are to be regulated as
"solid  waste,"  rather than as  "hazardous  waste," under RCRA Subtitle C. Only
three of the 20 exempt  "processing"  wastes  are  copper  "processing"  wastes.
Therefore,  the  generation  and  management  of any other  mineral  smelting or
refining  waste could be subject to  "hazardous  waste"  regulation if the waste
exhibits a hazardous waste  characteristic or if EPA specifically  designates it
as a "listed  hazardous  waste." The  Corporation has taken steps to address the
potential  regulation as "hazardous  waste" of any of its wastes which no longer
meet the definition of exempt mineral "processing" wastes. RCRA Subtitle D rules
governing  mineral  "extraction"  and  "beneficiation"  wastes and  "processing"
wastes that are exempt  from RCRA  Subtitle C have not yet been  promulgated  by
EPA, Arizona or New Mexico. As stated in its proposal and reproposal of Phase IV
Supplemental   Land  Disposal   Restriction  (LDR)  rules,  EPA  is  considering
restricting the Subtitle C exemption for mineral "extraction,"  "beneficiation,"
and "processing"  waste. EPA may seek to impose  "hazardous waste" regulation on
"processing"  waste that is stored or treated before it is recycled,  and EPA is
re-examining  the  scope of the  current  exemption,  apparently  as part of its
negotiations to settle a lawsuit brought by environmental  groups over the Phase
IV LDRs. Any  limitation on the scope of the exemption  could impact or increase
the costs of  operations.  The new  regulations  have not been  proposed and the
Corporation  cannot  estimate  the  impact  of  such  future  "solid  waste"  or
"hazardous waste" rules on its operations.

         The  Corporation's  copper  operations  are also subject to federal and
state  laws and  regulations  protecting  both  surface  water  and  groundwater
quality.  The  Corporation  possesses,  has applied for, or is in the process of
applying for the necessary  permits or other  governmental  approvals  presently
required under these rules and regulations.

         At the Hidalgo  smelter at Playas,  New Mexico,  in accordance with the
discharge plan approved by the New Mexico  Environment  Department  (NMED),  the
Corporation  continues  to  monitor  and  report to NMED  regarding  groundwater
quality in the vicinity of the smelter's compacted, clay-lined evaporation pond.
The  Corporation  is continuing  its efforts to assess the effect on groundwater
quality from operation of the evaporation  pond and will continue to investigate
and implement  appropriate  technologies  and contingency  plans to mitigate any
adverse  effect.  The  Corporation had also agreed during the term of an earlier
discharge plan to cease discharging  acidic solutions to the evaporation pond as
presently  constructed,  to neutralize or remove the acidic solutions present in
the evaporation pond, and to commence a groundwater  remediation program for any
existing  contamination.  Accordingly,  a neutralization  facility,  a series of
lined  impoundments,  and a series of pumpback wells have been installed and are
operated  to  begin  remediation  of  groundwater  adversely  affected  by  past
operation of the evaporation pond and to prevent future contamination.

         Effective  September  27, 1989,  Arizona  adopted  regulations  for its
aquifer  protection  permit (APP)  program,  which  replaced  the then  existing
Arizona  groundwater  quality  protection  permit  regulations.  Several  of the
Corporation's   properties  continue  to  operate  pursuant  to  the  transition
provisions  for  existing   facilities  under  the  APP  regulations.   The  APP
regulations  require permits for new  facilities,  activities and structures for
mining, concentrating and smelting. The APP may require mitigation and discharge
reduction or elimination.  APP  applications for existing  facilities  operating
pursuant to the APP transition  provisions  are not required until  requested by
the State or unless a major  modification  at the  facility  alters the existing
discharge  characteristics.  The Corporation has applied for and received an APP
for a closed  tailing  pile in  Clarkdale,  Arizona.  The  Corporation  also has
conducted  groundwater studies and submitted APP applications for several of its
other  properties  and  facilities,  including  the  Morenci  mine  and  certain
facilities at the Copper Queen branch.  The Corporation will continue to prepare
and  submit  APP  applications  for  its  remaining   existing   properties  and
facilities,  as well as for any new  properties or  facilities.  It is not known
what the APP  requirements  for all  existing  and new  facilities  will be and,
therefore,  it is not possible to estimate such costs. The Corporation is likely
to  continue  to have to make  expenditures  to comply  with the APP program and
regulations.

         On December 23, 1994,  Chino Mines Company  (CMC),  which is two-thirds
owned by Phelps Dodge  Corporation  and is located near Silver City, New Mexico,
entered  into an  Administrative  Order on  Consent  (AOC)  with the New  Mexico
Environment  Department that will require CMC to study the environmental impacts
and potential health risks associated with portions of the CMC property affected
by historical mining  operations.  Phelps Dodge acquired CMC at the end of 1986.
Those studies  began in 1995 and,  until  completed,  it will not be possible to
determine the nature,  extent,  cost,  and timing of remedial work which will be
required under the AOC, although remedial work is expected to be required.

         In  1993  and  1994,   the  New   Mexico  and   Arizona   legislatures,
respectively,  passed laws  requiring  the  reclamation  of mined lands in those
states.  The New  Mexico  Mining  Commission  adopted  rules for the New  Mexico
program  during 1994,  and the  Corporation's  operations  began  submitting the
required permit  applications in December 1994. The Arizona State Mine Inspector
adopted  rules for the Arizona  program in January 1997,  and the  Corporation's
operations are expected to begin  submitting the required  reclamation  plans in
March 1997.  These laws and regulations  will likely increase the  Corporation's
regulatory  obligations  and  compliance  costs with respect to mine closure and
reclamation.  At this time, it is not possible to quantify the impact of the new
laws and regulations on the Corporation.

         The 1990 Amendments to the federal Clean Air Act require EPA to develop
and  implement  many new  requirements,  and they allow states to establish  new
programs to implement some of the new requirements, such as the requirements for
operating  permits  under  Title V of the  1990  Amendments  and  hazardous  air
pollutants  under  Title  III of the 1990  Amendments.  Because  EPA has not yet
adopted or implemented all of the changes required by Congress,  the air quality
laws will  continue  to expand and change in coming  years as EPA  develops  new
requirements  and then  implements  them or allows the states to implement them.
Nevertheless,  most  states  have made or are in the  process of making  certain
required changes to their laws regarding Title V. In response to these new laws,
several of the Corporation's  subsidiaries  already have submitted or are in the
process of preparing  applications for Title V operating permits. These programs
will likely  increase the  Corporation's  regulatory  obligations and compliance
costs.  These costs could include  implementation of maximum  achievable control
technology for any of the  Corporation's  facilities  that is determined to be a
major source of federal hazardous air pollutants. Until more of the implementing
regulations are adopted, and more experience with the new programs is gained, it
is not  possible  to  determine  the  impact  of  the  new  requirements  on the
Corporation.

         The Corporation  estimates that its share of capital  expenditures  for
programs to comply  with  applicable  environmental  laws and  regulations  that
affect its mining  operations will total  approximately  $34 million in 1997 and
from $25 million to $30 million in 1998;  $21 million was spent on such programs
in 1996. The Corporation also anticipates making  significant  capital and other
expenditures   beyond  1998  for  continued   compliance   with  such  laws  and
regulations.  In light of the frequent  changes in such laws and regulations and
the  uncertainty  inherent in this area,  the  Corporation is unable to estimate
accurately  the total amount of such  expenditures  over the longer term, but it
may be substantial. (See the discussion of "OTHER ENVIRONMENTAL MATTERS.")

         In  1995,  legislation  was  introduced  in  both  the  U.S.  House  of
Representatives and the U.S. Senate to amend the Mining Law of 1872. None of the
bills was enacted into law. Also,  mining law amendments  were added to the 1996
budget  reconciliation  bill,  which was vetoed by the  President.  Among  other
things, the amendments contained in the 1996 bill would have imposed a 5 percent
net proceeds royalty on minerals extracted from federal lands,  required payment
of fair market value for  patenting  federal  lands,  and required that patented
lands used for non-mining purposes revert to the federal government.  Several of
these same concepts likely will be pursued  legislatively in 1997. The Secretary
of the Interior also  recently  ordered the Bureau of Land  Management  (BLM) to
form a task force to review BLM's hardrock mining surface management regulations
and propose  revisions to expand  environmental  and  reclamation  requirements,
among other things.  While the effect of such changes on Phelps Dodge's  current
operations and other currently owned mineral resources on private lands would be
minimal,  passage of mining law amendments  and/or  adoption of revisions to the
hardrock mining surface management regulations, as described above, would result
in additional  expenses in the development and operation of new mines on federal
lands.

         The  Corporation  is  also  subject  to  federal  and  state  laws  and
regulations pertaining to plant and mine safety and health conditions, including
the  Occupational  Safety and Health Act of 1970 and the Mine  Safety and Health
Act of 1977.  In  particular,  present and proposed  regulations  govern  worker
exposure to a number of substances and conditions  present in work environments,
including dust,  mist,  fumes,  heat and noise.  The Corporation has made and is
likely to continue to have to make  expenditures to comply with such legislation
and regulations.

         Phelps Dodge does not expect that the additional  capital and operating
costs  associated  with  achieving  compliance  with the various  environmental,
health and safety laws and  regulations  will adversely  affect its  competitive
position  relative  to  other  U.S.  copper  producers,  which  are  subject  to
comparable  requirements.  However,  because copper is an internationally traded
commodity, these costs could significantly affect the Corporation in its efforts
to compete  globally with those foreign  producers  that are not subject to such
stringent requirements.

Labor Matters
-------------

         Employees in Phelps Dodge Mining Company's Arizona operations,  El Paso
refinery,  Tyrone,  Hidalgo smelter,  Burro Chief Copper Company and Norwich rod
mill,  and certain  employees at Chino are not  represented  by any unions.  The
collective bargaining agreements covering  approximately 625 employees at Phelps
Dodge Mining  Company's Chino operations in New Mexico expired on June 30, 1996.
As of March 6, 1997, employees who were covered by the agreements have continued
to work without a contract.  The labor  contract at the El Paso rod mill expires
on May 29, 1998.

PHELPS DODGE INDUSTRIES
-----------------------

         Phelps Dodge  Industries  is a business  segment  comprising a group of
companies   that   manufacture   engineered   products   principally   for   the
transportation,  energy and telecommunications sectors worldwide. Its operations
are  characterized  by products with significant  market share,  internationally
competitive cost and quality,  and specialized  engineering  capabilities.  This
business  segment  includes the  Corporation's  specialty  chemicals  operations
through Columbian Chemicals Company and its subsidiaries  (Columbian Chemicals);
its wheel and rim operations  through Accuride  Corporation and its subsidiaries
(Accuride);  and its  U.S.  and  international  wire  and  cable  and  specialty
conductor  operations through Phelps Dodge International  Corporation and Phelps
Dodge Magnet Wire Company and their subsidiaries and affiliates.

Operations
----------

         Columbian   Chemicals,   headquartered  in  Atlanta,   Georgia,  is  an
international  producer and marketer of carbon  blacks.  The company  produces a
full range of rubber and industrial carbon blacks in 11 plants  worldwide,  with
approximately  one-half of its production in North America and the other half at
facilities in the United  Kingdom,  Germany,  Italy,  Spain,  Hungary  (owned 60
percent by  Columbian  Chemicals),  and the  Philippines  (owned 88.2 percent by
Columbian  Chemicals).  Columbian's  rubber carbon blacks improve the tread wear
and  durability  of tires,  and extend the service life of many rubber  products
such as belts and hoses. The company's industrial carbon blacks are used in such
diverse applications as pigmentation of coatings, inks and plastics; ultraviolet
stabilization of plastics;  and as conductive insulation for wire and cable. The
Hungarian  plant began  production  in December  1993.  It is owned by Columbian
Tiszai Carbon Ltd. which in turn is owned 60 percent by Columbian  Chemicals and
40 percent by Tiszai Vegyi  Kombinat Rt., the largest  petrochemical  company in
Hungary. The plant in Santander, Spain, was acquired in 1994 from Repsol Quimica
S.A. and is wholly owned by the  Corporation.  The company also maintains  sales
offices in 10  countries  and makes use of  distributors  worldwide.  One of the
company's carbon black plants in Germany,  the Hamburg plant, was closed in 1994
as a result  of its high  cost  structure  and  environmental  restrictions.  In
addition,  the company sold its U.S.  synthetic iron oxide plant (MAPICO) during
the 1995 first  quarter.  This  operation  was  peripheral to  Columbian's  core
business.

         Extensive  research,  development  and  engineering  are  performed  by
Columbian  at  four  locations.  The  company's  Technology  Center  at  Swartz,
Louisiana,  is responsible  for studies  specific to both  industrial and rubber
applications  of carbon black.  Carbon black product and process  development at
the Technology  Center is supported by development  work at the company's  North
Bend, Louisiana, and Hamilton,  Ontario, plants. The European Central Laboratory
at  Avonmouth,  United  Kingdom,  provides  technical  support  for  Columbian's
European operations.  Columbian Chemicals also licenses rubber carbon technology
to other carbon black manufacturing companies in various countries.

         Accuride   Corporation,    headquartered   in   Henderson,    Kentucky,
manufactures  and markets  wheels and rims for commercial  trucks,  trailers and
buses.  Accuride  produces a wide range of steel  tubeless  and  tube-type  disc
wheels and  demountable  rims for the mounting  systems of medium and heavy duty
trucks,  trailers and buses, as well as wheels for commercial light trucks.  The
company also offers a line of forged  aluminum  wheels for medium and heavy duty
trucks,  trailers  and  buses.  This  broad  product  line is sold at the  North
American original  equipment  manufacturer  level and is marketed through a U.S.
and  international  distribution  network.  Accuride  operates  a  manufacturing
facility and a design and test center in Henderson,  Kentucky;  a  manufacturing
facility in London,  Ontario,  Canada;  and a customer service center in Taylor,
Michigan.  In addition,  Accuride and The  Goodyear  Tire and Rubber  Company of
Akron,  Ohio,  each own 50  percent  of AOT Inc.,  a  commercial  tire and wheel
assembly  facility  located in  Springfield,  Ohio,  that services two plants of
Navistar  International  Transportation  Corporation.  On  September  18,  1996,
Accuride and Kaiser Aluminum and Chemical  Corporation  (Kaiser) announced their
intent to form a joint  venture  company  to  produce  aluminum  wheels  for the
commercial  transportation  industry.  Accuride  and  Kaiser  would  each own 50
percent of the new company.

         Phelps Dodge Magnet Wire Company, headquartered in Fort Wayne, Indiana,
is an  international  producer of magnet wire,  the insulated  conductor used in
most electrical  systems.  Its products are manufactured in the United States at
plants  in  Fort  Wayne,  Indiana;  Hopkinsville,  Kentucky;  Laurinburg,  North
Carolina;  and El Paso,  Texas.  The plant in North  Carolina was added in March
1994  when  Phelps  Dodge  Magnet  Wire  Company  acquired  certain  assets of a
fine-gauge magnet wire  manufacturing  plant from Rea Magnet Wire Company,  Inc.
(Rea).  The plant in Texas was also added in March 1994 with the  acquisition of
certain assets of Texas Magnet Wire Company, a joint venture of Rea and Fujikura
International,  Inc.  Phelps Dodge Magnet Wire  Company  also  manufactures  its
products at a plant in Mureck,  Austria.  The Austrian  operation,  Phelps Dodge
Eldra,  GmbH,  is a joint  venture  with Eldra  Elektrodraht-Erzeugung  GmbH,  a
leading  European  magnet  wire  manufacturer.  Phelps  Dodge  owns a 51 percent
interest in the venture; Eldra Elektrodraht-Erzeugung GmbH owns the remaining 49
percent. In addition,  the company and Sumitomo Electric  Industries,  Ltd. each
own a 50 percent  interest  in SPD Magnet Wire  Company,  a joint  venture  that
operates a magnet  wire  plant in  Edmonton,  Kentucky.  These  plants  draw and
insulate  copper  and  aluminum  wire which is sold as magnet  wire to  original
equipment  manufacturers for use in electric motors,  generators,  transformers,
televisions,  automobiles and a variety of small electrical  appliances.  Magnet
wire is also sold to  electrical  equipment  repair  shops and smaller  original
equipment manufactures through a network of distributors. On August 7, 1996, the
Corporation  announced plans to construct a magnet wire  manufacturing  plant in
Monterrey,  Mexico.  Construction  of the $42 million project began in 1996 with
commercial production expected in early 1998.

         The Corporation has interests in companies that are primarily  involved
in  the  manufacture  of  telecommunication  and  energy  cables  and  specialty
conductors for international  markets through U.S.  operations and joint venture
associations  in 14  other  countries.  The  Corporation's  interests  in  these
companies are managed by Phelps Dodge International  Corporation, a wholly owned
subsidiary   headquartered  in  Coral  Gables,   Florida,  which  also  provides
management,   marketing  assistance,  technical  support,  and  engineering  and
purchasing services to these companies. In order to supply the increasing demand
for copper rod in certain  countries,  five of the  Corporation's  international
wire and  cable  companies  have  continuous-cast  copper  rod  facilities.  The
Corporation  has majority  interests  in companies  operating in 10 countries --
Chile,  China, Costa Rica,  Ecuador, El Salvador,  Honduras,  Panama,  Thailand,
Venezuela  and  Zambia.  In Zambia,  the  Corporation  increased  its  effective
ownership  interest in Metal  Fabricators  of Zambia  Limited  (ZAMEFA)  from 20
percent to 51 percent.  The  Corporation  has  minority  interests  in companies
located in Hong Kong, Thailand, China and the Philippines,  accounted for on the
equity basis, and in companies located in Greece and India, accounted for on the
cost basis.

         Phelps Dodge  International  Corporation  also manages U.S.  operations
that  manufacture  and  market  specialty  high-performance  conductors  for the
aerospace,  automotive,  biomedical,  computer and consumer electronics markets.
The  principal  products are highly  engineered  conductors of copper and copper
alloy wire electroplated with silver, tin or nickel for sophisticated, specialty
product  niches.  These  manufacturing  operations  consist of plants located in
Inman, South Carolina; Trenton, Georgia; and Elizabeth, Fairfield, Montville and
West Caldwell, New Jersey. The plants in Fairfield, Montville and West Caldwell,
New  Jersey,  were added in May 1996 when  Phelps  Dodge  acquired  Nesor  Alloy
Corporation.

         See Note 20 to the  Consolidated  Financial  Statements for information
concerning Phelps Dodge Industries' sales by its specialty chemicals,  wheel and
rim, and wire and cable operations.

Ownership of Real Property
--------------------------

         Phelps Dodge  Industries  owns most of its plants and the land on which
they  located.  The  exceptions  are the  land  and  buildings  of  Accuride  in
Henderson,  Phelps  Dodge  Magnet  Wire in Austria  and Nesor at  Fairfield  and
Montville, which are leased.  Additionally,  the land on which six international
plants are located is leased.

Competition and Markets
-----------------------

         The  principal  competitive  factors  in the  various  markets in which
Phelps Dodge Industries competes are price,  product quality,  customer service,
dependability  of  supply,  delivery  lead time,  breadth  of  product  line and
research and development.

         Columbian  Chemicals is among the world's  largest  producers of carbon
black.  Approximately  90 percent of the carbon black produced is used in rubber
applications,  75 percent of which is used in the tire industry.  The major tire
manufacturers  in the United States and Western Europe account for a substantial
portion of  Columbian  Chemicals'  carbon black  sales.  In addition,  Columbian
Chemicals  maintains a strong  competitive  position in mechanical  rubber goods
markets based on its commitment to quality and service.  The  Corporation is not
aware of any product that could be substituted for carbon black to a significant
extent in any of its  principal  applications.  Including  Columbian  Chemicals,
there are a total of six carbon  black  producers in the United  States,  two in
Canada and three major producers in Western Europe. The carbon black industry is
highly  competitive,  particularly in the U.S. rubber black market.  The company
has expanded its  production  and marketing  position by entry into the emerging
market in Central Europe through the start up of operations of Columbian  Tiszai
Carbon  Ltd.  in Hungary in late 1993,  and  further  enhanced  its  presence in
international  markets  through the acquisition of a carbon black plant in Spain
in late 1994.

         The Corporation  believes that Accuride is the largest  producer of rim
and wheel products for commercial  trucks,  trailers and buses in North America.
Accuride's  sales are  primarily in the United  States,  where a majority of the
truck,  trailer and bus manufacturers are located, and in Canada. The demand for
its products fluctuates with the level of original equipment truck,  trailer and
bus  manufacturing  activity.  In the last five  years,  Accuride's  10  largest
customers  have  accounted  for  approximately  70 percent  of its total  sales.
Accuride principally competes with three U.S. companies.

         With the 1994 acquisition of plants in El Paso,  Texas, and Laurinburg,
North Carolina,  and the new plant being constructed in Monterrey,  Mexico,  the
Corporation  believes  that Phelps Dodge  Magnet Wire Company will  continue its
position as the world's  largest  manufacturer  of magnet wire.  It  principally
competes  with  four U.S.  manufacturers.  The  company  also has  expanded  its
production and marketing  position by acquiring a majority  interest in a magnet
wire  manufacturing  company in Austria.  The Corporation,  through Phelps Dodge
International Corporation,  also manufactures magnet wire at affiliate companies
in Venezuela, Thailand, Zambia and the Philippines.

         The  Corporation's  international  telecommunication  and energy  cable
companies sell a majority of their products to  contractors,  distributors,  and
public  and  private  utilities.  Their  products  are used in  lighting,  power
distribution,   telecommunications  and  other  electrical   applications.   The
Corporation's  specialty  high-performance  conductors  are  primarily  sold  to
intermediators (insulators,  assemblers,  subcontractors and distributors). More
than half of these  products  are  ultimately  sold to  commercial  and military
aerospace  companies for use in airframes,  avionics,  space electronics,  radar
systems and ground control electronics.  Specialty  high-performance  conductors
are also used in  appliances,  instrumentation,  computers,  telecommunications,
military electronics,  medical equipment and other products. The Corporation has
one primary U.S. competitor in the specialty conductor market; however, in those
few markets  where it competes for high volume  products,  it faces  competition
from several U.S. fabricators.

Raw Materials
-------------

         Carbon  black   primarily  is  produced  from  heavy  residual  oil,  a
by-product  of the crude oil refining  process.  Columbian  Chemicals  purchases
substantially all of its feedstock on a spot basis at prices that fluctuate with
world oil prices.  The cost of feedstock is a significant  factor in the cost of
carbon  black.  To achieve  satisfactory  financial  results  during  periods of
increasing  oil  prices,  Columbian  Chemicals  must be able to pass  through to
customers any increase in its feedstock costs.

         Accuride  manufactures a majority of its products from either flat roll
or section steel, except for certain finished aluminum products  manufactured to
its  specifications and designs by Kaiser. A joint venture company that Accuride
and Kaiser intend to form to produce aluminum wheels, when formed, would replace
the current manufacturing agreement between the two companies.

         The principal raw materials  used by Phelps Dodge Magnet Wire Company's
manufacturing  operations are copper, aluminum and various electrical insulating
materials.

         The  principal raw materials  used by the  Corporation's  international
telecommunication and energy cable companies are copper, copper alloy, aluminum,
copper-clad steel and various  electrical  insulating  materials.  The specialty
conductor  product line is usually  plated with silver,  nickel or tin. With the
exception of copper needed in specialty conductors,  a majority of the materials
used by these companies is purchased from others.

         Phelps Dodge Magnet Wire Company  acquires  most of its copper from the
Corporation.  Phelps Dodge  Industries  purchases its residual oil feedstock and
other raw materials from various other  suppliers.  It does not believe that the
loss of any one supplier  would have a material  adverse effect on its financial
conditions or on the results of its operations.

Energy Supplies
---------------

         Phelps Dodge Industries' operations generally use purchased electricity
and natural gas as their principal  sources of energy.  Phelps Dodge Magnet Wire
Company's  principal  manufacturing  equipment  that  uses  natural  gas is also
equipped to burn alternative fuels.

Environmental Matters
---------------------

         Environmental   laws  and  regulations   affect  many  aspects  of  the
Corporation's industrial operations.  Phelps Dodge Industries estimates that its
capital  expenditures for programs to comply with applicable  environmental laws
and  regulations  will  total  approximately  $18  million  in 1997 and from $10
million to $15 million in 1998; $16 million was spent on these programs in 1996.
The  Corporation  also  anticipates   making   significant   capital  and  other
expenditures   beyond  1998  for  continued   compliance   with  such  laws  and
regulations.  In light of the frequent  changes in such laws and regulations and
the  uncertainty  inherent in this area,  the  Corporation is unable to estimate
accurately  the total amount of such  expenditures  over the longer term, but it
may be substantial. (See the discussion of "OTHER ENVIRONMENTAL MATTERS.")

Labor Matters
-------------

         Phelps Dodge Industries has labor agreements  covering most of its U.S.
and  international  plants.  Accuride had a three-year labor agreement  covering
approximately 690 employees at its London,  Ontario,  Canada, plant that expired
on January 21, 1997.  All employees  covered by the expired  agreement  began an
immediate strike,  and as of March 6, 1997, that strike continued.  Accuride has
maintained  operations  with its salaried  workforce and continues to supply its
customers. Accuride also has a three-year labor agreement covering approximately
400 employees that will expire on February 20, 1998, at its Henderson, Kentucky,
plant. The collective bargaining agreement covering  approximately 360 employees
at Phelps Dodge Magnet Wire Company's Hopkinsville,  Kentucky,  plant expired on
October  11,  1996.  As of  March 6, 1997, employees  who  were  covered  by the
agreement   have   continued   to  work   without  a  contract.   Phelps   Dodge
International's  plant in  Elizabeth,  New Jersey,  has a  three-year  agreement
covering approximately 60 employees that expires on July 31, 1997.

RESEARCH AND DEVELOPMENT
------------------------

         The Corporation  conducts research and development programs relating to
technology  for  exploration  for  minerals,   recovery  of  metals  from  ores,
concentrates  and solutions,  smelting and refining of copper,  metal processing
and product  development.  It also conducts  research and  development  programs
related to its carbon black products through its Columbian Chemicals subsidiary,
its wheel and rim products through its Accuride subsidiary,  its wire insulating
processes and materials through Phelps Dodge Magnet Wire Company,  and conductor
materials  and  processes  through  Phelps  Dodge   International   Corporation.
Expenditures for all of these research and development  programs,  together with
contributions  to industry  and  government-supported  programs,  totaled  $16.5
million in 1996, compared with $15.8 million in 1995 and $15.9 million in 1994.

OTHER ENVIRONMENTAL MATTERS
---------------------------

         The  Corporation is subject to federal,  state and local  environmental
laws, rules and regulations, including the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA or Superfund),  as amended by the
Superfund  Amendments and  Reauthorization  Act of 1986.  Under  Superfund,  the
Environmental  Protection Agency (EPA) has identified approximately 35,000 sites
throughout the United States for review,  ranking and possible  inclusion on the
National   Priorities  List  (NPL)  for  possible  response.   Among  the  sites
identified, EPA has included 13 sites owned by the Corporation.  The Corporation
believes that most, if not all, of its sites so identified  will not qualify for
listing on the NPL.

         In addition,  the Corporation may be required to remove hazardous waste
or remediate  the alleged  effects of hazardous  substances  on the  environment
associated with past disposal  practices at sites not owned by the  Corporation.
The Corporation has received notice that it is a potentially  responsible  party
from EPA and/or  individual  states  under CERCLA or a state  equivalent  and is
participating in environmental  assessment and remediation activity at 37 sites.
For further information about these proceedings,  see Item 3. Legal Proceedings,
Part III.

         At December 31, 1996,  the  Corporation  had reserves of $117.0 million
for   remediation   of  certain  of  the  sites  referred  to  above  and  other
environmental  costs in  accordance  with its policy to record  liabilities  for
environmental  expenditures  when it is  probable  that  obligations  have  been
incurred and the costs reasonably can be estimated.  The Corporation's estimates
of these costs are based upon currently  available facts,  existing  technology,
and presently enacted laws and regulations.  Where the available  information is
sufficient  to estimate the amount of  liability,  that  estimate has been used;
where the  information  is only  sufficient  to  establish  a range of  probable
liability and no point within the range is more likely than any other, the lower
end of the range has been used.

         The amounts of these  liabilities are very difficult to estimate due to
such factors as the unknown extent of the remedial  actions that may be required
and, in the case of sites not owned by the  Corporation,  the unknown  extent of
the Corporation's  probable liability in proportion to the probable liability of
other  parties.  Moreover,  the  Corporation  has other  probable  environmental
liabilities  that in its judgment  cannot  reasonably be  estimated,  and losses
attributable to remediation  costs are reasonably  possible at other sites.  The
Corporation  cannot now estimate the total additional loss it may incur for such
environmental liabilities, but such loss could be substantial.

         The  possibility of recovery of some of the  environmental  remediation
costs from insurance companies or other parties exists; however, the Corporation
does not  recognize  these  recoveries in its  financial  statements  until they
become probable.

         The Corporation's  operations are subject to myriad  environmental laws
and  regulations  in  jurisdictions  both  in the  United  States  and in  other
countries in which it does  business.  For further  discussion of these laws and
regulations,  please  see  "Environmental  and  Other  Regulatory  Matters"  and
"Environmental Matters." The estimates given in those discussions of the capital
expenditures  for  programs to comply  with  applicable  environmental  laws and
regulations in 1997 and 1998, and the  expenditures  for those programs in 1996,
are separate from the reserves and estimates described above.

         The  Environmental,  Health  and  Safety  Committee  of  the  Board  of
Directors,  comprising four non-employee directors, was established in 1991. The
Committee  met  three  times  in  1996  to  review,   among  other  things,  the
Corporation's policies with respect to environmental, health and safety matters,
and the adequacy of management's  programs for implementing those policies.  The
Committee  reports on such  reviews and makes  recommendations  with  respect to
those policies to the Board of Directors and to management.

Item 3.  Legal Proceedings
--------------------------

         I. The Corporation is participating, either directly as a party or as a
member of certain trade associations, in several legal challenges to air quality
rules or guidance  documents issued by EPA. This litigation  primarily  involves
the  establishment or amendment of national ambient air quality  standards,  the
requirements  for the  construction  or major  modification  of major sources of
criteria  pollutants,  Title V  operating  permits,  and the status of  fugitive
emissions under the Title V and federal hazardous air pollutants programs.

         In August 1983, EPA proposed  regulations (48 Fed. Reg.  38,742) which,
if adopted,  would have  substantially  implemented a February  1982  settlement
agreement  dealing  with  fugitive  emissions,  but on  October  26,  1984,  EPA
promulgated  final regulations  inconsistent  with the August 1983 proposal.  In
December 1984, the Corporation,  the American Mining Congress and several mining
and energy  development  companies  filed a petition  (No.  84-1609) in the U.S.
Court of Appeals  for the  District  of  Columbia  for review of the October 26,
1984,  regulations,  asserting  that the terms of the settlement  agreement,  to
which they were party,  had not been  carried out. The court stayed the petition
pending the outcome of further EPA rulemakings.

         The further EPA rulemakings were also challenged by the American Mining
Congress and others in federal court  actions  filed in 1989 and 1993.  The U.S.
Court of Appeals for the District of Columbia Circuit decided two of the appeals
in 1995. In National  Mining  Association v. EPA, 59 F.3d 1351 (D.C. Cir. 1995),
the court  agreed with EPA that,  under the  federal  hazardous  air  pollutants
program, collocated facilities should be considered as part of the same emitting
"source"  and fugitive  emissions  must be counted  when  determining  whether a
source is a "major source." The court agreed with the industry  petitioners that
a source could avoid "major  source"  status by using  effective  air  pollution
controls, even if the controls are not "federally enforceable."

         In Chemical Manufacturers  Association et al. v. EPA, No. 89-1514, Slip
op. (D.C. Cir. 1995), the court agreed with the industry petitioners and vacated
and  remanded  EPA's  rules  which  did not allow  facilities  to  consider  air
pollution  controls  when  determining  whether a permit  is  needed  for new or
increased emissions of criteria pollutants,  unless the controls were "federally
enforceable." In response,  EPA has asserted that its rules nevertheless  remain
in effect and that it may cure the defect in the rules merely by issuing written
guidance in the near future.  The industry  petitioners have requested the court
to enforce its original mandate against the agency.

         The effect of these decisions on the Corporation's facilities will vary
on a case-by-case  basis. They will have no effect on some facilities;  they may
cause some  facilities  to be  regulated  as "major  sources"  under one or more
federal programs;  and they may allow some sources to avoid regulation as "major
sources" by using air pollution  controls that are  enforceable  under  federal,
state or local laws.

         II.  Reference  is made to Part  I,  Items 1 and 2 of this  report  for
information   regarding   proceedings   that   pertain  to  water  used  by  the
Corporation's Morenci, Arizona, operations.

                  A. The following state water rights  adjudication  proceedings
     are pending in Arizona Superior Court:

                      1. In re the  General  Adjudication  of All  Rights to Use
         Water  in the  Little  Colorado  River  System  and  Source,  No.  6417
         (Superior Court of Arizona, Apache County).

                              (a)  Petition was filed by the  Corporation  on or
             about  February  17,  1978,  and  process  has been  served  on all
             potential claimants. Virtually all statements of claimant have been
             filed.

                              (b) The  principal  parties,  in  addition  to the
             Corporation, are the State of Arizona, the Navajo Tribe of Indians,
             the Hopi  Indian  Tribe,  the San  Juan  Southern  Paiute  group of
             Indians  and the  United  States on its own behalf and on behalf of
             those Indian tribes.  In this adjudication and in the adjudications
             reported in items 2.(a),  (b) and (c) below,  the United States and
             the Indian  tribes seek to have  determined  and  quantified  their
             rights to use water  arising  under  federal law on the basis that,
             when the Indian  reservations and other federal  reservations  were
             established  by  the  United   States,   water  was  reserved  from
             appropriation under state law for the use of those reservations.

                              (c) This  proceeding  could  affect,  among  other
             things, the Corporation's  rights to impound water in Show Low Lake
             and Blue Ridge  Reservoir and to transport this water into the Salt
             River and Verde River  watersheds  for exchange with the Salt River
             Valley  Water  Users'   Association.   The  Corporation  has  filed
             statements  of  claimant  for these and other  water  claims.  This
             litigation  is stayed  pending  the  outcome of current  settlement
             negotiations. The Court has not set a final schedule of cases to go
             to trial, should the litigation resume.

                      2. In re the  General  Adjudication  of All  Rights to Use
         Water in the Gila River System and Source,  Nos. W-1 (Salt River),  W-2
         (Verde  River),  W-3 (Gila River) and W-4 (San Pedro  River)  (Superior
         Court  of  Arizona,  Maricopa  County).  As a result  of  consolidation
         proceedings,  this action now includes general adjudication proceedings
         with  respect  to the  following  three  principal  river  systems  and
         sources:

                              (a) The Gila River System and Source Adjudication:

                                            (i)   Petition   was  filed  by  the
                  Corporation  on February 17, 1978.  Process has been served on
                  water  claimants  in  the  upper  and  lower  reaches  of  the
                  watershed and  virtually all  statements of claimant have been
                  filed.

                                            (ii)  The  principal   parties,   in
                  addition to the  Corporation,  are the Gila Valley  Irrigation
                  District, the San Carlos Irrigation and Drainage District, the
                  State of Arizona,  the San Carlos Apache Tribe, the Gila River
                  Indian  Community  and the United States on its own behalf and
                  on behalf of the tribe and the community.

                                            (iii) This proceeding  could affect,
                  among   other   things,   the   Corporation's   claim  to  the
                  approximately   3,000  acre-feet  of  water  that  it  diverts
                  annually  from Eagle Creek,  Chase Creek or the San  Francisco
                  River and its claims to percolating groundwater that is pumped
                  from wells located north of its Morenci  Branch  operations in
                  the Mud  Springs and Bee Canyon  areas and in the  vicinity of
                  the New  Cornelia  Branch at Ajo.  The  Corporation  has filed
                  statements  of claimant with respect to waters that it diverts
                  from these sources.

                                            (iv)  By a  letter  agreement  dated
                  September 7, 1990, the  Corporation  and the San Carlos Apache
                  Tribe  agreed upon  principles  to settle the water  claims of
                  that  Tribe and other land use issues  involving  the  Tribe's
                  reservation.   Since  that  time,   comprehensive   settlement
                  agreements  among the Tribe, the Corporation and other parties
                  have been under negotiation.  In the more recent phases of the
                  settlement  negotiations,  the Tribe has sought terms that the
                  Corporation  believes are unacceptable  and inconsistent  with
                  the  principles  set forth in the  September  7, 1990,  letter
                  agreement. The Tribe has also notified the Corporation to make
                  preparations   to  stop  using  the   reservation   for  water
                  transportation  by July 1997, at the latest.  The  Corporation
                  obtains  water for its Morenci  complex from several  sources,
                  including   through  the   operation  of  a  pump  station  on
                  reservation  lands  adjacent to the Black River,  and uses the
                  natural channel of Eagle Creek,  which is partially located on
                  the  reservation,  to  transport  water from  Black  River and
                  certain other sources to its Morenci complex.  The Corporation
                  believes  that it holds valid rights of way and  easements and
                  has other legal rights  sufficient  to allow for the continued
                  operation of the Black River pump station on reservation lands
                  and for the use of Eagle Creek.  However,  if the  Corporation
                  were to lose the use of the Black River pump station,  and was
                  unable to transport  water using the natural  channel of Eagle
                  Creek,  that might adversely affect  production at the Morenci
                  complex depending upon the availability of alternative sources
                  of water.  The parties are  continuing to discuss all of these
                  matters. The federal legislation authorizing settlement of the
                  Tribe's water rights claims with the Corporation and the other
                  parties to the  proceeding  has been  extended for a six-month
                  period expiring June 30, 1997.

                              (b) The Salt River System and Source Adjudication:

                                            (i)  Petition  was filed by the Salt
                  River Valley Water  Users'  Association  on or about April 25,
                  1974. Process has been served, and statements of claimant have
                  been filed by virtually all claimants.

                                            (ii) Principal parties,  in addition
                  to the  Corporation,  include  the  petitioner,  the  State of
                  Arizona and the United States, on its own behalf and on behalf
                  of various Indian tribes and  communities  including the White
                  Mountain Apache Tribe,  the San Carlos Apache Tribe,  the Fort
                  McDowell  Mohave-Apache  Indian  Community,   the  Salt  River
                  Pima-Maricopa  Indian  Community  and the  Gila  River  Indian
                  Community.

                                            (iii)  The  Corporation  has filed a
                  statement  of  claimant  to assert its  interest  in the water
                  exchange  agreement  with the Salt River  Valley  Water Users'
                  Association by virtue of which it diverts from the Black River
                  water claimed by the  Association  and repays the  Association
                  with water impounded in Show Low Lake and Blue Ridge Reservoir
                  on the  Little  Colorado  River  Watershed,  and to assert its
                  interest  in  "water  credits"  to which  the  Corporation  is
                  entitled as a result of its  construction of the Horseshoe Dam
                  on the Verde River.

                                            (iv)  The Salt  River  Pima-Maricopa
                  Indian Community,  Salt River Valley Water Users' Association,
                  the principal Salt River Valley  Cities,  the State of Arizona
                  and others have  negotiated a settlement  as among  themselves
                  for the Verde and Salt River system.  The  settlement has been
                  approved by Congress,  the President and the Arizona  Superior
                  Court.  Under the  settlement,  the Salt  River  Pima-Maricopa
                  Indian  Community  waived all water  claims it has against all
                  other water claimants (including the Corporation) in Arizona.

                                            (v) Active  proceedings with respect
                  to   other   claimants   have  not  yet   commenced   in  this
                  adjudication.

                             (c) The Verde River System and Source Adjudication:

                                            (i)  Petition  was filed by the Salt
                  River Valley Water Users' Association on or about February 24,
                  1976, and process has been served. Virtually all statements of
                  claimant have been filed.

                                            (ii)  The  principal   parties,   in
                  addition  to the  Corporation,  are the  petitioner,  the Fort
                  McDowell Mohave-Apache Indian Community,  the Payson Community
                  of Yavapai Apache Indians, the Salt River Pima-Maricopa Indian
                  Community,  the Gila River Indian Community, the United States
                  on its own behalf and on behalf of those  Indian  communities,
                  and the State of Arizona.

                                            (iii) This proceeding  could affect,
                  among other  things,  the  Corporation's  Horseshoe Dam "water
                  credits"  with the Salt River Valley Water Users'  Association
                  resulting  from its  construction  of the Horseshoe Dam on the
                  Verde River.  (See the Black River water exchange  referred to
                  in Paragraph  II.A.  2.(b)(iii)  above.) The  Corporation  has
                  filed statements of claimant with respect to Horseshoe Dam and
                  water  claims  associated  with the former  operations  of the
                  United Verde Branch.

                                            (iv) The Fort McDowell Mohave-Apache
                  Indian Community,  Salt River Valley Water Users' Association,
                  the principal Salt River Valley  Cities,  the State of Arizona
                  and others have  negotiated a settlement  as among  themselves
                  for the Verde River system.  This settlement has been approved
                  by Congress,  the  President and the Arizona  Superior  Court.
                  Under this settlement,  the Fort McDowell Mohave-Apache Indian
                  Community  waived all water  claims it has  against  all other
                  water claimants (including the Corporation) in Arizona.

                   B.  The   following   proceedings   involving   water  rights
      adjudication  are pending in the U.S.  District  Court for the District of
      Arizona:

                       1. On June 29,  1988,  the Gila  River  Indian  Community
         filed a  complaint-in-intervention  in United  States  v.  Gila  Valley
         Irrigation  District,  et al.,  Globe  Equity  No. 59 (D.  Ariz.).  The
         underlying action was initiated by the United States in October 1925 to
         determine conflicting claims to water rights in certain portions of the
         Gila River watershed.  Although the Corporation was named and served as
         a defendant in that action,  it was  dismissed  without  prejudice as a
         defendant  in March  1935.  In June  1935,  the Court  entered a decree
         setting  forth the water rights of numerous  parties,  but not those of
         the Corporation. The Court retained, and still has, jurisdiction of the
         case. The complaint-in-intervention  does not name the Corporation as a
         defendant; however, it does name the Gila Valley Irrigation District as
         a defendant.  Therefore, the complaint-in-intervention could affect the
         approximately  3,000  acre-feet of water that the  Corporation  diverts
         annually  from Eagle  Creek,  Chase  Creek or the San  Francisco  River
         pursuant to the agreement  between the  Corporation and the Gila Valley
         Irrigation District.

                       2. On December 30, 1982, the Gila River Indian  Community
         initiated an action  styled Gila River Indian  Community v. Gila Valley
         Irrigation  District,  et al., No. CIA 82-2185 (D. Ariz.),  complaining
         about allegedly improper uses by approximately  17,000 named defendants
         of "water from within the Gila River  watershed."  The  Corporation was
         named as a defendant in the  complaint,  but it has not yet been served
         with process. The complaint seeks an injunction restraining future uses
         of water that interfere with the alleged prior rights of the Gila River
         Indian  Community,  as well as compensatory  and punitive damages in an
         unspecified amount.

                       3. Prior to December  1982,  various  Indian tribes filed
         several  suits in the U.S.  District  Court for the District of Arizona
         claiming  prior and paramount  rights to use waters which are presently
         being used by many water users, including the Corporation, and claiming
         damages  for  prior  use in  derogation  of their  allegedly  paramount
         rights.  These  federal  proceedings  have been  stayed  pending  final
         adjudication in the state courts.

         III.   Claims  under  CERCLA  and  related  state  acts  involving  the
Corporation  have  been  raised  with  respect  to the  remediation  of 37 waste
disposal  and other  sites.  Most are sites where the  Corporation  has received
information  requests  or  other  indications  that  the  Corporation  may  be a
Potentially Responsible Party (PRP) under CERCLA. CERCLA is intended to expedite
the  remediation of hazardous  substances  without regard to fault.  Responsible
parties  for  each  site   include   present  and  former   owners,   operators,
transporters, and generators of the substances at the site. Liability is strict,
joint and several.  Because of the ambiguity of the regulations,  the difficulty
of identifying the responsible  parties for any particular  site, the complexity
of allocating the  remediation  costs among them, the uncertainty as to the most
desirable  remediation  techniques and amount of remediation costs, and the time
period  during which such costs may be incurred,  the  Corporation  is unable to
reasonably  estimate the full cost of compliance with CERCLA or equivalent state
statutes.

         With  respect to these 37 sites,  and with the  exception of the Laurel
Hill site in  Maspeth,  New  York,  where a reserve  of $10.0  million  has been
established,  based on currently available  information,  which in many cases is
preliminary  and  incomplete,  the Corporation has no reason to believe that its
ultimate  responsibility  for remediation  costs will exceed $2.0 million at any
site  and  believes  most  will  be  substantially  under  $0.1  million.  While
additional  costs  to  the  Corporation  are  reasonably  possible,  that  cost,
excepting Laurel Hill, is not expected to exceed $10.0 million.

Item 4.  Submission of Matters to a Vote of Security Holders
------------------------------------------------------------

         No matters were  submitted  during the fourth quarter of 1996 to a vote
of security holders, through the solicitation of proxies or otherwise.

Executive Officers of Phelps Dodge Corporation
----------------------------------------------

         The executive officers of Phelps Dodge Corporation are elected to serve
at the pleasure of its Board of  Directors.  As of March 1, 1997,  the executive
officers of Phelps Dodge Corporation were as follows:

                     Age at                                     Officer of the
      Name           3/1/97               Position             Corporation since
      ----           ------               --------             -----------------

Douglas C. Yearley      61    Chairman of the Board, President and
                                  Chief Executive Officer            1981

J. Steven Whisler       42    Senior Vice President                  1987

Manuel J. Iraola        48    Senior Vice President                  1995

Ramiro G. Peru          41    Senior Vice President for
                                 Organizational Development and
                                  Information Technology             1995

Thomas M. St. Clair     61    Senior Vice President and
                                 Chief Financial Officer             1989

         Except as stated  below,  all of the above have been officers of Phelps
Dodge Corporation for the past five years.

         Mr. Iraola was elected Senior Vice President in January 1995.  Prior to
his  election,   Mr.   Iraola  was  President  of  Phelps  Dodge   International
Corporation,  the largest Phelps Dodge Industries'  company,  a position he held
since 1992. Prior to that time, he was Senior Vice President and Chief Financial
Officer of Columbian Chemicals Company, acquired by Phelps Dodge in 1986.

         Mr.  Peru  was  elected  Senior  Vice   President  for   Organizational
Development and Information  Technology in January 1997.  Prior to his election,
Mr.  Peru was Vice  President  and  Treasurer  of Phelps  Dodge  Corporation,  a
position he held since 1995. Prior to that time, he was Vice President of Phelps
Dodge Mining Company.
<PAGE>
                                     Part II

Item 5.  Market  for the  Registrant's  Common  Equity and  Related  Stockholder
Matters
----------------------------------------------------------------------------

         The information called for by Item 5 appears in Management's Discussion
and Analysis in this report.

Item 6.  Selected Financial Data
--------------------------------
(In millions except per share amounts)

                               1996     1995     1994 (a)    1993     1992 (b/c)
                               ----     ----     --------    ----     ----------

Sales and other
 operating revenues        $  3,786.6  4,185.4    3,289.2   2,595.9    2,579.3

Income before cumulative
 effect of accounting
  changes                  $    461.8    746.6      271.0     187.9      301.6

  Per common share         $     6.97    10.65       3.81      2.66       4.28

Cumulative effect of
 accounting changes        $        -        -          -         -     (79.9)

  Per common share         $        -        -          -         -     (1.13)

Net income                 $    461.8    746.6      271.0     187.9      221.7

  Per common share         $     6.97    10.65       3.81      2.66       3.15

Total assets               $  4,816.4  4,645.9    4,133.8   3,720.9    3,441.2

Long-term debt             $    554.6    613.1      622.3     547.3      373.8

Dividends per common
 share                     $     1.95     1.80       1.69      1.65       1.61

(a)      Reported  1994 net income of $271.0  million  ($3.81 per common  share)
         includes  income  of $362.7  million  ($5.10  per  common  share)  less
         non-recurring  after-tax  charges in the fourth quarter  totaling $91.7
         million ($1.29 per common share) reflecting  additional  provisions for
         estimated  future  costs  associated  with  environmental  matters  and
         estimated losses on the disposition of certain operating facilities.

(b)      1992 includes a non-taxable  gain of $36.4 million (52 cents per common
         share) on a subsidiary's  stock  issuance from two Sumitomo  companies'
         acquisition of a 20 percent  interest in the Candelaria  copper project
         in Chile.

(c)      Includes  one-time,  after-tax  charges in 1992 for the adoption of new
         accounting methods for postretirement and postemployment benefits (SFAS
         No. 106 and SFAS No. 112) and income taxes (SFAS No. 109).

Note:    See Management's Discussion and Analysis for a discussion of the effect
         on the  Corporation's  results  of  material  changes  in the price the
         Corporation receives for copper or in its unit production costs.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS
---------------------------------------------

Phelps Dodge reported 1996  consolidated net income of $461.8 million,  or $6.97
per common share.  This amount  compares with 1995 net income of $746.6 million,
or $10.65 per common  share.  The 1996 amount  includes an  after-tax  charge of
approximately $10.7 million, or 16 cents per share, resulting from a 1996 fourth
quarter  reclamation  provision and interest  charges related to a Court ordered
rescission  of a 1986 sale of  property.  The 1995 amount  includes an after-tax
gain of  $16.6  million,  or 24 cents  per  share,  from  the sale of  Columbian
Chemicals Company's MAPICO division.

         The Corporation  reported 1994 income of $362.7  million,  or $5.10 per
common share,  less  non-recurring  after-tax  charges in the fourth  quarter of
$91.7 million,  or $1.29 per common share, that reduced reported 1994 net income
to $271.0 million,  or $3.81 per common share.  The 1994  non-recurring  charges
primarily reflected additional  provisions for estimated future costs associated
with  environmental  matters  and for  estimated  losses on the  disposition  of
certain operating  facilities.  Note 2 to the Consolidated  Financial Statements
contains  further  information  to which  reference  should be made for a fuller
understanding of the 1994 non-recurring charges.

         The  Corporation's  consolidated  financial  results for the last three
years are summarized below (in millions except per common share amounts):

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

                                                     1996       1995       1994
                                                     ----       ----       ----

Sales and other operating revenues          $     3,786.6    4,185.4    3,289.2
Operating income                            $       712.9    1,100.5      400.4
Net income                                  $       461.8      746.6      271.0
Net income per common share                 $        6.97      10.65       3.81

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

         A significant factor influencing the Corporation's 1996 results was the
lower  price  of  copper,  the  Corporation's  principal  product.  The New York
Commodity  Exchange  (COMEX) spot price per pound of copper cathode,  upon which
the Corporation bases its selling price,  averaged $1.06 in 1996,  compared with
$1.35 in 1995 and $1.07 in 1994.  The COMEX price  averaged  $1.09 per pound for
the first two months of 1997, and closed at $1.16 on March 6, 1997.

         Any material change in the price the  Corporation  receives for copper,
or in its unit production  costs, has a significant  effect on the Corporation's
results.  The Corporation's  present share of annual production is approximately
1.5 billion pounds of copper.  Accordingly,  each 1 cent per pound change in the
average  annual copper price received by the  Corporation,  or in average annual
unit  production  costs,  causes a variation in annual  operating  income before
taxes of approximately $15 million.

         Depending on market  circumstances,  the Corporation  may  periodically
purchase or sell various copper option contracts to mitigate the risk of adverse
price  fluctuations  on a portion of its expected future mine  production.  With
respect to 1996  production,  the  Corporation  had  contracts  that  provided a
combination of minimum and maximum quarterly average London Metal Exchange (LME)
prices for 185 million pounds of third quarter copper  production  that resulted
in payments of $3.1 million to Phelps Dodge.  Similar contracts ensuring minimum
prices for 790 million pounds of 1996 copper production  expired without payment
to Phelps Dodge.  During the 1996 third  quarter,  the  Corporation  sold copper
price  protection  contracts  that  covered  94  million  pounds of  anticipated
production in the fourth  quarter of 1996 and 85 million  pounds of  anticipated
production  in the first  quarter  of 1997.  This  resulted  in  immediate  cash
payments to the  Corporation  of $15.6 million.  Consequently,  $8.8 million for
1996 fourth quarter contracts was recognized in income during the fourth quarter
and $6.8  million for 1997 first  quarter  contracts  was  deferred  and will be
recognized in income during the 1997 first quarter.

         During 1995,  the  Corporation  had  contracts  that  provided  minimum
quarterly average LME prices of 80 cents per pound for approximately 640 million
pounds of copper that expired on December 31,  1995,  without  payment to Phelps
Dodge.  In  addition,  the  Corporation  had  contracts  that  provided  minimum
(approximately 95 cents) and maximum  (approximately $1.33) LME prices per pound
for  approximately  650 million  pounds of copper.  These  contracts  expired on
December 31, 1995,  with Phelps Dodge making  payments  totaling $1.3 million to
the financial  institutions  involved.  During 1994, contracts that provided the
Corporation  with  minimum  average LME copper  prices of 75 cents per pound for
about 244 million pounds of production expired without payment to Phelps Dodge.

         With respect to 1997  production,  as of March 6, 1997, the Corporation
had net positions in place with several financial  institutions that provide for
a minimum  first  quarter  average  price of 90 cents  per pound for 85  million
pounds  of copper  cathode.  These  minimum  prices  are based on the  quarterly
average  LME price.  If average  quarterly  LME  prices  fall below the  minimum
prices,  the  financial  institutions  will be obligated to pay Phelps Dodge the
difference.

         The  Corporation's  objective  and  practice is to sell its copper at a
price based on the COMEX average price in the month of shipment.  However, a few
customers  request a firm  price as of a  specified  date prior to or during the
month of shipment.  In such  transactions,  the Corporation  usually hedges such
sales commitments by entering into copper futures and copper swap contracts that
approximate the shipment  quantities and periods.  The copper futures  contracts
are then liquidated  during the month of shipment which generally results in the
realization  of the  COMEX  average  monthly  price  for  copper  shipped.  This
liquidation process involves the use of offsetting futures contracts. Therefore,
the notional value,  which represents the absolute sum of all outstanding copper
futures  contracts,  is not an accurate  measurement of risk to the  Corporation
from  the use of such  derivative  financial  instruments.  Swap  contracts  are
settled at the COMEX average  monthly  price in the month copper is shipped.  At
December 31, 1996, the Corporation had futures and swap hedge contracts in place
for  approximately 149 million pounds of copper with an approximate net value of
$143 million and an aggregate notional value of approximately $156 million.  The
Corporation had deferred  unrecognized  gains of $2.3 million on its futures and
swap  contracts  at December 31,  1996.  With  respect to 1995,  at year end the
Corporation had futures and swap hedge contracts in place for  approximately 104
million  pounds of copper with an  approximate  net value of $125 million and an
aggregate  notional value of approximately  $125 million.  At December 31, 1995,
the  Corporation  had  deferred  unrecognized  losses  on its  futures  and swap
contracts  of $2.4  million  as the  offsetting  customer  transactions  had not
matured.

         The Corporation  periodically enters into forward exchange and currency
option  contracts to hedge certain recorded  transactions,  firm commitments and
other anticipated foreign currency  transactions.  The Corporation does not hold
these  financial  instruments  for  trading  purposes.   The  objective  of  the
Corporation's  foreign currency hedging activities is to protect the Corporation
from the risk that the  eventual  equivalent  dollar cash flows  resulting  from
transactions  denominated in foreign  currencies  will be adversely  affected by
changes in exchange  rates.  During 1996,  recorded,  committed and  anticipated
foreign  currency  transactions  that the  Corporation had hedged did not exceed
$166 million and totaled $141 million at year end. The  Corporation did not have
any deferred  unrecognized  gains or losses on its foreign exchange contracts at
December 31, 1996,  or December  31,  1995.  Notes 1 and 19 to the  Consolidated
Financial  Statements  contain further  information to which reference should be
made for a fuller  understanding of the Corporation's policy for hedging foreign
currency transactions.

         Consolidated  1996  revenues  were  $3,786.6  million,   compared  with
$4,185.4 million in 1995. The 1996 decrease was a result of lower average copper
prices and lower sales  volumes of wheels and rims.  The decrease was  partially
offset  by higher  sales  volumes  of  copper,  carbon  black and wire and cable
products. The increase in consolidated revenues from $3,289.2 million in 1994 to
$4,185.4  million in 1995 resulted from higher average copper prices,  increased
volumes of copper sold from mine production, and higher prices and sales volumes
for carbon black, wheels and rims, and wire and cable products.

         Phelps  Dodge's  results  for 1996,  1995 and 1994 can be  meaningfully
compared by separate  reference to its reporting  segments,  Phelps Dodge Mining
Company and Phelps Dodge  Industries.  Phelps Dodge Mining Company  includes the
Corporation's  worldwide  copper  operations from mining through rod production,
marketing and sales,  other mining  operations  and  investments,  and worldwide
mineral exploration and development  programs.  Phelps Dodge Industries includes
the Corporation's  specialty chemicals  operations,  its wheel and rim business,
and its wire and cable operations.

         Within each such  segment,  significant  events and  transactions  have
occurred which, as indicated in the separate  discussions  presented  below, are
material  to  an  understanding  of  the  particular  year's  results  and  to a
comparison  with  results  of the  other  periods.  Note 20 to the  Consolidated
Financial  Statements  contains further information to which reference should be
made  for a fuller  understanding  of the  following  discussion  and  analysis.
Statistics on reserves and  production  can be found in Part I, Items 1 and 2 of
this report.

RESULTS OF PHELPS DODGE MINING COMPANY

Phelps Dodge Mining Company is an international  business  comprising a group of
companies involved in vertically  integrated copper operations including mining,
concentrating,  electrowinning, smelting and refining, rod production, marketing
and sales,  and related  activities.  Copper is sold primarily to others as rod,
cathode or concentrates,  and as rod to the Phelps Dodge Industries  segment. In
addition,  Phelps  Dodge Mining  Company at times smelts and refines  copper and
produces copper rod for others on a toll basis. Phelps Dodge Mining Company also
produces  gold,  silver,  molybdenum  and copper  chemicals as  byproducts,  and
sulfuric  acid  from its air  quality  control  facilities.  This  segment  also
includes the Corporation's  other mining  operations and investments  (including
fluorspar,   silver,  lead  and  zinc  operations)  and  its  worldwide  mineral
exploration and development programs.

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

                                                    1996       1995        1994
                                                    ----       ----        ----
Copper (from own mines - thousand tons) *
   Production                                      770.4      712.7       572.8
   Deliveries                                      771.6      696.6       560.6
COMEX average spot copper price
   per pound - cathodes                      $      1.06       1.35        1.07

                                                     (millions of dollars)

Sales and other operating revenues           $   2,091.1    2,488.7     1,820.7
Operating income                             $     526.6      896.8       326.4

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

*        The  Corporation's  worldwide copper production and deliveries shown in
         the above table exclude the amounts  attributable to (i) the 15 percent
         undivided interest in the Morenci,  Arizona, copper mining complex held
         by Sumitomo Metal Mining Arizona,  Inc. (Sumitomo),  (ii) the one-third
         partnership  interest  in Chino  Mines  Company in New  Mexico  held by
         Heisei Minerals Corporation (Heisei), and (iii) the 20 percent interest
         in Candelaria held by SMMA  Candelaria,  Inc., a jointly owned indirect
         subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo Corporation.
         Excluded  production  amounts for 1996, 1995 and 1994 were 76,500 tons,
         65,600  tons and 61,000  tons  produced  at Morenci  for the account of
         Sumitomo,  56,200 tons,  56,200 tons and 53,200 tons  produced at Chino
         for the account of Heisei and 30,200  tons,  33,100 tons and 6,200 tons
         at Candelaria for the account of Sumitomo.

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

         Phelps Dodge Mining Company  reported 1996  operating  income of $526.6
million which included a pre-tax charge of $10.0 million resulting from a fourth
quarter  reclamation  provision related to a Court ordered  rescission of a 1986
sale of property.  This compares with 1995 operating  income of $896.8  million.
Earnings  in 1994 of  $420.8  million  were  reduced  to  $326.4  million  after
reflecting  $94.4  million  of  fourth  quarter  non-recurring  pre-tax  charges
applicable to its operations.  The decrease in 1996 operating  income  reflected
lower average copper prices,  partially  offset by higher volumes of copper sold
from mine production.  The increase in operating  earnings in 1995 compared with
1994 resulted  from higher  average  copper prices and higher  volumes of copper
sold from mine production,  especially from Candelaria which commenced operation
in the 1994  fourth  quarter.  Unit  production  costs of  copper  in 1996  were
slightly higher than in 1995,  principally as a result of increased depreciation
charges  from recent  capital  projects,  increased  mining  expenses  and costs
associated with a maintenance  overhaul at the Hidalgo smelter.  Unit production
costs of copper  generally  continued  to  reflect  high  levels of  production,
ongoing cost  containment  programs and  increasing  amounts of copper  obtained
through the solution  extraction/electrowinning  (SX/EW) process,  including the
start-up of the  Southside  SX/EW  project at the Morenci mine in the 1995 third
quarter, at favorable incremental costs.

         The  Candelaria  mine is located near Copiapo in the Atacama  Desert of
northern Chile. Phelps Dodge Mining Company completed construction and commenced
operations at Candelaria in October 1994, and achieved full  production in 1995.
Phelps  Dodge owns an 80 percent  interest  in  Candelaria  and a jointly  owned
indirect subsidiary of Sumitomo Metal Mining Co., Ltd. and Sumitomo  Corporation
owns  a  20  percent  interest.  The  project  consists  of  an  open-pit  mine,
concentrator,  port and associated  facilities.  On May 1, 1996, the Corporation
announced  plans  to  expand  concentrator  throughput  at  Candelaria.  At full
capacity,  the $337  million  expansion  (the  Corporation's  share will be $270
million with the remainder provided by its co-participant) will result in annual
copper  production  of 400  million to 450 million  pounds  during the first few
years of the  post-expansion  mine life;  the  average  ore grade is expected to
drop,  with a corresponding  decrease in production,  in subsequent  years.  The
expansion will include  increased mining activity,  the installation of a second
semi-autogenous (SAG) mill line and new and expanded  concentrating  facilities,
and the  addition of more than 200  employees.  Construction  began in the third
quarter of 1996 with new production scheduled to come on line by mid-1998.  As a
result of the expansion,  the estimated mine life of Candelaria  will be reduced
from 35 years of production to 19 years.

         During the third quarter of 1995, Phelps Dodge Mining Company completed
construction and commenced operations at its $200 million Southside project (the
Corporation's  share  was  $170  million  with  the  remainder  provided  by its
co-participant)  at its Morenci mine in southeastern  Arizona.  This project has
increased Phelps Dodge's share of annual electrowon  copper production  capacity
by approximately 130 million pounds.  The expansion  involved the development of
the Southside ore deposit adjacent to the existing open-pit mine at Morenci. The
expansion  included  the  construction  of  an  electrowinning   tankhouse,  the
expansion   of  existing   solution   extraction   plants,   the   upgrading  of
infrastructure systems and the addition of mining equipment.

         Copper  unit  production  costs  generally  have  been  stable  for the
three-year period ended December 31, 1996,  primarily as a result of high levels
of production of low-cost  cathode  copper at SX/EW plants in Morenci,  Arizona;
Tyrone,  New  Mexico;  and Santa  Rita,  New Mexico.  In 1996,  the  Corporation
produced a total of  408,000  tons of  cathode  copper at its SX/EW  facilities,
compared with 364,200 tons in 1995 and 325,800 tons in 1994. The SX/EW method is
a  cost-effective  process of  extracting  copper from certain types of ores. As
used by the  Corporation in  conjunction  with its  conventional  concentrating,
smelting  and  refining,  SX/EW is a major factor in its  continuing  efforts to
maintain internationally competitive costs.

         The  Corporation  expects to operate  the Burro  Chief SX/EW plant near
Tyrone, New Mexico, for at least the next 10 years.  Exploration continues in an
effort to identify further mineral resources.

         The Corporation  has additional  sources of copper that could be placed
in production should market  circumstances  warrant.  Permitting and significant
capital  expenditures  would be required,  however,  to develop such  additional
production capacity.

         In 1996,  operations  outside the United  States  provided 8 percent of
Phelps  Dodge Mining  Company's  sales,  compared  with 10 percent in 1995 and 5
percent  in  1994.  During  the  year,  operations  outside  the  United  States
contributed  8 percent  of the  segment's  operating  income,  compared  with 19
percent in 1995 and less than 1 percent in 1994.

         In  December  1996,  the United  States  District  Court of the Eastern
District of New York ruled that the 1986 sale of property in Maspeth,  New York,
by the  Corporation to the United States Postal Service is to be rescinded.  The
Court ordered the Corporation to return the $14.8 million originally paid by the
Postal  Service for the  property  and to pay  interest on the sales price for a
portion  of the time since that sale.  The  Corporation  has not yet  determined
whether to appeal the Court's  decision,  but as a precaution,  the  Corporation
recorded  interest  charges of $5.9  million and  reclamation  reserves of $10.0
million in the 1996 fourth  quarter.  This  reclamation  provision was estimated
based on the Corporation's experience at other Corporate-owned properties.

         The  collective  bargaining   agreements  covering   approximately  625
employees  at Phelps  Dodge  Mining  Company's  Chino  operations  in New Mexico
expired on June 30, 1996. As of March 6, 1997, employees who were covered by the
agreements have continued to work without a contract.

         By a letter  agreement dated September 7, 1990, the Corporation and the
San Carlos  Apache  Tribe agreed upon  principles  to settle the water claims of
that Tribe and other land use issues  involving the Tribe's  reservation.  Since
that time,  comprehensive settlement agreements among the Tribe, the Corporation
and other parties have been under negotiation.  In the more recent phases of the
settlement  negotiations,  the  Tribe  has  sought  terms  that the  Corporation
believes are unacceptable and inconsistent  with the principles set forth in the
September 7, 1990, letter agreement. The Tribe has also notified the Corporation
to make  preparations to stop using the reservation for water  transportation by
July 1997, at the latest. The Corporation  obtains water for its Morenci complex
from  several  sources,  including  through the  operation  of a pump station on
reservation  lands adjacent to the Black River,  and uses the natural channel of
Eagle Creek,  which is partially located on the reservation,  to transport water
from  Black  River  and  certain  other  sources  to its  Morenci  complex.  The
Corporation  believes  that it holds valid rights of way and  easements  and has
other legal rights sufficient to allow for the continued  operation of the Black
River pump station on reservation lands and for the use of Eagle Creek. However,
if the Corporation were to lose the use of the Black River pump station, and was
unable to transport water using the natural  channel of Eagle Creek,  that might
adversely  affect   production  at  the  Morenci  complex   depending  upon  the
availability  of  alternative  sources of water.  The parties are  continuing to
discuss all of these matters. The federal legislation  authorizing settlement of
the Tribe's  water rights claims with the  Corporation  and the other parties to
the proceeding has been extended for a six-month period expiring June 30, 1997.

RESULTS OF PHELPS DODGE INDUSTRIES

Phelps Dodge  Industries is a business  segment  comprising a group of companies
that manufacture engineered products principally for the transportation,  energy
and  telecommunications  sectors worldwide.  Its operations are characterized by
products with  significant  market share,  internationally  competitive cost and
quality,  and  specialized  engineering  capabilities.   This  business  segment
includes the  Corporation's  specialty  chemicals  operations  through Columbian
Chemicals Company and its subsidiaries  (Columbian Chemicals or Columbian);  its
wheel and rim  operations  through  Accuride  Corporation  and its  subsidiaries
(Accuride);  and its wire and cable and specialty  conductor  operations through
Phelps Dodge International  Corporation and Phelps Dodge Magnet Wire Company and
their subsidiaries and affiliates.

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

                                              1996         1995        1994
                                              ----         ----        ----
                                                 (millions of dollars)

Sales and other operating revenues:
   Specialty chemicals                $      437.0        420.8       335.0
   Wheels and Rims                           307.8        357.8       333.6
   Wire and Cable                            950.7        918.1       799.9
                                           -------      -------     -------
                                      $    1,695.5      1,696.7     1,468.5
                                           =======      =======     =======

Operating income:
   Specialty chemicals                $       79.8        103.9        20.0
   Wheels and rims                            41.4         45.6        42.3
   Wire and cable                            104.6         93.8        43.8
                                           -------      -------     -------
                                      $      225.8        243.3       106.1
                                           =======      =======     =======

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

         Phelps  Dodge  Industries  reported  1996  operating  income  of $225.8
million, compared with operating income in 1995 that was $216.5 million before a
pre-tax gain of $26.8  million from the sale of  Columbian  Chemicals  Company's
synthetic  iron  oxide  division  (MAPICO).   Increased  1996  operating  income
primarily  reflected  the  benefits of  manufacturing  cost  reduction  programs
instituted during 1995, higher sales volumes in the wire and cable business, and
continued strength in the specialty  chemicals  business.  Earnings increases in
1995 over 1994  primarily  reflected  the  strength of the  specialty  chemicals
business which saw higher average worldwide prices and higher sales volumes both
in the United States and Europe,  especially  from new operations in Hungary and
Spain.  Increased 1995 operating  income also reflected  higher prices and sales
volumes  in the wire and cable  businesses  and in the  wheel  and rim  business
(which  experienced a decline in sales  volumes in the 1995 fourth  quarter that
continued into 1996).  Operating income in 1994 of $150.7 million was reduced to
$106.1  million by $44.6 million of 1994 fourth  quarter  non-recurring  pre-tax
charges applicable to its facilities.

         Columbian  Chemicals' 1996 earnings were higher than in 1995 (excluding
the $26.8 million pre-tax gain from the sale of MAPICO) as a result of increased
carbon black sales and production  volumes.  North American volumes continued to
grow in both the basic rubber black and  industrial  black product  lines.  Only
limited growth was achieved in the European rubber market; however,  significant
growth continued in the European  specialty market. Raw material costs increased
throughout  the year  resulting in tighter  margins.  Major capital  projects to
expand  existing  North  American  and  European  facilities  are  under way and
resulted in a record level of annual capital investment. Several major expansion
projects are expected to be completed during 1997.

         Columbian  Chemicals'  1995  earnings  were higher than 1994  primarily
because of higher sales in both North America,  as overall capacity continued to
tighten in the industry,  and Europe.  Margins in North  America were  favorably
affected by high operating rates and improved prices in 1995.  Columbian's  1994
earnings  were  offset  in  part  by  a  non-recurring   pre-tax   provision  of
approximately $9 million for the closure of its plant in Hamburg,  Germany, as a
result of that plant's high cost structure and environmental restrictions.  This
charge was included in the 1994 fourth  quarter  reserve  discussed in Note 2 to
the Consolidated Financial Statements.

         Columbian's newer operations include a carbon black plant in Santander,
Spain,  acquired  in December  1994 for  approximately  $25 million  from Repsol
Quimica S.A. The  acquisition of this plant has increased the presence of Phelps
Dodge  Industries  in the  European  market and extends the ability of Columbian
Chemicals to serve customers in Spain and Portugal.

         Accuride's  1996 earnings fell below 1995 earnings  primarily due to an
18 percent drop in overall sales  volumes,  partially  offset by higher  prices.
North American demand for heavy trucks and trailers were the major  contributors
to the drop in sales  volumes.  Demand  for  specialty  products,  such as light
wheels  for  smaller  trucks and sport  utility  vehicles,  increased  partially
offsetting  the effects of the downturn in the heavy truck and trailer  markets.
Accuride's 1995 earnings  exceeded its 1994 earnings  principally as a result of
higher sales volumes and prices.  In 1994,  earnings  reflected  increased sales
volume of wheels, rims and components in response to strong demand.

         Accuride had a three-year labor agreement  covering  approximately  690
employees  at its London,  Ontario,  Canada,  plant that  expired on January 21,
1997. All employees  covered by the expired agreement began an immediate strike,
and as of  March  6,  1997,  that  strike  continued.  Accuride  has  maintained
operations with its salaried workforce and continues to supply its customers.

         On  September  18,  1996,  Accuride  and Kaiser  Aluminum  and Chemical
Corporation  (Kaiser)  announced their intent to form a joint venture company to
produce aluminum wheels for the commercial transportation industry. Accuride and
Kaiser  would  each own 50  percent  of the new  company.  The joint  venture is
expected to be finalized by the end of the first  quarter of 1997.  This venture
would replace the current arrangement under which Kaiser  manufactured  finished
aluminum wheels for Accuride.

         Earnings in the wire and cable business  increased in 1996 over 1995 as
a result of higher  magnet  wire sales  volumes  and  margins in North  America,
favorable  results of aluminum  tolling in Thailand and the 1996 second  quarter
acquisition  of  Nesor  Alloy  Corporation,   a  leading  manufacturer  of  high
performance conductors for the general electronics and aerospace industries. New
customers  were  attracted  in North  America by the Phelps  Dodge  Magnet  Wire
Company  expansion  of its El Paso plant and the  announcement  of its new plant
under  construction  in  Monterrey,  Mexico.  European  demand for  magnet  wire
products  also was strong in the latter  half of 1996  after a slow  start.  The
increase  in earnings in 1996 came about  despite the  continuation  of economic
difficulties in Venezuela.

         Wire and cable earnings increases in 1995 over 1994 generally reflected
higher sales  volumes and  improved  margins.  Earnings  for the U.S.  specialty
conductor business improved in 1995 as manufacturing cost reduction programs and
an administrative reorganization began to take effect.

         Earnings  in the wire and cable  business  in 1994  reflected  economic
difficulties  in  Venezuela  and economic  slowdowns in Mexico and Chile.  These
conditions  resulted in additional  costs  associated with complying with strict
foreign exchange controls instituted in 1994 by the Venezuelan government, and a
pre-tax  loss of  $7.0  million  on the  sale of the  Corporation's  40  percent
interest in its Mexican  associate company CONELEC S.A. de C.V. Earnings in 1994
also reflected a pre-tax  provision of $20.0 million for the impairment of value
of the Corporation's U.S. specialty conductor operations.

         The loss on the sale of CONELEC and the  provision  for  impairment  of
value of the  specialty  conductor  business  are  included  in the 1994  fourth
quarter reserve  discussed in Note 2 to the Consolidated  Financial  Statements.
The effect of these  charges  on  earnings  was  offset in part by higher  sales
volumes, particularly in the North American magnet wire market and the telephone
cable market in Thailand,  and improved margins for magnet wire in North America
where  demand in the housing,  automotive  and major home  appliance  industries
allowed Phelps Dodge Magnet Wire Company to operate at full capacity  throughout
the year.  Sales volumes in 1994 also benefited from the acquisition in March of
two U.S. magnet wire facilities.

         In May  1996,  Phelps  Dodge  acquired  Nesor  Alloy  Corporation,  for
approximately  $35 million.  In addition,  Phelps Dodge  increased its ownership
interest in Metal  Fabricators of Zambia Limited  (ZAMEFA) from 20 percent to 51
percent.  The  Corporation's  interest in these  companies  is managed by Phelps
Dodge International Corporation, a wholly owned subsidiary.

         On August 7, 1996,  the  Corporation  announced  plans to  construct  a
magnet wire manufacturing plant in Monterrey,  Mexico. Construction of the $42.0
million project began in 1996 with commercial production expected in early 1998.

         In  response  to demand by  Japanese-owned  companies  located in North
America,  SPD Magnet Wire  Company,  a joint venture of Phelps Dodge Magnet Wire
Company  and  Sumitomo  Electric  Industries,  Ltd.,  each  owning a 50  percent
interest,  expanded  its  plant in  Edmonton,  Kentucky.  The  capacity  of this
facility has  increased by 75 percent  after new equipment was installed in late
1995 through early 1996.

         In  March  1994,   Phelps  Dodge  Magnet  Wire  Company   acquired  for
approximately $52 million certain assets of a plant that manufactures fine-gauge
magnet wire in Laurinburg,  North Carolina,  from Rea Magnet Wire Company,  Inc.
(Rea),  and  certain  assets of a magnet  wire  manufacturing  plant in El Paso,
Texas,  from  Texas  Magnet  Wire  Company,  an  affiliate  of Rea and  Fujikura
International,  Inc.  The El Paso  facility  was  expanded in 1996  doubling its
previous  capacity.  The capacity of the Laurinbug  facility is also expected to
double upon completion in 1999 of a current plant expansion program.

         In 1996,  operations  outside the United States  provided 50 percent of
Phelps Dodge Industries' sales,  compared with 51 percent in 1995 and 48 percent
in 1994. During the year,  operations  outside the United States  contributed 57
percent of the  segment's  operating  income,  compared  with 53 percent in 1995
(after  excluding from U.S.  earnings the $26.8 million pre-tax gain on the sale
of Columbian Chemicals' MAPICO division) and 52 percent in 1994.

OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED OPERATIONS

The  Corporation's  1996  exploration and research and  development  expense was
$83.9  million,  compared  with $73.2 million in 1995 and $53.0 million in 1994.
The increase in 1996 primarily resulted from increased exploration  expenditures
at the Corporation's U.S. mining operations. The 1994 to 1995 increase primarily
resulted from increased spending for exploration in South and Central America.

         The Corporation reported net interest expense in 1996 of $66.1 million,
compared with $62.0 million in 1995 and $36.6  million in 1994.  Increased  1996
interest  expenses  principally  resulted  from a $5.9 million  interest  charge
resulting  from the 1996 Court  ordered  rescission  of a 1986 sale of property.
Increased 1995 net interest expense  principally  resulted from the cessation of
capitalization of interest costs for the Candelaria  project in Chile reflecting
the substantial  completion of  construction  and development in the 1994 fourth
quarter.  The 1995 increase also reflected  interest expense on second half 1994
borrowings  at  Candelaria,   and  interest  expense  on  increased   short-term
borrowings  at the  Corporation's  international  wire and cable  operations  to
finance working capital requirements. Included in the 1996 and 1995 amounts were
foreign currency exchange gains of $8.0 million and $8.1 million,  respectively,
reflecting  the  remeasurement  of  Venezuelan  local  currency debt after major
devaluations of the Bolivar.

         The  Corporation's  1996  miscellaneous  income,  net of  miscellaneous
expense,  was $40.7  million,  compared  with  $37.2  million  in 1995 and $11.3
million in 1994.  The increase in 1996  primarily  resulted  from an increase of
$2.8 million in dividends  received from the Corporation's 13.9 percent minority
interest in Southern  Peru Copper  Corporation.  The increase  from 1994 to 1995
primarily  resulted from higher  interest  income earned on cash and  short-term
investments.  Miscellaneous  income in 1995 also  included  an increase of $10.1
million in dividends received from Southern Peru Copper Corporation.

         For the year  ended  December  31,  1996,  the  Corporation  recorded a
provision for taxes of $220.0 million (an effective rate of  approximately  32.0
percent).  This compares with a 1995  provision for taxes of $322.7  million (an
effective  rate of  approximately  30.0 percent) and a 1994  provision of $104.7
million (an effective rate of  approximately  27.9 percent).  The 1996 effective
rate was higher than 1995  primarily due to the effect of a change in the income
mix between U.S.  and  international  operations.  The 1995  effective  rate was
higher than in 1994  primarily as a result of a decrease in the U.S. tax benefit
for percentage depletion. Despite higher average realized copper prices in 1995,
the benefit from the Corporation's  allowable deduction for percentage depletion
decreased  from  1994  due to the  first  full  year  of  operating  results  at
Candelaria  which are not subject to  percentage  depletion.  (See Note 6 to the
Consolidated  Financial  Statements for a  reconciliation  of the  Corporation's
effective tax rates to statutory rates.)

         The  Corporation's  federal income tax returns for the years 1992, 1993
and  1994  are  currently  under  examination.   The  Corporation  has  received
substantial  proposed  adjustments from the Internal Revenue Service relating to
the  Corporation's  federal income tax liability for the years 1990 and 1991 and
has filed a protest with the appropriate authorities.  These years are currently
under  consideration  by the appeals  division of the Internal  Revenue Service.
Management believes that it has made adequate provision so that final resolution
of the  issues  involved,  including  application  of  those  determinations  to
subsequent  open  years,  will  not  have  a  material  adverse  effect  on  the
consolidated  financial  condition or results of operations of the  Corporation.
However,  settlement  of these  issues could  involve  material tax and interest
payments  with  respect to the open  years,  a  substantial  part of which would
involve timing  differences.  The Corporation does not agree with these proposed
adjustments  and expects either to  substantially  settle them with the Internal
Revenue Service or litigate the issues involved.

         Under  current   financial   accounting   standards,   any  significant
year-to-year  movement  in the  rate  of  interest  on  long-term,  high-quality
corporate bonds necessitates a change in the discount rate used to calculate the
actuarial  present  value of the  Corporation's  accumulated  pension  and other
postretirement benefit obligations. The Corporation maintained its discount rate
at 7.25 percent at December 31, 1996,  as a result of long-term  interest  rates
staying at essentially the same rate as in 1995. Better-than-expected returns on
plan  assets  during  1996  increased  the excess of plan  assets  over  pension
liabilities  at  December  31,  1996.  Other  estimated  postretirement  benefit
obligations of the Corporation decreased by $6 million as a result of a decrease
in the assumed  annual rate of increase in the per capita cost of covered health
care  benefits  over the next 12 years  averaging  0.6 percent  per year.  For a
further  discussion  of these  issues,  see Notes 15 and 16 to the  Consolidated
Financial Statements.

CHANGES IN FINANCIAL CONDITION; CAPITALIZATION

At the end of 1996,  the  Corporation  had cash and  short-term  investments  of
$470.1  million,  compared with $608.5 million at the beginning of the year. The
Corporation's  operating  activities  provided $837.5 million of cash during the
year which was used along with a portion of existing  cash  balances to fund its
investing activities, dividend payments on its common stock and purchases of its
common stock.

         Investing  activities  during 1996  included  capital  expenditures  of
$513.0 million, compared with $404.9 million in 1995 and $355.0 million in 1994.
The  1996  capital  expenditures  included  $76  million  for the  expansion  of
Candelaria. Investing activities in 1996 also included approximately $35 million
for the acquisition of Nesor. The 1995 capital expenditures included $40 million
for certain mining  properties owned by Azco Mining,  Inc. and its subsidiaries,
comprising  the  Sanchez  property  in  southeastern  Arizona  and a 70  percent
interest in the Piedras Verdes property in Mexico.  Investing activities in 1995
also included cash proceeds of $45.0 million from the  divestiture  of Columbian
Chemicals  Company's  synthetic  iron oxide  facility  (MAPICO).  Investments in
subsidiaries in 1994 included the acquisition of two U.S. magnet wire facilities
for  approximately  $52 million and the  acquisition  of a carbon black plant in
Spain for approximately $25 million.  Investing activities in 1994 also included
cash  proceeds of $15.0 million from the  divestiture  of the  Corporation's  40
percent  interest in its Mexican  associate  company,  CONELEC S.A. de C.V., and
$8.0  million  from  the  issuance  of  shares  to a  minority  investor  in the
Corporation's majority-owned affiliate in Venezuela.

         The Corporation  expects  capital  outlays in 1997 to be  approximately
$500 million for Phelps  Dodge  Mining  Company  (including  approximately  $175
million for the Candelaria expansion project) and approximately $200 million for
Phelps  Dodge  Industries.  These  capital  outlays  will be  funded  from  cash
reserves, operating cash flow and from borrowings.

         The $3.0  million  increase in dividend  payments on the  Corporation's
common  shares,  from  $125.6  million  in  1995  to  $128.6  million  in  1996,
principally  resulted from an 11 percent increase in the quarterly dividend rate
in the 1996  second  quarter  (from 45 cents  per  common  share to 50 cents per
common  share),  partially  offset by the effect of the reduced number of common
shares outstanding.

         The Corporation  purchased  4,297,300 of its common shares in 1996 at a
total cost of $273.2 million. There were 64,711,000 common shares outstanding on
December 31, 1996. On March 6, 1996, the Corporation  announced that its current
share purchase  authorization had been increased from 5 million shares (buy back
program  authorized on March 7, 1995) to a total of 10 million  shares.  Through
March 6, 1997,  the  Corporation  purchased a total of  7,393,400  of its common
shares under the program,  leaving an additional 2,606,600 shares authorized for
purchase.  The Corporation will continue to make purchases in the open market as
circumstances  warrant,  and will also consider  purchasing  shares in privately
negotiated transactions.

         The  Corporation's  total debt was $659.3 million at December 31, 1996,
compared with $696.5 million at the end of 1995. Total debt decreased  primarily
as a result of the prepayment of Candelaria's Chilean peso-denominated debt (see
below). The ratio of total debt to total  capitalization was 18.8 percent at the
end of 1996, compared with 20.2 percent at the end of 1995.

         During  the  1995  second  quarter,  the  Corporation's  majority-owned
subsidiary,   Compania  Contractual  Minera  Candelaria  (CCMC),  satisfied  all
operating,  financial,  construction and legal tests and conditions as set forth
in the completion agreement associated with the $290.0 million project financing
of its Candelaria mine in Chile.  Borrowings under these debt facilities are now
non-recourse  to Phelps Dodge.  Financing  agreements  for the $290 million debt
were executed  during 1993. The debt carries a 13-year  maturity,  and comprises
$200 million of floating rate dollar-denominated debt, $60 million of fixed rate
dollar-denominated  debt,  and $30 million of floating rate debt  denominated in
Chilean pesos. This floating rate  peso-denominated debt was prepaid in December
1996 at a cost  of  $37.6  million  including  exchange  losses  and  prepayment
penalties. The agreements provide for a nine and one-half year repayment period,
starting in 1997. As the Corporation consolidates its interest in majority-owned
mining joint  ventures  using the  proportional  consolidation  method,  only 80
percent of this debt and related  financing  charges have been  reflected in the
Corporation's  consolidated  financial  statements.  The Corporation also caused
CCMC to enter into an interest rate protection  agreement with certain financial
institutions to limit the effect of increases in the cost of the $200 million of
floating rate dollar debt.  Under the terms of the  agreement,  the project will
receive  payments  from these  institutions  if the six-month  London  Interbank
Offered  Rate  (LIBOR)  exceeds 9 percent  prior to December  31,  2001,  and 11
percent during the two subsequent years ending December 31, 2003.

         In the 1997 first quarter,  CCMC entered into  agreements  with certain
lenders to provide up to $185 million of floating rate  dollar-denominated  debt
financing  for the  expansion of the  Candelaria  mine.  At the same time,  CCMC
entered into an agreement  with a lender to provide $30 million of floating rate
dollar-denominated  debt  financing to refinance  the Chilean peso debt that was
prepaid in December 1996. All of these borrowings will be non-recourse to Phelps
Dodge,  which  will  reflect  only 80  percent  of any  borrowings  and  related
financing   charges  under  these  agreements  in  its  consolidated   financial
statements.  The agreements  provide for a 10-year  repayment period starting in
1998.

         During 1993, the Corporation's  60-percent-owned  Hungarian subsidiary,
Columbian Tiszai Carbon Ltd. (CTC), borrowed $33.5 million under facilities from
the Overseas  Private  Investment  Corporation  (OPIC) and the European Bank for
Reconstruction and Development (EBRD) to finance  construction of a carbon black
manufacturing plant. Both facilities are without recourse to Columbian Chemicals
Company since the satisfaction of completion  agreements with the two lenders in
1996. In the 1997 first  quarter,  CTC  refinanced the loans with local banks at
more  advantageous  interest  rates and better terms.  These new  facilities are
without recourse to Columbian Chemicals Company.

         During  1994,  the  Corporation  issued  $81.1  million of  tax-exempt,
unsecured 5.45 percent obligations due in 2009. The proceeds from the issue were
used to retire the  Corporation's  5.75 percent to 6.25  percent  Series A and B
notes due in the years 1994 through 2004.

         An existing  revolving  credit  agreement  between the  Corporation and
several  lenders  was  amended on June 4, 1996.  The  agreement,  as amended and
restated,  permits  borrowings of up to $500 million from time to time until its
scheduled  maturity  on June 4, 2001.  The  agreement  allows  for two  one-year
renewals  beyond the  scheduled  maturity date if the  Corporation  requests and
receives approval from at least two-thirds of the lenders involved.  Interest is
payable at a  fluctuating  rate based on the agent  bank's prime rate or a fixed
rate, based on the Eurodollar  Interbank  Offered Rate or at fixed rates offered
independently by the several lenders,  for maturities of from seven to 360 days.
This agreement  provides for a facility fee of eight basis points (0.08 percent)
on total  commitments.  The  agreement  requires the  Corporation  to maintain a
minimum consolidated  tangible net worth of $1.1 billion and limits indebtedness
to 50 percent of total  consolidated  capitalization.  There were no  borrowings
under this agreement at either December 31, 1996, or December 31, 1995.

         The  Corporation  had other lines of credit  totaling $100.0 million at
December 31,  1996,  and December  31,  1995.  These  facilities  are subject to
agreement  as to  availability,  terms  and  amount.  There  were no  borrowings
outstanding under these lines of credit at either December 31, 1996, or December
31, 1995.

         The Corporation had $66.5 million in short-term borrowings,  all by its
international  operations,  at December 31, 1996, compared with $66.6 million at
December 31, 1995. The weighted  average  interest rate on this debt at December
31,  1996,   and  December  31,  1995,   was  15.3  percent  and  18.5  percent,
respectively.

         Accuride  Canada Inc.  has a revolving  credit  facility  that  permits
borrowings of up to U.S. $25.0 million.  Interest on these borrowings is payable
at a  fluctuating  rate based on the agent bank's Base Rate  Canada,  or a fixed
rate based on LIBOR,  for  maturities of one week to six months.  This facility,
which is subject to renewal  annually,  provides for a standby fee of one-eighth
of 1 percent of the $25.0 million.  There were no borrowings  outstanding  under
this facility at either December 31, 1996, or December 31, 1995.

         The current portion of the Corporation's  long-term debt, scheduled for
payment in 1997, is $38.2 million  including $14.0 million for its international
manufacturing  operations  and $24.2  million  primarily  for its  international
mining operations.

         During  1996,  decreases  in  current  assets  (exclusive  of cash  and
short-term  investments  and  adjustments  for foreign  currency  exchange  rate
changes)  together with increases in current  liabilities  (exclusive of current
debt and adjustments for foreign currency  exchange rate changes)  resulted in a
$64.0  million  decrease in net working  capital.  This  decrease in net working
capital resulted  principally from a $10.7 million decrease in prepaid expenses,
a $38.3 million  increase in accounts  payable and a $10.0  million  increase in
accrued  expenses.  The $10.7 million decrease in prepaid expenses was primarily
the result of decreases in hedging and  deferred  income for 1997 first  quarter
copper price protection  contracts that were sold during the 1996 third quarter.
The $38.3 million increase in accounts payable was attributable to timing of raw
materials and equipment purchases.  The accrued expense increase was primarily a
result of accruals for contractor expenses for the Candelaria expansion project.

         During  1995,  increases  in  current  assets  (exclusive  of cash  and
short-term  investments  and  adjustments  for foreign  currency  exchange  rate
changes)  together with decreases in current  liabilities  (exclusive of current
debt and adjustments for foreign currency  exchange rate changes) resulted in an
$84.2  million  increase  in net  working  capital.  This  increase  principally
resulted  from a $55.5  million  decrease in accounts  payable,  a $29.5 million
decrease in accrued income taxes, a $15.8 million increase in inventories and an
$11.9 million increase in supplies, partially offset by a $36.8 million increase
in accrued  expenses.  The $55.5 million decrease in accounts payable  primarily
resulted from lower copper  concentrate  purchase  requirements  by Phelps Dodge
Mining Company's smelter  operations and the timing of raw material purchases by
the Phelps Dodge  Industries  businesses.  The $29.5 million decrease in accrued
income  taxes  was  principally  the  result of  approximately  $22  million  in
additional  federal  income  taxes  paid in the first  quarter  of 1995 with the
Corporation's  1994 income tax return. The $15.8 million increase in inventories
was attributable to higher inventories of copper at Phelps Dodge Mining Company,
partially offset by lower inventories at Accuride. The $11.9 million increase in
supplies was the result of  increases  at  Candelaria  and  Accuride.  The $36.8
million increase in accrued expenses primarily resulted from higher accruals for
copper  conversion and freight charges and accruals for certain costs associated
with higher copper prices at Phelps Dodge Mining Company (higher  conversion and
freight accruals are due to the higher copper  inventory  balances at the end of
1995),  and an  increase  in  the  current  portion  of  Corporate-wide  pension
liabilities  due to an increase in expected plan funding in 1996  resulting from
certain  provisions  of the recently  enacted  General  Agreement on Tariffs and
Trade (GATT).

         The  Corporation is subject to federal,  state and local  environmental
laws, rules and regulations, including the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA or Superfund),  as amended by the
Superfund  Amendments and  Reauthorization  Act of 1986.  Under  Superfund,  the
Environmental  Protection Agency (EPA) has identified approximately 35,000 sites
throughout the United States for review,  ranking and possible  inclusion on the
National   Priorities  List  (NPL)  for  possible  response.   Among  the  sites
identified, EPA has included 13 sites owned by the Corporation.  The Corporation
believes that most, if not all, of its sites so identified  will not qualify for
listing on the NPL.

         In addition,  the Corporation may be required to remove hazardous waste
or remediate  the alleged  effects of hazardous  substances  on the  environment
associated with past disposal  practices at sites not owned by the  Corporation.
The Corporation has received notice that it is a potentially  responsible  party
from EPA and/or  individual  states  under CERCLA or a state  equivalent  and is
participating in environmental  assessment and remediation activity at 37 sites.
For further information about these proceedings,  see Item 3. Legal Proceedings,
Part III.

         The 1990 Amendments to the federal Clean Air Act require EPA to develop
and  implement  many new  requirements,  and they allow states to establish  new
programs to implement some of the new requirements, such as the requirements for
operating  permits  under  Title V of the  1990  Amendments  and  hazardous  air
pollutants  under  Title  III of the 1990  Amendments.  Because  EPA has not yet
adopted or implemented all of the changes required by Congress,  the air quality
laws will  continue  to expand and change in coming  years as EPA  develops  new
requirements  and then  implements  them or allows the states to implement them.
Nevertheless,  most  states  have made or are in the  process of making  certain
required changes to their laws regarding Title V. In response to these new laws,
several of the Corporation's  subsidiaries  already have submitted or are in the
process of preparing  applications for Title V operating permits. These programs
will likely  increase the  Corporation's  regulatory  obligations and compliance
costs.  These costs could include  implementation of maximum  achievable control
technology for any of the  Corporation's  facilities  that is determined to be a
major source of federal hazardous air pollutants. Until more of the implementing
regulations are adopted, and more experience with the new programs is gained, it
is not  possible  to  determine  the  impact  of  the  new  requirements  on the
Corporation.

         At December 31, 1996,  the  Corporation  had reserves of $117.0 million
for   remediation   of  certain  of  the  sites  referred  to  above  and  other
environmental  costs in  accordance  with its policy to record  liabilities  for
environmental  expenditures  when it is  probable  that  obligations  have  been
incurred and the costs reasonably can be estimated.  The Corporation's estimates
of these costs are based upon currently  available facts,  existing  technology,
and presently enacted laws and regulations.  Where the available  information is
sufficient  to estimate the amount of  liability,  that  estimate has been used;
where the  information  is only  sufficient  to  establish  a range of  probable
liability and no point within the range is more likely than any other, the lower
end of the range has been used.

         The amounts of the  Corporation's  liabilities for remedial  activities
are very  difficult to estimate due to such factors as the unknown extent of the
remedial actions that may be required and, in the case of sites not owned by the
Corporation,  the unknown  extent of the  Corporation's  probable  liability  in
proportion  to the probable  liability of other  parties.  The  Corporation  has
probable  environmental  liabilities  that in its judgment cannot  reasonably be
estimated,  and losses attributable to remediation costs are reasonably possible
at other sites. The Corporation cannot now estimate the total additional loss it
may  incur  for  such  environmental   liabilities,   but  such  loss  could  be
substantial.

         The  possibility of recovery of some of the  environmental  remediation
costs from insurance companies or other parties exists; however, the Corporation
does not  recognize  these  recoveries in its  financial  statements  until they
become probable.

         The Corporation's  operations are subject to myriad  environmental laws
and  regulations  in  jurisdictions  both  in the  United  States  and in  other
countries in which it does  business.  For further  discussion of these laws and
regulations,  please  see  "Environmental  and  Other  Regulatory  Matters"  and
"Environmental  Matters" in Part I, Items 1 and 2 of this report.  The estimates
given in those  discussions of the capital  expenditures  for programs to comply
with  applicable  environmental  laws and  regulations in 1997 and 1998, and the
expenditures  for those  programs in 1996,  are  separate  from the reserves and
estimates described above.

         On December 23, 1994,  Chino Mines Company  (CMC),  which is two-thirds
owned by Phelps Dodge  Corporation  and is located near Silver City, New Mexico,
entered  into an  Administrative  Order on  Consent  (AOC)  with the New  Mexico
Environment  Department that will require CMC to study the environmental impacts
and potential health risks associated with portions of the CMC property affected
by historical mining  operations.  Phelps Dodge acquired CMC at the end of 1986.
Those studies  began in 1995 and,  until  completed,  it will not be possible to
determine the nature,  extent,  cost,  and timing of remedial work which will be
required under the AOC, although remedial work is expected to be required.

         In  1993  and  1994,   the  New   Mexico  and   Arizona   legislatures,
respectively,  passed laws  requiring  the  reclamation  of mined lands in those
states.  The New  Mexico  Mining  Commission  adopted  rules for the New  Mexico
program  during 1994,  and the  Corporation's  operations  began  submitting the
required permit  applications in December 1994. The Arizona State Mine Inspector
adopted  rules for the Arizona  program in January 1997,  and the  Corporation's
operations are expected to begin  submitting the required  reclamation  plans in
March 1997.  These laws and regulations  will likely increase the  Corporation's
regulatory  obligations  and  compliance  costs with respect to mine closure and
reclamation.  At this time, it is not possible to quantify the impact of the new
laws and regulations on the Corporation.

         In  1995,  legislation  was  introduced  in  both  the  U.S.  House  of
Representatives and the U.S. Senate to amend the Mining Law of 1872. None of the
bills was enacted into law. Also,  mining law amendments  were added to the 1996
budget  reconciliation  bill,  which was vetoed by the  President.  Among  other
things, the amendments contained in the 1996 bill would have imposed a 5 percent
net proceeds royalty on minerals extracted from federal lands,  required payment
of fair market value for  patenting  federal  lands,  and required that patented
lands used for non-mining purposes revert to the federal government.  Several of
these same concepts likely will be pursued  legislatively in 1997. The Secretary
of the Interior also  recently  ordered the Bureau of Land  Management  (BLM) to
form a task force to review BLM's hardrock mining surface management regulations
and propose  revisions to expand  environmental  and  reclamation  requirements,
among other things.  While the effect of such changes on Phelps Dodge's  current
operations and other currently owned mineral resources on private lands would be
minimal,  passage of the amendments  would result in additional  expenses in the
development and operation of new mines on federal lands.

CAPITAL OUTLAYS

The Corporation's  capital outlays in each of the past three years are set forth
in the  following  table.  These capital  outlays are  exclusive of  capitalized
interest and the portions of the  expenditures at Morenci,  Chino and Candelaria
payable by minority interest holders.

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

                                                 1996        1995       1994
                                                 ----        ----       ----
                                                  (millions of dollars)

Phelps Dodge Mining Company:
  Southside project (Morenci mine)        $       5.8       112.6       49.6
  Azco acquisition                                  -        40.2          -
  Candelaria                                     89.5        15.1      137.9
  Other                                         234.9       153.7      111.7
                                              -------     -------    -------
                                                330.2       321.6      299.2
Phelps Dodge Industries                         179.6        82.3       55.1
Corporate and other                               3.2         1.0        0.7
                                              -------     -------    -------
                                          $     513.0       404.9      355.0
                                              =======     =======    =======

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

INFLATION

During the last three years, the principal impact of general  inflation upon the
financial  results  of the  Corporation  has  been  on  unit  production  costs,
especially supply costs, at the Corporation's mining and industrial  operations.
In  considering  the impact of changing  prices on the financial  results of the
Corporation,  it is  important  to  recognize  that  the  selling  price  of the
Corporation's principal product,  copper, does not necessarily parallel the rate
of inflation or deflation.
<PAGE>
DIVIDENDS AND MARKET PRICE RANGES

Phelps  Dodge's  common  shares are listed on the New York Stock  Exchange,  the
principal  market on which they are traded.  At March 6, 1997, there were 10,999
holders of record of the  Corporation's  common  shares.  The  Corporation  paid
quarterly  dividends  of 41.25  cents on each  common  share for the first three
quarters  of 1994.  In the 1994  fourth  quarter,  the  quarterly  dividend  was
increased 9 percent to 45 cents on each common share and  continued at that rate
until the 1996 second  quarter when the  quarterly  dividend was increased by 11
percent to 50 cents on each common share.

         The table below sets forth the high,  low and closing prices per common
share (composite quotation) in the periods indicated.

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

Market Price Ranges *

                                          High            Low           Close
                                          ----            ----           ----
1996:
 First Quarter                      $     69.88           56.25          69.00
 Second Quarter                           77.63           61.13          62.25
 Third Quarter                            64.88           54.63          64.13
 Fourth Quarter                           74.25           61.38          67.50

1995:
 First Quarter                      $     63.00           51.88          56.88
 Second Quarter                           60.25           52.50          59.00
 Third Quarter                            70.50           58.50          62.75
 Fourth Quarter                           69.50           59.75          62.25

1994:
 First Quarter                      $     59.50           47.63          52.25
 Second Quarter                           60.88           50.50          57.00
 Third Quarter                            65.00           55.88          62.00
 Fourth Quarter                           64.00           54.38          61.88

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

* The market price ranges reflect actual share prices as reported for each day's
  trading.

--------------------------------------------------------------------------------
<PAGE>
QUARTERLY FINANCIAL DATA
(In millions except per common share amounts)

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

                                          First     Second     Third     Fourth
                                         Quarter    Quarter    Quarter   Quarter
                                         -------    -------    -------   -------
1996 (a)

 Sales and other operating revenues   $  1,004.7     957.7     853.6     970.6

 Operating income                          229.8     195.5     126.7     160.9

 Net income                                153.1     126.3      80.2     102.2

 Net income per common share                2.26      1.90      1.22      1.57

1995 (b)

 Sales and other operating revenues   $  1,033.5   1,024.2   1,076.7   1,051.0

 Operating income                          271.3     239.1     311.4     278.7

 Net income                                185.3     159.5     211.8     190.0

 Net income per common share                2.61      2.28      3.03      2.73

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

         (a)      Operating  income in the 1996 fourth quarter  included a $10.0
                  million pre-tax charge resulting from a reclamation  provision
                  related  to the  Court  ordered  rescission  of a 1986 sale of
                  property.  The  loss on  this  rescission,  including  related
                  interest,  was  $10.7  million  after  taxes,  or 16 cents per
                  common share.

         (b)      Operating  income in the 1995 first  quarter  included a $26.8
                  million  pre-tax  gain  from the sale of  Columbian  Chemicals
                  Company's  MAPICO  division.  MAPICO  produced  synthetic iron
                  oxides at a plant in St. Louis,  Missouri,  and was peripheral
                  to Columbian's  core  business.  The gain on the sale of these
                  assets was $16.6 million  after taxes,  or 24 cents per common
                  share.

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------


PHELPS DODGE CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

         The  consolidated  balance sheet at December 31, 1996 and 1995, and the
related  consolidated  statements  of  income,  of  cash  flows  and  of  common
shareholders'  equity for each of the three years in the period  ended  December
31,  1996,  and  notes  thereto,  together  with  the  report  thereon  of Price
Waterhouse LLP dated January 15, 1997,  follow.  The  additional  financial data
referred to below should be read in conjunction with these financial statements.
Schedules not included with these  additional  financial  data have been omitted
because  they are not  applicable  or the required  information  is shown in the
financial  statements or notes thereto.  The individual  financial statements of
the  Corporation  have been  omitted  because the  Corporation  is  primarily an
operating  company and all subsidiaries  included in the consolidated  financial
statements,  in the  aggregate,  do not have minority  equity  interests  and/or
indebtedness  to any  person  other  than the  Corporation  or its  consolidated
subsidiaries  in amounts which together  exceed 5 percent of total  consolidated
assets at December 31, 1996.  Separate financial  statements of subsidiaries not
consolidated  and 50 percent or less owned  persons  accounted for by the equity
method, other than those for which summarized financial  information is provided
in Note 3 to the Consolidated  Financial Statements,  have been omitted because,
if considered in the aggregate,  such  subsidiaries and 50 percent or less owned
affiliates would not constitute a significant subsidiary.


                            ADDITIONAL FINANCIAL DATA

Financial  statement  schedule for the years ended  December 31, 1996,  1995 and
1994:

VIII - Valuation and qualifying accounts and reserves.


REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of Phelps Dodge Corporation

Our audits of the consolidated  financial  statements  referred to in our report
dated January 15, 1997 appearing in this Form 10-K also included an audit of the
Financial  Statement  Schedule listed in the foregoing index titled  "Additional
Financial  Data." In our opinion,  this Financial  Statement  Schedule  presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

PRICE WATERHOUSE LLP

Phoenix, Arizona
January 15, 1997

REPORT OF MANAGEMENT

The  management of Phelps Dodge  Corporation  is  responsible  for preparing the
consolidated  financial statements presented in this annual report and for their
integrity and objectivity.  The statements have been prepared in accordance with
generally accepted accounting principles  appropriate in the circumstances,  and
include  amounts that are based on  management's  best  estimates and judgments.
Management also has prepared the other  information in this annual report and is
responsible for its accuracy and consistency with the financial statements.

         Management maintains a system of internal controls,  including internal
accounting controls, which in management's opinion provides reasonable assurance
that assets are  safeguarded  and that  transactions  are properly  recorded and
executed in accordance  with  management's  authorization.  The system  includes
formal  policies  and  procedures  that  are   communicated  to  employees  with
significant  roles in the financial  reporting process and updated as necessary.
The system  also  includes  the careful  selection  and  training  of  qualified
personnel, an organization that provides a segregation of responsibilities and a
program of internal  audits that  independently  assesses the  effectiveness  of
internal controls and recommends possible improvements.

         The  Audit  Committee,   currently   consisting  of  five  non-employee
directors,  meets at least  three times a year to review,  among other  matters,
internal  control  conditions and internal and external audit plans and results.
It meets  periodically  with senior officers,  internal auditors and independent
accountants  to  review  the  adequacy  and  reliability  of  the  Corporation's
accounting, financial reporting and internal controls.

         The consolidated  financial  statements have also been audited by Price
Waterhouse LLP, our independent  accountants,  whose appointment was ratified by
the  shareholders.  The Price  Waterhouse LLP  examination  included a study and
evaluation  of internal  accounting  controls to  establish a basis for reliance
thereon in determining  the nature,  extent and timing of audit tests applied in
the examination of the financial statements.

         Management  also recognizes its  responsibility  for fostering a strong
ethical climate so that the Corporation's affairs are conducted according to the
highest  standards of personal and corporate  conduct.  This  responsibility  is
characterized  and reflected in the  Corporation's  code of business  ethics and
policies,  which is distributed throughout the Corporation.  The code of conduct
addresses,  among other things,  the  necessity of ensuring  open  communication
within the  Corporation;  potential  conflicts of interest;  compliance with all
applicable  laws,  including  those  relating to financial  disclosure;  and the
confidentiality  of  proprietary   information.   The  Corporation  maintains  a
systematic program to assess compliance with these policies.
<PAGE>
<AUDIT-REPORT>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Phelps Dodge Corporation

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

PRICE WATERHOUSE LLP

Phoenix, Arizona
January 15, 1997
</AUDIT-REPORT>
<PAGE>
STATEMENT OF CONSOLIDATED INCOME
--------------------------------
(In thousands except per share data)

                                              1996          1995         1994
                                              ----          ----         ----

SALES AND OTHER OPERATING REVENUES       $  3,786,600    4,185,400    3,289,200
                                            ---------    ---------    ---------
OPERATING COSTS AND EXPENSES
 Cost of products sold                      2,604,400    2,691,400    2,375,700
 Depreciation, depletion and
  amortization                                249,500      223,500      195,300
 Selling and general administrative
  expense                                     125,900      123,600      107,100
 Exploration and research expense              83,900       73,200       53,000
 Provision for environmental costs,
  reclamation costs, and (gains)
   losses on asset dispositions                10,000     (26,800)      157,700
                                            ---------    ---------    ---------
                                            3,073,700    3,084,900    2,888,800
                                            ---------    ---------    ---------
OPERATING INCOME                              712,900    1,100,500      400,400
 Interest expense                             (68,000)     (65,100)     (57,300)
 Capitalized interest                           1,900        3,100       20,700
 Miscellaneous income and expense, net         40,700       37,200       11,300
                                            ---------    ---------    ---------
INCOME BEFORE TAXES, MINORITY
 INTERESTS AND EQUITY IN NET EARNINGS
 OF AFFILIATED COMPANIES                      687,500    1,075,700      375,100
 Provision for taxes                         (220,000)    (322,700)    (104,700)
 Minority interests in consolidated
  subsidiaries                                (16,200)     (12,900)      (8,000)
 Equity in net earnings of affiliated
  companies                                    10,500        6,500        8,600
                                            ---------    ---------    ---------
NET INCOME                               $    461,800      746,600      271,000
                                            =========    =========    =========


EARNINGS PER SHARE                       $       6.97        10.65         3.81



AVERAGE NUMBER OF SHARES OUTSTANDING           66,300       70,100       71,100


See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED BALANCE SHEET
--------------------------
(In thousands except per share values)
                                                      December        December
                                                         31,             31,
                                                        1996            1995
                                                        ----            ----

ASSETS
 Current assets:
  Cash and short-term investments, at cost        $      470,100       608,500
  Accounts receivable, less allowance for
   doubtful accounts (1996 - $14,200;
    1995 - $12,000)                                      489,100       483,700
  Inventories                                            293,000       281,500
  Supplies                                               117,000       121,400
  Prepaid expenses                                         6,100        15,500
  Deferred income taxes                                   46,200        44,600
                                                       ---------     ---------
   Current assets                                      1,421,500     1,555,200
  Investments and long-term accounts receivable           86,400        79,000
  Property, plant and equipment, net                   3,020,500     2,728,700
  Other assets and deferred charges                      288,000       283,000
                                                       ---------     ---------
                                                  $    4,816,400     4,645,900
                                                       =========     =========

LIABILITIES
 Current liabilities:
  Short-term debt                                 $       66,500        66,600
  Current portion of long-term debt                       38,200        16,800
  Accounts payable and accrued expenses                  564,900       504,800
  Income taxes                                            16,300        16,800
                                                       ---------     ---------
   Current liabilities                                   685,900       605,000
  Long-term debt                                         554,600       613,100
  Deferred income taxes                                  424,900       358,100
  Other liabilities and deferred credits                 309,600       318,700
                                                       ---------     ---------
                                                       1,975,000     1,894,900
                                                       ---------     ---------
COMMITMENTS AND CONTINGENCIES
 (SEE NOTES 17 AND 18)

MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES           85,500        73,300
                                                       ---------     ---------
COMMON SHAREHOLDERS' EQUITY
 Common shares, par value $6.25; 100,000
   shares authorized; 64,711 outstanding
   (1995 - 68,593) after deducting 10,478 shares
   (1995 - 6,595) held in treasury                       404,400       428,700
 Retained earnings                                     2,465,000     2,360,100
 Cumulative translation adjustments                      (98,800)      (93,900)
 Other                                                   (14,700)      (17,200)
                                                       ---------     ---------
                                                       2,755,900     2,677,700
                                                       ---------     ---------
                                                  $    4,816,400     4,645,900
                                                       =========     =========

See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(In thousands)

                                                 1996        1995         1994
                                                 ----        ----         ----

OPERATING ACTIVITIES
 Net income                              $    461,800     746,600      271,000
 Adjustments to reconcile net income
  to net cash provided by operating
  activities:
  Depreciation, depletion and
   amortization                               249,500     223,500      195,300
  Deferred income taxes                        61,900     107,600      (28,300)
  Equity earnings net of dividends
   received                                    (3,800)       (400)      (4,400)
  Provision for environmental costs 
   and asset dispositions                           -           -      140,200
  Changes in current assets and
   liabilities:
    (Increase) decrease in accounts
     receivable                                (6,200)     (2,300)    (138,600)
    (Increase) decrease in inventories          3,600     (15,800)     (35,400)
    (Increase) decrease in supplies             3,800     (11,900)       1,600
    (Increase) decrease in prepaid
     expenses                                  10,700         100       (3,400)
    (Increase) decrease in deferred
     income taxes                              (1,800)     (6,000)      (3,200)
    Increase (decrease) in interest
     payable                                    5,900        (100)         500
    Increase (decrease) in other
     accounts payable                          38,300     (55,500)      88,200
    Increase (decrease) in income
     taxes                                       (300)    (29,500)      32,200
    Increase (decrease) in other
     accrued expenses                          10,000      36,800       22,100
  (Gains) losses on asset dispositions              -     (26,800)      17,500
  Other adjustments, net                        4,100      (7,300)     (12,700)
                                            ---------   ---------    ---------
    Net cash provided by operating
     activities                               837,500     959,000      542,600
                                            ---------   ---------    ---------
INVESTING ACTIVITIES
 Capital outlays                             (513,000)   (404,900)    (355,000)
 Capitalized interest                          (1,900)     (3,100)     (20,700)
 Investment in subsidiaries                   (47,400)       (300)     (77,300)
 Proceeds from asset sales                      5,000      40,900       19,300
 Other                                              -           -        7,200
                                            ---------   ---------    ---------
    Net cash used in investing
     activities                              (557,300)   (367,400)    (426,500)
                                            ---------   ---------    ---------
FINANCING ACTIVITIES
 Increase in debt                              16,100      30,800      185,600
 Payment of debt                              (54,100)    (22,800)    (137,100)
 Common dividends                            (128,600)   (125,600)    (119,200)
 Purchase of common shares                   (273,200)   (162,700)      (3,900)
 Debt issue costs                                   -           -       (7,500)
 Other                                         21,200      10,300       (2,900)
                                            ---------   ---------    ---------
    Net cash used in financing
     activities                              (418,600)   (270,000)     (85,000)
                                            ---------   ---------    ---------
INCREASE (DECREASE) IN CASH AND
 SHORT-TERM INVESTMENTS                      (138,400)    321,600       31,100
CASH AND SHORT-TERM INVESTMENTS AT
 BEGINNING OF YEAR                            608,500     286,900      255,800
                                            ---------   ---------    ---------
CASH AND SHORT-TERM INVESTMENTS AT END
 OF YEAR                                 $    470,100     608,500      286,900
                                            =========   =========    =========

See Notes to Consolidated Financial Statements.
<PAGE>
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
                                        Common Shares                              Cumulative
                                        -------------    Capital in               Translation       Common
                                     Number       At Par Excess of    Retained    Adjustments    Shareholders'
                                   of Shares      Value  Par Value    Earnings     and Other        Equity
                                   ---------      -----  ---------    --------     ---------        ------
<S>                                 <C>         <C>      <C>           <C>         <C>            <C>       
BALANCE AT DECEMBER 31, 1993        70,531      $440,800    $83,100    $1,618,500   ($120,300)     $2,022,100
  Stock options exercised              216         1,400        700                                     2,100
  Tax benefit from stock options                              3,900                                     3,900
  Common shares purchased              (76)         (500)    (3,400)                                   (3,900)
  Restricted shares issued, net         14           100        700                        700          1,500
  Restricted shares terminated         (13)         (100)      (500)                       600              -
  Net income                                                              271,000                     271,000
  Dividends on common shares                                             (119,200)                   (119,200)
  Translation adjustment                                                                 7,400          7,400
  Additional pension liability                                                           3,000          3,000
  Other                                                                                   (300)          (300)
                                    ------      --------  ---------   -----------   ----------    -----------
BALANCE AT DECEMBER 31, 1994        70,672       441,700     84,500     1,770,300     (108,900)     2,187,600
  Stock options exercised              455         2,800     10,000                                    12,800
  Tax benefit from stock options                              6,100                                     6,100
  Common shares purchased           (2,761)      (17,300)  (114,200)      (31,200)                   (162,700)
  Restricted shares issued, net        186         1,200     11,200                    (10,800)         1,600
  Employee stock bonus award            41           300      2,400                                     2,700
  Net income                                                              746,600                     746,600
  Dividends on common shares                                             (125,600)                   (125,600)
  Translation adjustment                                                                  (100)          (100)
  Additional pension liability                                                           8,000          8,000
  Other                                                                                    700            700
                                    ------      --------  ---------   -----------   ----------    -----------
BALANCE AT DECEMBER 31, 1995        68,593       428,700          -     2,360,100    (111,100)      2,677,700
  Stock options exercised              408         2,600                   12,000                      14,600
  Tax benefit from stock options                                            5,500                       5,500
  Common shares purchased           (4,297)      (26,900)                (246,300)                   (273,200)
  Restricted shares issued, net          7             -                      500        1,200          1,700
  Net income                                                              461,800                     461,800
  Dividends on common shares                                             (128,600)                   (128,600)
  Translation adjustment                                                                (4,900)        (4,900)
  Additional pension liability                                                           1,000          1,000
  Other                                                                                    300            300
                                    ------      --------  ---------   -----------   ----------    -----------
BALANCE AT DECEMBER 31, 1996        64,711      $404,400  $       -    $2,465,000   ($113,500)     $2,755,900
                                    ======      ========  =========   ===========   ==========    ===========

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Dollar amounts in tables stated in thousands except as noted)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of  Consolidation.  The  consolidated  financial  statements  include  the
accounts of the Corporation and its  majority-owned  subsidiaries.  Interests in
mining  joint  ventures in which the  Corporation  owns more than 50 percent are
reported  using  the  proportional  consolidation  method.  Interests  in  other
majority-owned  subsidiaries are reported using the full  consolidation  method;
the  consolidated  financial  statements  include  100 percent of the assets and
liabilities  of these  subsidiaries  and the  ownership  interests  of  minority
participants are recorded as "Minority interests in consolidated  subsidiaries."
All material intercompany balances and transactions are eliminated.

         Investments in  unconsolidated  companies  owned 20 percent or more are
recorded on an equity basis. Investments in companies less than 20 percent owned
are carried at cost.

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

Foreign Currency Translation.  Except as noted below, the assets and liabilities
of foreign  subsidiaries are translated at current exchange rates while revenues
and  expenses  are  translated  at average  rates in effect for the period.  The
related  translation  gains and losses are  included in a separate  component of
common shareholders'  equity. For the translation of the financial statements of
certain foreign subsidiaries dealing predominantly in U.S. dollars and for those
affiliates  operating in highly inflationary  economies,  assets and liabilities
receivable or payable in cash are  translated  at current  exchange  rates,  and
inventories  and other  non-monetary  assets and  liabilities  are translated at
historical rates.  Gains and losses resulting from translation of such financial
statements are included in operating  results,  as are gains and losses incurred
on foreign currency transactions.

Statement of Cash Flows. For the purpose of preparing the Consolidated Statement
of Cash Flows,  the Corporation  considers all highly liquid  investments with a
maturity of three months or less when purchased to be cash equivalents.

Inventories  and Supplies.  Inventories  and supplies are stated at the lower of
cost or market.  Cost for  substantially  all  inventories  is determined by the
last-in,  first-out  method  (LIFO).  Cost for  substantially  all  supplies  is
determined by a moving-average method.

Property,  Plant and  Equipment.  Property,  plant and  equipment are carried at
cost. Cost of significant assets includes  capitalized  interest incurred during
the  construction  and development  period.  Expenditures  for  replacements and
betterments are capitalized;  maintenance and repair expenditures are charged to
operations as incurred.

         The  principal  depreciation  method  used  for  mining,  smelting  and
refining  operations is the units of production method applied on a group basis.
Buildings,  machinery and equipment for other  operations are depreciated  using
the  straight-line  method  over  estimated  lives of five to 40  years,  or the
estimated life of the operation if shorter.  Upon disposal of assets depreciated
on a group basis, cost less salvage is charged to accumulated depreciation.

         Values for mining  properties  represent  mainly  acquisition  costs or
pre-1932 engineering valuations.  Depletion of mines is computed on the basis of
an overall unit rate applied to the pounds of principal  products sold from mine
production.

         Mine exploration costs and development costs to maintain  production of
operating  mines  are  charged  to  operations  as  incurred.  Mine  development
expenditures at new mines and major development  expenditures at operating mines
that are expected to benefit future  production are capitalized and amortized on
the units of  production  method  over the  estimated  commercially  recoverable
minerals.

Environmental   Expenditures.   Environmental   expenditures   are  expensed  or
capitalized depending upon their future economic benefits.  Liabilities for such
expenditures  are  recorded  when it is  probable  that  obligations  have  been
incurred and the costs reasonably can be estimated.  The Corporation's estimates
of these costs are based upon currently  available facts,  existing  technology,
and presently enacted laws and regulations.  Where the available  information is
sufficient  to estimate the amount of  liability,  that  estimate has been used;
where the  information  is only  sufficient  to  establish  a range of  probable
liability and no point within the range is more likely than any other, the lower
end of the range has been used.  The  possibility  of  recovery of some of these
costs from insurance companies or other parties exists; however, the Corporation
does not  recognize  these  recoveries in its  financial  statements  until they
become probable.

Goodwill. Included in "Other assets and deferred charges" are costs in excess of
the net  assets  of  businesses  acquired.  These  amounts  are  amortized  on a
straight-line  basis over periods of 15 to 40 years.  The Corporation  evaluates
for  impairment  its long-term  assets to be held and used and its  identifiable
intangible assets when events or changes in economic  circumstances indicate the
carrying  amount of such assets may not be recoverable.  Long-term  assets to be
disposed  of are  carried  at the lower of cost or fair  value less the costs of
disposal.

Hedging  Programs.  The Corporation  does not acquire,  hold or issue derivative
financial instruments for trading purposes. Derivative financial instruments are
used to manage well-defined commodity price and foreign exchange risks.

         Depending on market  circumstances,  the Corporation  may  periodically
purchase or sell various copper option contracts to mitigate the risk of adverse
price fluctuations on a portion of its copper production.  Any net premiums paid
on purchased  option  contracts  that guarantee a minimum price over a specified
period  are  initially  recorded  as  prepaid  assets  and then  amortized  on a
straight-line  basis over the hedge  protection  period.  Gains and losses  from
option contracts that effectively  establish price ranges for future  production
are  recognized in income at the maturity of the option  contract.  Any premiums
received on the sale of option  contracts are recorded as accrued expenses until
the  maturity of the option  contract  when the premium  received is recorded as
income.

         The  Corporation's  objective  and  practice is to sell its copper at a
price based on the New York  Commodity  Exchange  (COMEX)  average  price in the
month  of  shipment.  However,  a few  customers  request  a firm  price as of a
specified date prior to or during the month of shipment.  In such  transactions,
the  Corporation  usually hedges such sales  commitments by entering into copper
futures and copper swap contracts that  approximate the shipment  quantities and
periods.  The copper futures  contracts are then liquidated  during the month of
shipment which generally results in the realization of the COMEX average monthly
price for copper  shipped.  Swap  contracts  are  settled  at the COMEX  average
monthly price in the month copper is shipped. Gains and losses on copper futures
and copper swap contracts are recognized in income when the underlying  exposure
is recognized or when a previous firm commitment is no longer expected to occur.

         The Corporation  periodically enters into forward exchange and currency
option  contracts to hedge certain recorded  transactions,  firm commitments and
other anticipated transactions denominated in foreign currencies.  The objective
of  the  Corporation's  foreign  currency  hedging  program  is to  protect  the
Corporation  from the risk  that  the  eventual  equivalent  dollar  cash  flows
resulting from transactions  denominated in foreign currencies will be adversely
affected by changes in exchange  rates.  The carrying  value of premiums paid on
currency option contracts and unrecognized  gains and losses on forward exchange
contracts are recorded as prepaid assets,  while recognized gains and losses are
recorded as  miscellaneous  income or expense items.  Gains and losses on option
contracts  that qualify as hedges are  recognized in income when the  underlying
hedged transaction is recognized or when a previously anticipated transaction is
no  longer  expected  to occur.  Changes  in market  value of  forward  exchange
contracts and certain option contracts protecting  anticipated  transactions are
recognized in the period incurred.

         The  Corporation  may enter into  interest  rate hedging  agreements to
limit the effect of increases in the interest  rates on floating rate debt.  The
costs associated with such agreements are amortized to interest expense over the
term of the agreement.

Stock  Compensation.  The  Corporation  elected  early  adoption of Statement of
Financial  Accounting  Standards  (SFAS) No. 123,  "Accounting  for  Stock-Based
Compensation"  in 1995. In accordance  with the  provisions of SFAS No. 123, the
Corporation applies APB Opinion 25 and related Interpretations in accounting for
its stock option plans and, accordingly,  does not recognize  compensation cost.
Note 14 to the Consolidated  Financial  Statements contains a summary of the pro
forma  effects to reported net income and earnings per share for 1996,  1995 and
1994 if the Corporation had elected to recognize  compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS No. 123.

Income Taxes. In addition to charging income for taxes actually paid or payable,
the provision for taxes reflects deferred income taxes resulting from changes in
temporary  differences between the tax bases of assets and liabilities and their
reported  amounts in the  financial  statements.  The effect on deferred  income
taxes of a change  in tax rates is  recognized  in  income  in the  period  that
includes the enactment date.

Pension Plans.  The  Corporation  has trusteed,  non-contributory  pension plans
covering  substantially all of its U.S. employees and in some cases employees of
international  subsidiaries.  The  benefits are based on, in the case of certain
plans,  final  average  salary  and years of service  and,  in the case of other
plans, a fixed amount for each year of service. The Corporation's funding policy
provides  that  payments  to the pension  trusts  shall be at least equal to the
minimum funding  requirements of the Employee  Retirement Income Security Act of
1974 for U.S. plans or, in the case of international  subsidiaries,  the minimum
legal requirements in that particular  country.  Additional payments may also be
provided by the Corporation from time to time.

Postretirement  Benefits  Other  Than  Pensions.  The  Corporation  has  several
postretirement health care and life insurance benefit plans covering most of its
U.S.  employees  and in some  cases  employees  of  international  subsidiaries.
Postretirement  benefits vary among plans and many plans  require  contributions
from employees. The Corporation accounts for these benefits on an accrual basis.
The Corporation's  funding policy provides that payments shall be at least equal
to its cash basis  obligation,  plus additional  amounts that may be approved by
the Corporation from time to time.

Postemployment  Benefits.  The  Corporation has certain  postemployment  benefit
plans  covering  most of its  U.S.  employees  and in some  cases  employees  of
international subsidiaries. The benefit plans may provide severance, disability,
supplemental  health  care,  life  insurance  or  other  welfare  benefits.  The
Corporation  accounts for these benefits on an accrual basis. The  Corporation's
funding policy  provides that payments shall be at least equal to its cash basis
obligation, plus additional amounts that may be approved by the Corporation from
time to time.

Earnings  per  Share.  Earnings  per share  amounts  are  computed  based on the
weighted  average number of shares actually  outstanding  during the period plus
the shares that would be  outstanding  assuming the  exercise of dilutive  stock
options,  which are  considered  to be common stock  equivalents.  The number of
equivalent  shares  that would be issued from the  exercise of stock  options is
computed using the treasury stock method. Note 14 to the Consolidated  Financial
Statements  contains a summary of the pro forma effects to reported earnings per
share  for 1996,  1995 and 1994 if the  Corporation  had  elected  to  recognize
compensation  cost in accordance with SFAS No. 123,  "Accounting for Stock-Based
Compensation."

Reclassification. For comparative purposes, certain prior year amounts have been
reclassified to conform with the current year presentation.

2.    PROVISION FOR ENVIRONMENTAL COSTS AND ASSET DISPOSITIONS
In December  1996, the United States  District Court of the Eastern  District of
New York ruled  that the 1986 sale of  property  in  Maspeth,  New York,  by the
Corporation  to the United States Postal  Service is to be rescinded.  The Court
ordered  the  Corporation  to return the $14.8  million  originally  paid by the
Postal  Service for the  property  and to pay  interest on the sales price for a
portion  of the time since that sale.  The  Corporation  has not yet  determined
whether to appeal the Court's  decision,  but as a precaution,  the  Corporation
recorded  interest  charges of $5.9  million and  reclamation  reserves of $10.0
million in the 1996 fourth  quarter.  This  reclamation  provision was estimated
based on the Corporation's experience at other Corporate-owned properties.

         During the 1995  first  quarter,  the  Corporation  recognized  a $26.8
million  gain  before  taxes  from the  sale of  Columbian  Chemicals  Company's
synthetic  iron  oxide  facility  in St.  Louis,  Missouri  (MAPICO).  This gain
increased  net  income by $16.6  million,  or 24 cents per common  share,  after
taxes. MAPICO was peripheral to Columbian's core business.

         In the 1994 fourth  quarter,  the  Corporation  recorded  non-recurring
pre-tax  charges of $140.2  million  reflecting  additional  provisions of $98.7
million before taxes for estimated  future costs  associated with  environmental
matters  primarily in Phelps Dodge Mining Company and $41.5 million before taxes
for estimated losses,  primarily in Phelps Dodge Industries,  on the disposition
of certain  operating  facilities.  These  charges  reduced  net income by $91.7
million, or $1.29 per common share, after taxes.

         The  pre-tax  charge  of  $98.7  million  for  estimated  future  costs
associated with  environmental  matters  comprised  $88.9 million  applicable to
Phelps Dodge Mining Company,  $8.6 million applicable to Phelps Dodge Industries
and $1.2 million  applicable to Corporate  and other.  As a result of these 1994
environmental  charges and balances  remaining from previously  provided charges
for  environmental  costs,  the  Corporation's  reserves for such costs  totaled
$117.0  million and $144.1  million at December 31, 1996, and December 31, 1995,
respectively  (see Note 1 to the Consolidated  Financial  Statements for further
information  concerning  the  Corporation's  policy for recording  environmental
obligations).

         The pre-tax charge of $41.5 million  associated with the disposition of
certain operating  facilities included $36.0 million for Phelps Dodge Industries
and $5.5  million for Phelps  Dodge Mining  Company  issues.  The portion of the
charge  attributable to Phelps Dodge  Industries  comprised a provision of $20.0
million for the impairment of value of Hudson International  Conductors,  a loss
of $7.0  million on the sale of the  Corporation's  40 percent  interest  in its
Mexican associate company, CONELEC S.A. de C.V., and a provision of $9.0 million
for the closure of Columbian Chemicals Company's plant in Hamburg, Germany.

         Also  included  in the  provision  for  environmental  costs  and asset
dispositions for the full year 1994 was a second quarter  provision for the sale
of Phelps Dodge Mining  Company's  interest in its Santa Gertrudis gold property
in Mexico and its Olinghouse  gold property in Nevada.  The combined net loss on
the sale of these interests was $17.5 million before taxes.  This charge reduced
net income by $11.2 million, or 16 cents per common share, after taxes.

3.    EQUITY EARNINGS AND INVESTMENTS AND LONG-TERM RECEIVABLES
Equity earnings (losses) were as follows:

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

                                                    1996      1995       1994
                                                    ----      ----       ----

International wire and cable manufacturers    $    2,600     1,000      1,700
Black Mountain                                     6,600     4,500      6,000
Santa Gertrudis                                        -         -       (600)
Other                                              1,300     1,000      1,500
                                                 -------   -------    -------
                                              $   10,500     6,500      8,600
                                                 =======   =======    =======

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

         Dividends were received as follows:
-------------------------------------------------------------------------------

                                              1996        1995          1994
                                              ----        ----          ----

Equity investments:
 International wire and cable
  manufacturers                         $     300          300         1,400
 Black Mountain                             6,000        5,700         2,900
 Other                                        500          100             -
                                          -------      -------       -------
                                        $   6,800        6,100         4,300
                                          =======      =======       =======
Cost basis investments:
 Southern Peru Copper Corporation       $  16,400       13,600         3,500
 Other                                        300          300           400
                                          -------      -------       -------
                                        $  16,700       13,900         3,900
                                          =======      =======       =======

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

         Investments and long-term receivables were as follows:
-------------------------------------------------------------------------------

                                              1996       1995         1994
                                              ----       ----         ----
Equity basis:
 International wire and cable
  manufacturers                        $    20,300     18,200       18,500
 Black Mountain                              9,100     11,300       12,800
 Other                                      16,000     12,200       11,100
Cost basis:
 Southern Peru Copper Corporation           13,200     13,200       13,200
 Other                                      27,800     24,100       26,400
                                           -------    -------      -------
                                       $    86,400     79,000       82,000
                                           =======    =======      =======

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

         Retained earnings of the Corporation include undistributed  earnings of
equity investments of (in millions): 1996 - $62.8; 1995 - $59.0; 1994 - $58.6.

         Condensed financial  information for companies in which the Corporation
has equity basis investments  together with majority-owned  foreign subsidiaries
previously accounted for on an equity basis is as follows:

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

                                                   1996        1995        1994
                                                   ----        ----        ----

Sales                                     $     764,100     771,200     637,200
Net income                                       56,000      42,000      46,000
-------------------------------------------------------------------------------

Net current assets                        $      85,600      66,600      63,300
Fixed assets, net                               290,800     259,100     249,500
Long-term debt                                  (54,500)    (40,500)    (39,000)
Other assets and liabilities, net                (8,000)     (3,900)     (2,500)
                                               --------    --------    --------
Net assets                                $     313,900     281,300     271,300
                                               ========    ========    ========

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

4.    INTEREST EXPENSE, NET OF AMOUNT CAPITALIZED
The Corporation reported net interest expense in 1996 of $66.1 million, compared
with $62.0  million in 1995 and $36.6  million in 1994.  Reported  net  interest
expense increased in 1996 despite a $37.2 million decrease in debt primarily due
to a $5.9  million  interest  charge  resulting  from  the  1996  Court  ordered
rescission  of a 1986 sale of  property.  Increased  1995 net  interest  expense
principally  resulted from the cessation of capitalization of interest costs for
the  Candelaria  project  in Chile  reflecting  the  substantial  completion  of
construction  and development in the 1994 fourth  quarter.  Included in the 1996
and 1995 interest expense were foreign  currency  exchange gains of $8.0 million
and $8.1 million, respectively, reflecting the remeasurement of Venezuelan local
currency debt after major devaluations of the Bolivar.

5.    MISCELLANEOUS INCOME AND EXPENSE, NET
Interest   income   totaled  $34.3  million  in  1996,   principally   from  the
Corporation's  short-term  investments,  compared  with $31.5  million and $11.0
million  in 1995 and  1994,  respectively.  Miscellaneous  income  in 1996  also
included  pre-tax  dividends  of  $16.4  million  on its 13.9  percent  minority
interest in Southern  Peru Copper  Corporation,  compared with $13.6 million and
$3.5  million in 1995 and 1994,  respectively.  Losses from  changes in currency
exchange rates,  especially in Venezuela and Chile, amounted to $11.7 million in
1996,  compared  with losses of $10.2 million and $6.3 million in 1995 and 1994,
respectively.

6.    INCOME TAXES
The Corporation  reports its income taxes using an asset and liability  approach
for financial accounting and reporting of income taxes. Changes in tax rates and
laws are  reflected  in income from  operations  in the period such  changes are
enacted. In addition,  balance sheet  classification of deferred income taxes is
determined  by the balance  sheet  classification  of the asset or  liability to
which the temporary difference is related.

         Geographic  sources of income  before  taxes,  minority  interests  and
equity in net earnings of affiliated  companies for the years ended  December 31
were as follows:

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

                                                 1996         1995        1994
                                                 ----         ----        ----

United States                          $      536,100      816,200     298,900
Foreign                                       151,400      259,500      76,200
                                            ---------    ---------   ---------
                                       $      687,500    1,075,700     375,100
                                            =========    =========   =========

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

         The provisions for income taxes for the years ended December 31 were as
follows:

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

                                                1996          1995        1994
                                                ----          ----        ----
Currently payable:
   Federal                             $      99,000       157,800      94,000
   State                                      16,100        23,900      14,000
   Foreign                                    43,000        38,100      25,000
                                            --------      --------    --------
                                             158,100       219,800     133,000
                                            --------      --------    --------
Deferred:
   Federal                                    45,200        78,400     (27,100)
   State                                       6,400           400      (2,500)
   Foreign                                    10,300        24,100       1,300
                                            --------      --------    --------
                                              61,900       102,900     (28,300)
                                            --------      --------    --------
                                       $     220,000       322,700     104,700
                                            ========      ========    ========

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

         A reconciliation  of the U.S.  statutory tax rate to the  Corporation's
effective tax rate is as follows:

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

                                         1996            1995           1994
                                         ----            ----           ----

Statutory tax rate                        35.0  %         35.0           35.0
Depletion                                 (7.0)           (5.3)         (10.6)
State and local income taxes               2.1             1.5            2.0
Effective international tax rate           0.9            (1.9)          (0.5)
Other items, net                           1.0             0.7            2.0
                                         -----           -----          -----
Effective tax rate                        32.0  %         30.0           27.9
                                         =====           =====          =====

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

         The Corporation paid federal,  state, local and foreign income taxes of
approximately $160 million in 1996,  compared with approximately $247 million in
1995 and  approximately  $114  million in 1994.  As of December  31,  1996,  the
Corporation had  alternative  minimum tax credits of  approximately  $78 million
available for carryforward for federal income tax purposes. These credits can be
carried forward indefinitely, but may only be used to the extent the regular tax
exceeds the  alternative  minimum  tax.  The  Corporation  also has  alternative
minimum  foreign tax credit  carryforwards  for federal  income tax  purposes of
approximately $27 million, which begin to expire in 1997.

         The  Corporation's  federal income tax returns for the years 1992, 1993
and  1994  are  currently  under  examination.   The  Corporation  has  received
substantial  proposed  adjustments from the Internal Revenue Service relating to
the  Corporation's  federal income tax liability for the years 1990 and 1991 and
has filed a protest with the appropriate authorities.  These years are currently
under  consideration  by the appeals  division of the Internal  Revenue Service.
Management believes that it has made adequate provision so that final resolution
of the  issues  involved,  including  application  of  those  determinations  to
subsequent  open  years,  will  not  have  a  material  adverse  effect  on  the
consolidated  financial  condition or results of operations of the  Corporation.
However,  settlement  of these  issues could  involve  material tax and interest
payments  with  respect to the open  years,  a  substantial  part of which would
involve timing  differences.  The Corporation does not agree with these proposed
adjustments  and expects either to  substantially  settle them with the Internal
Revenue Service or litigate the issues involved.

         Deferred income tax assets and (liabilities) comprised the following at
December 31:

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

                                                           1996          1995
                                                           ----          ----

Minimum tax credits                              $       78,400        86,700
Postretirement and postemployment benefits               58,000        52,500
Reserves                                                 69,700        89,600
Mining costs                                             45,000        33,100
Inventories                                               4,800         1,400
Other                                                     4,400         6,400
                                                      ---------     ---------
  Deferred tax assets                                   260,300       269,700
                                                      ---------     ---------
Depreciation                                           (596,100)     (540,600)
Mining properties                                        (8,900)       (9,300)
Exploration and mine development costs                   (3,700)       (8,300)
Pensions                                                (30,300)      (25,000)
                                                      ---------     ---------
  Deferred tax liabilities                             (639,000)     (583,200)
                                                      ---------     ---------
                                                 $     (378,700)     (313,500)
                                                      =========     =========

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

         Income taxes have not been  provided on the  Corporation's  share ($452
million) of undistributed  earnings of those  manufacturing and mining interests
abroad  over which the  Corporation  has  sufficient  influence  to control  the
distribution  of such earnings and has  determined  that such earnings have been
reinvested  indefinitely.  These earnings could become subject to additional tax
if they were  remitted  as  dividends,  if foreign  earnings  were loaned to the
Corporation or a U.S. affiliate,  or if the Corporation should sell its stock in
the  subsidiaries.  It is estimated that  repatriation of these foreign earnings
would generate  additional  foreign tax withholding and U.S. tax, net of foreign
tax credit, in the amounts of $70 million and $40 million, respectively.

7.    INVENTORIES AND SUPPLIES
Inventories at December 31 were as follows (in millions):
--------------------------------------------------------------------------------

                                                            1996           1995
                                                            ----           ----

Metals and other raw materials                     $       194.1          200.4
Work in process                                             19.2           14.6
Finished manufactured goods                                 75.2           61.4
Other                                                        4.5            5.1
                                                         -------        -------
                                                   $       293.0          281.5
                                                         =======        =======

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

         Inventories  valued by the  last-in,  first-out  method would have been
greater  if valued at  current  costs by  approximately  $117  million  and $115
million at December 31, 1996 and 1995, respectively.

         Supplies in the amount of $117.0 million and $121.4 million at December
31, 1996 and 1995, respectively, are stated net of a reserve for obsolescence of
$8.9 million and $10.5 million, respectively.

8.    PROPERTY, PLANT AND EQUIPMENT
Property,  plant and  equipment  at  December 31  comprised  the  following  (in
millions):

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

                                                            1996           1995
                                                            ----           ----

Buildings, machinery and equipment                 $     4,669.7        4,296.2
Mining properties                                          173.1          173.2
Capitalized mine development                               290.4          284.8
Land and water rights                                       72.7           66.6
                                                         -------        -------
                                                         5,205.9        4,820.8
Less accumulated depreciation, depletion
 and amortization                                        2,185.4        2,092.1
                                                         -------        -------
                                                   $     3,020.5        2,728.7
                                                         =======        =======

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

         The net increases in property, plant and equipment of $291.8 million in
1996 and $162.3 million in 1995 are summarized below (in millions):

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

                                                            1996           1995
                                                            ----           ----

Balance at beginning of year                       $     2,728.7        2,566.4
                                                         -------        -------
Capital expenditures                                       513.0          404.9
Depreciation, depletion and amortization                  (243.7)        (218.7)
Property, plant and equipment of acquired
 companies                                                  37.2              -
Asset sales, currency translation adjustments
 and other                                                 (14.7)         (23.9)
                                                         -------        -------
                                                           291.8          162.3
                                                         -------        -------
Balance at end of year                             $     3,020.5        2,728.7
                                                         =======        =======

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

9.    OTHER ASSETS AND DEFERRED CHARGES
Other assets and deferred charges at December 31 were as follows (in millions):

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

                                                            1996           1995
                                                            ----           ----

Goodwill, less accumulated amortization
 (1996 - $39.4; 1995 - $34.5)                      $       130.6          120.8
Employee benefit plans                                     105.2          108.8
Debt issue costs                                            25.6           29.2
Intangible pension asset                                    20.5           18.0
Other intangible assets                                      4.0            4.0
Other                                                        2.1            2.2
                                                         -------        -------
                                                   $       288.0          283.0
                                                         =======        =======

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

10.   ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts  payable  and  accrued  expenses  at  December  31 were as follows  (in
millions):
--------------------------------------------------------------------------------

                                                            1996           1995
                                                            ----           ----

Accounts payable                                   $       292.1          247.5
Employee benefit plans                                      31.5           55.8
Insurance and loss reserves                                 11.8           12.3
Salaries, wages and other compensation                      48.3           36.5
Environmental reserves                                      43.6           51.1
Smelting, refining and freight                              20.9           25.9
Other accrued taxes                                         16.1           17.6
Candelaria expansion                                        15.3              -
Shutdown, relocation and restructuring                      10.3            7.1
Interest *                                                  17.5           13.6
Returnable containers                                        3.6            3.3
Other                                                       53.9           34.1
                                                         -------        -------
                                                   $       564.9          504.8
                                                         =======        =======
---------------

*        Interest paid by the  Corporation in 1996 was $67.2  million,  compared
         with $70.4 million in 1995 and $58.5 million in 1994.

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

11.   OTHER LIABILITIES AND DEFERRED CREDITS
Other  liabilities  and  deferred  credits at  December  31 were as follows  (in
millions):

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

                                                            1996           1995
                                                            ----           ----

Postretirement and postemployment benefit plans    $       157.5          148.8
Other employee benefit plans                                41.5           39.9
Environmental reserves                                      71.8           92.1
Shutdown, relocation and restructuring                       5.4           11.2
Insurance and loss reserves                                 22.5           20.7
Other                                                       10.9            6.0
                                                         -------        -------
                                                   $       309.6          318.7
                                                         =======        =======

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

12.   LONG-TERM DEBT AND OTHER FINANCING
Long-term debt at December 31 is summarized below (in millions):

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

                                                            1996           1995
                                                            ----           ----

7.75% Notes due 2002                               $       100.0          100.0
7.96% Notes due 1998-2000                                   50.0           50.0
Air Quality Control Obligations:
 5.45% Notes due 2009                                       81.1           81.1
 6.50% Installment sale obligations due 2013                90.0           90.0
Candelaria                                                 208.0          237.4
Ojos del Salado                                              6.0            8.0
Columbian Tiszai Carbon Ltd.                                25.0           30.0
Columbian Carbon Spain, S.A.                                10.9           14.1
Phelps Dodge International Corporation                      17.8           13.3
Other                                                        4.0            6.0
                                                         -------        -------
Long-term debt including current portion                   592.8          629.9
Less current portion                                        38.2           16.8
                                                         -------        -------
Long-term debt excluding current portion           $       554.6          613.1
                                                         =======        =======

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

Annual  maturities of debt  outstanding at December 31, 1996, are as follows (in
millions): 1997 - $38.2; 1998 - $49.5; 1999 - $56.9; 2000 - $48.1; 2001 - $30.3.

         An existing  revolving  credit  agreement  between the  Corporation and
several  lenders  was  amended on June 4, 1996.  The  agreement,  as amended and
restated,  permits  borrowings of up to $500 million from time to time until its
scheduled  maturity  on June 4, 2001.  The  agreement  allows  for two  one-year
renewals  beyond the  scheduled  maturity date if the  Corporation  requests and
receives approval from at least two-thirds of the lenders involved.  Interest is
payable at a  fluctuating  rate based on the agent  bank's prime rate or a fixed
rate, based on the Eurodollar  Interbank  Offered Rate or at fixed rates offered
independently by the several lenders,  for maturities of from seven to 360 days.
This agreement  provides for a facility fee of eight basis points (0.08 percent)
on total  commitments.  The  agreement  requires the  Corporation  to maintain a
minimum consolidated  tangible net worth of $1.1 billion and limits indebtedness
to 50 percent of total  consolidated  capitalization.  There were no  borrowings
under this agreement at either December 31, 1996, or December 31, 1995.

         Accuride  Canada Inc.  has a revolving  credit  facility  that  permits
borrowings of up to U.S. $25.0 million.  Interest on these borrowings is payable
at a  fluctuating  rate based on the agent bank's Base Rate  Canada,  or a fixed
rate based on the London Interbank  Offered Rate (LIBOR),  for maturities of one
week to six  months.  This  facility,  which is  subject  to  renewal  annually,
provides  for a standby  fee of  one-eighth  of 1 percent of the $25.0  million.
There were no borrowings  outstanding under this facility at either December 31,
1996, or December 31, 1995.

         The  Corporation  had other lines of credit  totaling $100.0 million at
December 31, 1996,  and at December 31, 1995.  These  facilities  are subject to
agreement  as to  availability,  terms  and  amount.  There  were no  borrowings
outstanding under these lines of credit at either December 31, 1996, or December
31, 1995.

         The Corporation had $66.5 million in short-term borrowings,  all by its
international  operations,  at December 31, 1996, compared with $66.6 million at
December 31, 1995. The weighted  average  interest rate on this debt at December
31,  1996,   and  December  31,  1995,   was  15.3  percent  and  18.5  percent,
respectively.

         The  Corporation's   80-percent-owned   Compania   Contractual   Minera
Candelaria (CCMC)  subsidiary  borrowed $290 million under its project financing
agreements to finance  construction  of the Candelaria  copper project in Chile.
Under the proportional consolidation method, the Corporation reflects 80 percent
of this amount in its financial statements. These borrowings became non-recourse
to the Corporation  subsequent to the  satisfaction of certain  completion tests
during  the  second  quarter of 1995.  This $290  million  of 13-year  financing
comprises  $200 million of floating  rate  dollar-denominated  debt (with a rate
based on the six-month  LIBOR) and $60 million of fixed rate  dollar-denominated
debt,  with a nine and one-half year  repayment  period that starts in 1997. The
remaining  $30 million of 13-year  financing,  representing  floating  rate debt
denominated  in Chilean  pesos,  was prepaid in December 1996 at a cost of $37.6
million including exchange losses and prepayment penalties. The Corporation also
caused CCMC to enter into an interest  rate  protection  agreement  with certain
financial  institutions to limit the effect of increases in the cost of the $200
million  of  floating  rate  dollar-denominated  debt.  Under  the  terms of the
agreement,  the project will receive  payments  from these  institutions  if the
six-month  LIBOR  exceeds 9 percent  prior to December 31, 2001,  and 11 percent
during the two subsequent years ending December 31, 2003.

         The  Corporation's  60-percent-owned  Hungarian  subsidiary,  Columbian
Tiszai Carbon Ltd.,  borrowed $33.5 million under  facilities  from the Overseas
Private  Investment  Corporation (OPIC) and the European Bank for Reconstruction
and Development (EBRD) to finance  construction of a carbon black  manufacturing
plant.  Both  facilities  became  non-recourse  to Columbian  Chemicals  Company
subsequent  to the  satisfaction  of certain  completion  tests during the first
quarter  of  1996.  The OPIC  facility  is a $24.5  million  fixed  rate  dollar
borrowing  bearing interest rates of between 8.01 percent and 9.15 percent,  and
the EBRD $9 million  loan is a fixed rate dollar  borrowing  bearing an interest
rate of 8.30 percent.  The balances due on these borrowings  mature in the years
1997 through 2001.

13.   SHAREHOLDERS' EQUITY
On March 6, 1996,  the  Corporation  announced  that its current share  purchase
authorization  program had been  increased  from 5 million  shares to 10 million
shares. During 1996, the Corporation purchased 4,297,300 of its common shares at
a total cost of $273.2  million.  There were  64,711,000  shares  outstanding on
December  31, 1996.  During 1995,  the  Corporation  purchased  2,760,600 of its
common  shares  at a total  cost  of  $163  million.  These  purchases  included
2,675,600 shares under a 5 million share buy-back program authorized on March 7,
1995, and 85,000 shares under a superseded program.  These purchased shares were
restored to the treasury.

         The Corporation has 6,000,000  authorized  preferred  shares with a par
value of $1.00 each; no shares were  outstanding at either December 31, 1996, or
December 31, 1995.

         In 1988, the Corporation adopted a Preferred Share Purchase Rights Plan
and  declared a dividend of one right on each of its common  shares.  In certain
circumstances,  if a person  or group of  persons  acquires  or  tenders  for 20
percent or more of the  Corporation's  outstanding  common shares,  these rights
vest and  entitle the holder to certain  share  purchase  rights.  Until 10 days
after vesting, the rights may be modified or redeemed by the Board of Directors.

14.   STOCK OPTION PLANS; RESTRICTED STOCK
Executives and other key employees have been granted  options to purchase common
shares under stock option plans  adopted in 1979,  1987 and 1993.  In each case,
the option price equals the fair market value of the common shares on the day of
the grant and an option's maximum term is 10 years. Options granted vest ratably
over a three-year period. The options include limited stock appreciation  rights
under which an optionee has the right,  in the event common shares are purchased
pursuant  to a third  party  tender  offer or in the event a merger  or  similar
transaction  in which the  Corporation  shall not  survive  as a  publicly  held
corporation  is approved by the  Corporation's  shareholders,  to relinquish the
option  and to receive  from the  Corporation  an amount per share  equal to the
excess of the price payable for a common share in such offer or transaction over
the option price per share.

         The  Corporation   elected  the  adoption  of  Statement  of  Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based  Compensation,"
in 1995. In  accordance  with the  provisions  of SFAS No. 123, the  Corporation
applies APB Opinion 25 and related  Interpretations  in accounting for its stock
option plans and,  accordingly,  does not  recognize  compensation  cost. If the
Corporation had elected to recognize  compensation  cost based on the fair value
of the options  granted at grant date as  prescribed by SFAS No. 123, net income
and  earnings  per share  would  have  been  reduced  to the pro  forma  amounts
indicated in the table below (in millions except per share amounts):

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

                                                   1996       1995       1994
                                                   ----       ----       ----
Net income - as reported                     $    461.8      746.6      271.0
Net income - pro forma                            456.2      741.6      266.8

Earnings per share - as reported                   6.97      10.65       3.81
Earnings per share - pro forma                     6.89      10.60       3.76

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

         The fair value of each option  grant is  estimated on the date of grant
using a Black-Scholes option-pricing model with the following assumptions:

                                                   1996               1995
                                                  ------             ------

Expected dividend yield                            3.32%             3.34%
Expected stock price volatility                    24.0%             22.1%
Risk-free interest rate                             5.7%              6.0%
Expected life of options                         3 years           3 years

The weighted  average fair value of options  granted  during 1996 was $12.68 per
share, compared with $11.04 in 1995.

         The 1993 plan provides (and the 1987 plan provided) for "reload" option
grants to executives and other key employees. If an optionee exercises an option
under the 1993 or 1987 plan with  already-owned  shares of the Corporation,  the
optionee  receives a reload  option that  restores the option  opportunity  on a
number of common  shares  equal to the  number of shares  used to  exercise  the
original  option.  A reload  option  has the same terms as the  original  option
except that it has an exercise price per share equal to the fair market value of
a common share on the date the reload option is granted and is  exercisable  six
months after the date of grant.

         The 1993 plan provides (and the 1987 plan provided) for the issuance to
executives  and other key  employees,  without  any  payment by them,  of common
shares subject to certain restrictions  (Restricted Stock). The 1993 plan limits
the award of Restricted Stock to 1,000,000 shares.

         Under a stock option plan adopted in 1989,  options to purchase  common
shares  have  been  granted  to  directors  who have not been  employees  of the
Corporation or its  subsidiaries for one year or are not eligible to participate
in any plan of the  Corporation or its  subsidiaries  entitling  participants to
acquire stock, stock options or stock appreciation rights.

         In 1996, the Corporation suspended the 1989 Directors Stock Option Plan
(1989 Plan),  thereby eliminating the annual grant of options to directors.  The
1989 Plan was replaced with the 1997 Directors Stock Unit Plan which provides to
each  non-employee  director  an  annual  grant  of stock  units  having a value
equivalent to the Corporation's common shares.

         At December 31, 1996,  options for 354,360  shares,  40,938  shares and
1,384,580  shares were  exercisable  under the 1987 plan,  the 1989 plan and the
1993  plan,  respectively,  at average  prices of $45.18,  $41.93 and $57.99 per
share.  In addition,  227,700  shares of Restricted  Stock issued under the 1993
plan were outstanding at December 31, 1996. Also at December 31, 1996, 2,049,541
shares were available for option grants (including  748,758 shares as restricted
stock awards) under the 1993 plan (plus an additional 488,032 shares that may be
issued as reload  options) and 83,219  shares were  available  for option grants
under the 1989 plan. These amounts are subject to future adjustment.  No further
options may be granted  under the 1987 plan.  There were no options  outstanding
under the 1979 plan as of December 31, 1996, or December 31, 1995.

         Changes  during  1994,  1995 and 1996 in  options  outstanding  for the
combined plans were as follows:

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

                                                               Average option
                                               Shares          price per share
                                               ------          ----------------

Outstanding at December 31, 1993              2,379,561        $     40.88
  Granted                                       961,087              58.35
  Exercised                                    (479,660)             37.32
  Expired or terminated                         (28,802)             44.34
                                              ---------
Outstanding at December 31, 1994              2,832,186              47.38
  Granted                                       953,838              66.37
  Exercised                                    (635,881)             38.19
  Expired or terminated                        (110,345)             51.03
                                              ---------
Outstanding at December 31, 1995              3,039,798              55.13
  Granted                                       810,551              71.49
  Exercised                                    (552,973)             45.19
  Expired or terminated                         (98,182)             62.71
                                              ---------
Outstanding at December 31, 1996 *            3,199,194              60.76
                                              =========
---------------

*        Exercise  prices for options  outstanding  at December 31, 1996,  range
         from  a  minimum  of  approximately  $21  per  share  to a  maximum  of
         approximately  $76 per share.  The average  remaining  maximum  term of
         options outstanding is approximately eight years.

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

         Changes during 1994, 1995 and 1996 in Restricted Stock were as follows:

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

                                                               Shares
                                                               ------

Outstanding at December 31, 1993                               100,200
  Granted                                                       14,226
  Terminated                                                  (13,000)
  Released                                                    (33,400)
                                                             ---------
Outstanding at December 31, 1994                                68,026
  Granted                                                      186,516
  Released                                                    (28,617)
                                                             ---------
Outstanding at December 31, 1995                               225,925
  Granted                                                       17,000
  Terminated                                                   (4,500)
  Released                                                    (10,725)
                                                             ---------
Outstanding at December 31, 1996                               227,700
                                                             =========

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

15.   PENSION PLANS
The Corporation has several  non-contributory  employee  defined benefit pension
plans  covering  substantially  all U.S.  employees  (the U.S.  pension  plans).
Employees  covered under the salaried defined benefit pension plans are eligible
to  participate  upon the  completion  of one year of service,  and benefits are
based upon final average  salary and years of service.  Employees  covered under
the  remaining  plans  are  generally  eligible  to  participate  at the time of
employment,  and benefits are generally based on a fixed amount for each year of
service.  Employees  are vested in the plans  after five years of  service.  The
Corporation also maintains  pension plans for certain employees of international
subsidiaries following the legal requirements in those countries.

         In a number of these  plans,  the plan  assets  exceed the  accumulated
benefit  obligations  (overfunded  plans) and in the remainder of the plans, the
accumulated benefit obligations exceed the plan assets (underfunded plans).

         The  status  of  employee  pension  benefit  plans  at  December  31 is
summarized below (in millions):

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

                                                 Overfunded        Underfunded
                                                    Plans             Plans
                                                -------------      ------------
                                                1996     1995      1996    1995
                                                ----     ----      ----    ----
Actuarial  present value of projected  
 benefit  obligation,  based on employment
 service to date and current salary levels:
  Vested employees                            $    507     335       41     194
  Non-vested employees                              34      18        6      17
                                                 -----   -----    -----   -----
  Accumulated benefit obligation                   541     353       47     211
  Additional amounts related to projected
   salary increases                                 43      39        6       5
                                                 -----   -----    -----   -----
  Total projected benefit obligation               584     392       53     216

Plan assets at fair value                          681     448       22     178
                                                 -----   -----    -----   -----
Projected pension benefit obligation in
 excess of (less than) plan assets                 (97)    (56)       31     38
Unamortized net asset (liability)
  existing at January 1, 1985                        5      10        -      (3)
Unrecognized prior service cost                    (22)    (14)      (5)    (15)
Unrecognized net gain (loss) from
 actuarial experience                               23     (12)      (9)    (11)
                                                 -----   -----    -----   -----
Accrued (prepaid) pension cost                $    (91)    (72)      17       9
                                                 =====   =====    =====   =====

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

         The  Corporation's  pension plans were valued between November 1, 1994,
and January 1, 1995,  and between  November  1, 1995,  and January 1, 1996.  The
obligations  were  projected to and the assets were valued as of the end of 1995
and  1996.  Of its 13 U.S.  pension  plans  at  December  31,  1996,  nine  were
overfunded  while four were  underfunded.  Effective  November 30, 1996, 10 U.S.
salaried and non-bargained hourly pension plans were consolidated into one plan.
In addition,  pension plans were added in 1996 as a result of the acquisition of
Nesor Alloy Corporation.  Of the Corporation's 21 U.S. pension plans at December
31, 1995, eight were overfunded while 13 were underfunded.  The majority of plan
assets are invested in a diversified portfolio of stocks, bonds and cash or cash
equivalents.  A small  portion of the plan  assets is  invested  in pooled  real
estate and other private corporate investment funds.

         The  components  of net  periodic  pension  cost  were as  follows  (in
millions):

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

                                                      1996       1995      1994
                                                      ----       ----      ----

Benefits earned during the year                 $     14.2       11.2      12.6
Interest accrued on projected benefit
 obligation                                           43.4       42.9      40.1
Return on assets - actual                           (108.4)    (119.6)     (0.4)
                 - unrecognized gain (loss)           51.8       66.6    (51.2)
Net amortization                                       1.5        1.0       1.2
                                                   -------    -------   -------
   Net periodic pension cost for the year       $      2.5        2.1       2.3
                                                   =======    =======   =======

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

         Assumptions  used to develop the net periodic  pension cost  included a
7.25 percent discount rate in 1996,  compared with discount rates of 8.5 percent
and 7.25 percent in 1995 and 1994,  respectively.  An expected long-term rate of
return on assets of 9.5 percent and a rate of increase in compensation levels of
4 percent  were  used for 1996,  1995 and 1994.  For the  valuation  of  pension
obligations,  the discount rate at the end of 1996 was 7.25 percent,  equivalent
to the discount  rate at the end of 1995 and  decreased  from 8.5 percent at the
end of 1994.

         The  Corporation  recognizes  a  minimum  liability  in  its  financial
statements for its underfunded  plans.  "Other liabilities and deferred credits"
at December 31, 1996,  included $10 million relating to this minimum  liability,
compared  with $26 million at December 31, 1995.  This amount was offset by a $4
million  intangible  asset,  a $4 million  reduction  in  "Common  Shareholders'
Equity" and a $2 million  deferred tax benefit at December  31,  1996,  compared
with  an $18  million  intangible  asset,  a $5  million  reduction  in  "Common
Shareholders'  Equity" and a $3 million  deferred  tax  benefit at December  31,
1995.

         The  Corporation  intends to fund at least the minimum amount  required
under the Employee  Retirement Income Security Act of 1974 for U.S. plans or, in
the case of international  subsidiaries,  the minimum legal requirements in that
particular  country.   The  excess  of  amounts  accrued  over  minimum  funding
requirements,  together with such excess  amounts  accrued in prior years,  have
been  included in "Other  liabilities  and deferred  credits."  The  anticipated
funding  for the  current  year is  included  in  "Accounts  payable and accrued
expenses."

16.   POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The  Corporation  records its  obligation  for  postretirement  medical and life
insurance  benefits on the accrual basis.  One of the principal  requirements of
the method is that the expected cost of providing such  postretirement  benefits
be accrued during the years employees render the necessary service.

         Substantially all of the Corporation's  U.S.  employees who retire from
active  service on or after  normal  retirement  age of 65 are eligible for life
insurance benefits. The Corporation also provides  postretirement life insurance
for  employees  of  international  subsidiaries  in some cases.  Life  insurance
benefits also are available under certain early retirement  programs or pursuant
to the terms of certain collective  bargaining  agreements.  The majority of the
costs of such benefits were paid out of a previously established fund maintained
by an  insurance  company;  however,  a portion  was paid  through an  insurance
contract.  Health care  insurance  benefits also are provided for many employees
retiring  from active  service.  The coverage is provided on a  non-contributory
basis for certain  groups of  employees  and on a  contributory  basis for other
groups. The majority of these benefits are paid by the Corporation.

         The status of employee  postretirement  benefit plans at December 31 is
summarized below (in millions):

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

                                                               1996       1995
                                                               ----       ----
Accumulated Postretirement Benefit Obligation:
  Retirees                                             $         74         80
  Fully eligible active plan participants                        14         10
  Other active plan participants                                 64         61
                                                            -------    -------
  Total accumulated postretirement benefit
   obligation                                                   152        151

Plan assets at fair value                                        11         11
                                                            -------    -------
Accumulated postretirement benefit obligation in
 excess of plan assets                                          141        140
Unrecognized prior service cost                                   7          7
Unrecognized net gain (loss) from actuarial
 experience                                                      (1)       (10)
                                                            -------    -------
Accrued postretirement benefit cost                    $        147        137
                                                            =======    =======

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

         The  components  of net  periodic  postretirement  benefit cost were as
follows (in millions):

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

                                                      1996       1995      1994
                                                      ----       ----      ----
Benefits attributed to service during
 the year                                       $        4          4         4
Interest cost on accumulated postretirement
 benefit obligation                                     10         11        10
Return on assets - actual                               (1)        (1)       (1)
Net amortization                                         -         (1)       (1)
                                                   -------    -------   -------
Net periodic postretirement benefit cost
 for the year                                   $       13         13        12
                                                   =======    =======   =======

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

         For 1996  measurement  purposes,  annual  rates of  increase in the per
capita cost of covered  health care  benefits  were assumed to average 8 percent
for 1997 decreasing gradually to 5.3 percent by 2008 and remaining at that level
thereafter.  For 1995 measurement purposes,  annual rates of increase in the per
capita cost of covered  health care  benefits  were assumed to average 9 percent
for 1996 decreasing gradually to 5.3 percent by 2010 and remaining at that level
thereafter.  The health care cost trend rate assumption has a significant effect
on the amounts reported. To illustrate,  increasing the assumed health care cost
trend rates by 1 percentage  point in each year would  increase the  accumulated
postretirement  benefit  obligation  as of December 31, 1996,  by  approximately
$12.4 million and the  aggregate of the service and interest cost  components of
net   periodic   postretirement   benefit  cost  for  the  year  then  ended  by
approximately $1 million.

         The weighted  average discount rate used in determining the accumulated
postretirement  benefit  obligation  was 7.25 percent for 1996, the same as that
used for 1995.  The  expected  long-term  rate of return  on plan  assets  was 8
percent for both years.  Assumptions used to develop net periodic postretirement
benefit cost included a 7.25 percent  discount rate in 1996, a decrease from 8.5
percent in 1995 and equivalent to the 7.25 percent discount rate used in 1994.

17.   COMMITMENTS
Rent expense for the years 1996, 1995 and 1994 was (in millions):  $15.6,  $18.8
and $23.5,  respectively.  Future minimum lease  payments for all  noncancelable
operating  leases  having a remaining  term in excess of one year totaled  $53.0
million at  December  31,  1996.  These  commitments  for future  periods are as
follows (in millions):  1997 - $12.6;  1998 - $10.3;  1999 - $9.1;  2000 - $6.0;
2001 - $5.3; 2002 and thereafter - $9.7.

         The Corporation enters into price protection  arrangements from time to
time, depending on market circumstances, to ensure a minimum price for a portion
of its  expected  future  mine  production.  See  Note  19 to  the  Consolidated
Financial   Statements  to  which   reference   should  be  made  for  a  fuller
understanding of these arrangements with respect to expected 1997 production.

         On  December  31,  1996,   the   Corporation's   share  of  outstanding
commitments  was  approximately  $72  million to  construction  contractors  and
equipment  manufacturers  for the  expansion  of the  Candelaria  copper  mining
complex in northern Chile.

18.   CONTINGENCIES
The Corporation is from time to time involved in various legal  proceedings of a
character normally incident to its past and present businesses.  Management does
not believe that the outcome of these  proceedings  will have a material adverse
effect on the financial condition or results of operations of the Corporation on
a consolidated basis.

         The  Corporation is subject to federal,  state and local  environmental
laws, rules and regulations, including the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA or Superfund),  as amended by the
Superfund  Amendments and  Reauthorization  Act of 1986.  Under  Superfund,  the
Environmental  Protection Agency (EPA) has identified approximately 35,000 sites
throughout the United States for review,  ranking and possible  inclusion on the
National   Priorities  List  (NPL)  for  possible  response.   Among  the  sites
identified, EPA has included 13 sites owned by the Corporation.  The Corporation
believes that most, if not all, of its sites so identified  will not qualify for
listing on the NPL.

         In addition,  the Corporation may be required to remove hazardous waste
or remediate  the alleged  effects of hazardous  substances  on the  environment
associated with past disposal  practices at sites not owned by the  Corporation.
The Corporation has received notice that it is a potentially  responsible  party
from EPA and/or  individual  states  under CERCLA or a state  equivalent  and is
participating in environmental assessment and remediation activity at 37 sites.

         The amounts of the  Corporation's  liabilities for remedial  activities
are very  difficult to estimate due to such factors as the unknown extent of the
remedial actions that may be required and, in the case of sites not owned by the
Corporation,  the unknown  extent of the  Corporation's  probable  liability  in
proportion  to the probable  liability of other  parties.  The  Corporation  has
probable  environmental  liabilities  that in its judgment cannot  reasonably be
estimated,  and losses attributable to remediation costs are reasonably possible
at other sites. The Corporation cannot now estimate the total additional loss it
may incur for such environmental liabilities, but such loss could be substantial
(see  Notes  1  and 2 to  the  Consolidated  Financial  Statements  for  further
information concerning the Corporation's environmental obligations).

         In  1993  and  1994,   the  New   Mexico  and   Arizona   legislatures,
respectively,  passed laws  requiring  the  reclamation  of mined lands in those
states.  The New  Mexico  Mining  Commission  adopted  rules for the New  Mexico
program  during 1994,  and the  Corporation's  operations  began  submitting the
required permit  applications in December 1994. The Arizona State Mine Inspector
has adopted rules for the Arizona program in January 1997, and the Corporation's
operations are expected to begin  submitting the required  reclamation  plans in
March 1997.  These laws and regulations  will likely increase the  Corporation's
regulatory  obligations  and  compliance  costs with respect to mine closure and
reclamation.  At this time, it is not possible to quantify the impact of the new
laws and regulations on the Corporation.

         By a letter  agreement dated September 7, 1990, the Corporation and the
San Carlos  Apache  Tribe agreed upon  principles  to settle the water claims of
that Tribe and other land use issues  involving the Tribe's  reservation.  Since
that time,  comprehensive settlement agreements among the Tribe, the Corporation
and other parties have been under negotiation.  In the more recent phases of the
settlement  negotiations,  the  Tribe  has  sought  terms  that the  Corporation
believes are unacceptable and inconsistent  with the principles set forth in the
September 7, 1990, letter agreement. The Tribe has also notified the Corporation
to make  preparations to stop using the reservation for water  transportation by
July 1997, at the latest. The Corporation  obtains water for its Morenci complex
from  several  sources,  including  through the  operation  of a pump station on
reservation  lands adjacent to the Black River,  and uses the natural channel of
Eagle Creek,  which is partially located on the reservation,  to transport water
from  Black  River  and  certain  other  sources  to its  Morenci  complex.  The
Corporation  believes  that it holds valid rights of way and  easements  and has
other legal rights sufficient to allow for the continued  operation of the Black
River pump station on reservation lands and for the use of Eagle Creek. However,
if the Corporation were to lose the use of the Black River pump station, and was
unable to transport water using the natural  channel of Eagle Creek,  that might
adversely  affect   production  at  the  Morenci  complex   depending  upon  the
availability  of  alternative  sources of water.  The parties are  continuing to
discuss all of these matters. The federal legislation  authorizing settlement of
the Tribe's  water rights claims with the  Corporation  and the other parties to
the proceeding has been extended for a six-month period expiring June 30, 1997.

19.  DERIVATIVE  FINANCIAL  INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING AND
   FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation does not acquire, hold or issue derivative financial instruments
for  trading  purposes.  Derivative  financial  instruments  are used to  manage
well-defined commodity price, foreign exchange and, to a lesser extent, interest
rate risks, that arise out of the Corporation's  core business  activities.  The
fair values of the Corporation's  derivative financial  instruments are based on
quoted market prices for similar financial instruments.  A summary of derivative
financial instruments held by the Corporation is as follows:

         COPPER PRICE  PROTECTION  AGREEMENTS - Depending on market  conditions,
the  Corporation  may  periodically  purchase  or  sell  various  copper  option
contracts to mitigate the risk of adverse price fluctuations on a portion of its
expected  future  mine  production.   With  respect  to  1996  production,   the
Corporation  had contracts  that  provided a combination  of minimum and maximum
quarterly  average  London Metal  Exchange  (LME) prices for  approximately  185
million pounds of third quarter copper  production  that resulted in payments of
$3.1 million to Phelps Dodge.  In addition,  the  Corporation had contracts that
provided  a  combination  of  minimum  and  maximum  LME  prices  per  pound for
approximately  790 million  pounds of copper  that  expired  without  payment to
Phelps Dodge.  During the 1996 third quarter,  the Corporation sold copper price
protection contracts that covered 94 million pounds of anticipated production in
the fourth quarter of 1996 and 85 million  pounds of  anticipated  production in
the first  quarter of 1997.  This  resulted in  immediate  cash  payments to the
Corporation of $15.6 million. Consequently, $8.8 million for 1996 fourth quarter
contracts was  recognized  in income during the fourth  quarter and $6.8 million
for 1997 first  quarter  contracts was deferred and will be recognized in income
during the 1997 first quarter.

         With respect to 1995  production,  the  Corporation  had contracts that
provided  minimum  quarterly  average  LME  prices  of 80 cents  per  pound  for
approximately  640 million pounds of copper.  These  contracts  expired  without
payment to Phelps Dodge. In addition, the Corporation had contracts in 1995 that
provided minimum  (approximately 95 cents) and maximum (approximately $1.33) LME
prices per pound for approximately 650 million pounds of copper. These contracts
expired on December 31, 1995, and the  Corporation  made payments  totaling $1.3
million to the financial  institutions  involved.  During 1994,  contracts  that
provided the Corporation  with minimum average LME copper prices of 75 cents per
pound for about 244 million  pounds of  production  expired  without  payment to
Phelps Dodge.

         With  respect to 1997  production,  the  Corporation  has entered  into
contracts with several  financial  institutions  that provide for a minimum 1997
first  quarter  average  price of 90  cents  per  pound  for a net  position  of
approximately 85 million pounds of copper cathode.

         COPPER FUTURES CONTRACTS - The Corporation's  objective and practice is
to sell its copper at a price based on the New York Commodity  Exchange  (COMEX)
average price in the month of shipment.  However, a few customers request a firm
price as of a specified  date prior to or during the month of shipment.  In such
transactions,  the Corporation usually hedges such sales commitments by entering
into copper  futures and copper swap  contracts  that  approximate  the shipment
quantities and periods.  The copper futures contracts are then liquidated during
the month of  shipment  which  generally  results  in  realization  of the COMEX
average monthly price for copper shipped.  The liquidation  process involves the
use of  offsetting  futures  contracts.  Therefore,  the notional  value,  which
represents the absolute sum of all outstanding copper futures contracts,  is not
an  accurate  measurement  of  risk  to the  Corporation  from  the  use of such
derivative  financial  instruments.  Swap  contracts  are  settled  at the COMEX
average monthly price in the month copper is shipped.  At December 31, 1996, the
Corporation had futures and swap hedge contracts in place for  approximately 149
million  pounds of copper with an  approximate  net value of $143 million and an
aggregate notional value of approximately  $156 million.  The copper futures and
swap  contracts  acquired by the  Corporation  at year end had maturities of two
years or less. The Corporation had deferred  unrecognized  gains of $2.3 million
on its futures and swap contracts at December 31, 1996. With respect to 1995, at
year end the  Corporation  had  futures  and swap hedge  contracts  in place for
approximately  104 million pounds of copper at an approximate  net value of $125
million and an  aggregate  notional  value of  approximately  $125  million.  At
December 31, 1995,  the  Corporation  had  deferred  unrecognized  losses on its
futures  and  swap  contracts  of  $2.4  million  as  the  offsetting   customer
transactions had not matured.

         FOREIGN EXCHANGE CONTRACTS - The Corporation  periodically  enters into
forward  exchange  and  currency  option  contracts  to hedge  certain  recorded
transactions, firm commitments and other anticipated transactions denominated in
foreign currencies.  The objective of the Corporation's foreign currency hedging
activities  is to  protect  the  Corporation  from  the risk  that the  eventual
equivalent dollar cash flows resulting from transactions  denominated in foreign
currencies will be adversely affected by changes in exchange rates. In hedging a
transaction,  the Corporation's foreign exchange hedging strategy may, from time
to time,  involve  the use of a  number  of  offsetting  currency  contracts  to
minimize the cost of the  underlying  hedge.  Thus,  the notional  value,  which
represents  the  arithmetic  sum of all  outstanding  foreign  currency  hedging
instruments,  is not a measurement  of risk to the  Corporation  from the use of
derivative  financial  instruments.  At December 31, 1996, the  Corporation  had
protection in place for  approximately  $141 million of recorded,  committed and
anticipated foreign currency  transactions  through the use of forward contracts
and  currency  options with a matching  aggregate  notional  value.  The forward
contracts and currency  options  acquired by the Corporation  have maturities of
less than one year. The Corporation did not have any deferred unrecognized gains
or losses on its foreign  exchange  contracts at December 31, 1996,  or December
31, 1995.

         INTEREST RATE  PROTECTION  AGREEMENT - The  Corporation  has caused its
80-percent-owned  Candelaria  copper  project in Chile to enter into an interest
rate  protection  agreement  with certain  financial  institutions  to limit the
effect of  increases  in the  interest  rate on $200  million of  floating  rate
dollar-denominated  debt.  Under the terms of the  agreement,  the project  will
receive  payments  from these  institutions  if the six-month  London  Interbank
Offered  Rate  (LIBOR)  exceeds 9 percent  prior to December  31,  2001,  and 11
percent during the two subsequent years ending December 31, 2003.

         CREDIT RISK - The Corporation is exposed to credit loss in the event of
nonperformance by  counterparties to its price protection,  foreign exchange and
interest rate  protection  agreements.  To minimize the risk of credit loss, the
Corporation deals only with highly rated financial institutions and monitors the
credit  worthiness of these  institutions on a continuing basis. The Corporation
does not anticipate nonperformance by any of these counterparties.

         The methods  and  assumptions  used to estimate  the fair value of each
class of financial  instrument  for which it is  practicable to estimate a value
are as follows:

         Cash and short-term  investments -- the carrying amount is a reasonable
         estimate  of  the  fair  value  because  of the short maturity of those
         instruments.

         Investments  and  long-term  receivables  -- the  fair  values  of some
         investments  are  estimated  based on quoted market prices for those or
         similar investments.  The fair values of other types of instruments are
         estimated by discounting  the future cash flows using the current rates
         at which similar  instruments would be made with similar credit ratings
         and for the same remaining maturities.

         Long-term  debt  --  the  fair  value  of  substantially   all  of  the
         Corporation's  long-term  debt is estimated  based on the quoted market
         prices for the same or similar  issues or on the current  notes offered
         to the Corporation for debt of the same remaining maturities.

         Standby  letters of credit and financial  guarantees -- the fair values
         of guarantees and letters of credit are based on fees currently charged
         for similar  agreements or on the estimated  cost to terminate  them or
         otherwise  settle  the  obligations  with  the  counterparties  at  the
         reporting date. The Corporation,  including certain subsidiaries,  have
         various guarantees and letters of credit totaling $86.2 million.  There
         is no market for these guarantees or standby letters of credit and they
         were issued without explicit cost. Therefore,  it is not practicable to
         establish their fair value.

         The estimated fair values of the Corporation's financial instruments as
of December 31, 1996, were as follows (in millions):

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

                                                          Carrying     Fair
                                                           Amount      Value
                                                          --------     -----

Cash and short-term investments                       $     470.1      470.1
Copper option contracts - assets (liabilities)              (5.1)        0.3
Investments and long-term receivables (including
 amounts due within one year) for which it is
 practicable to estimate fair value *                        37.5      188.6
Long-term debt (including amounts due
 within one year)                                           592.8      613.4
Interest rate protection agreements - assets                  2.5        1.0
Foreign currency exchange contracts - assets
 (liabilities)                                               (0.6)      (0.7)
-----------

*        The  Corporation's  largest  cost  basis  investment  is  its  minority
         interest in Southern Peru Copper Corporation  (SPCC),  which is carried
         at a book value of $13.2 million.  Phelps Dodge's  interest in SPCC was
         reduced from 16.25 percent to 13.9 percent through an exchange offering
         of SPCC common shares  consummated in 1996. Based on the New York Stock
         Exchange  closing  market price of those SPCC shares as of December 31,
         1996, the estimated fair value of the Corporation's  investment in SPCC
         is approximately  $163 million.  Phelps Dodge's  ownership  interest in
         SPCC is  represented by its share of a class of SPCC common stock which
         is currently not registered for trading on any public exchange.

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

20.   BUSINESS SEGMENT DATA
The Corporation's business consists of two segments, Phelps Dodge Mining Company
and Phelps  Dodge  Industries.  The  principal  activities  of each  segment are
described below,  and the accompanying  tables present results of operations and
other financial information by segment and by significant geographic area.

         Phelps Dodge Mining Company is an international  business  comprising a
group of companies involved in vertically integrated copper operations including
mining,  concentrating,  electrowinning,  smelting and refining, rod production,
marketing and sales, and related activities.  Copper is sold primarily to others
as rod,  cathode  or  concentrates,  and as rod to the Phelps  Dodge  Industries
segment.  In addition,  Phelps Dodge Mining  Company at times smelts and refines
copper and produces  copper rod for others on a toll basis,  and produces  gold,
silver,  molybdenum and copper chemicals as byproducts,  and  sulfuric acid from
its air quality control facilities. This segment also includes the Corporation's
other mining operations and investments  (including fluorspar,  silver, lead and
zinc operations) and its worldwide mineral exploration and development programs.

         Phelps Dodge  Industries  is a business  segment  comprising a group of
companies   that   manufacture   engineered   products   principally   for   the
transportation,  energy and telecommunications sectors worldwide. Its operations
are  characterized  by products with significant  market share,  internationally
competitive cost and quality,  and specialized  engineering  capabilities.  This
business  segment  includes the  Corporation's  specialty  chemicals  operations
through  Columbian  Chemicals  Company and its  subsidiaries;  its wheel and rim
operations through Accuride  Corporation and its subsidiaries;  and its wire and
cable and specialty  conductor  operations  through  Phelps Dodge  International
Corporation  and Phelps  Dodge Magnet Wire  Company and their  subsidiaries  and
affiliates.

         The  Corporation's  total 1996 sales included  exports of $60.2 million
from U.S.  operations to  unaffiliated  foreign  customers,  compared with $93.7
million  in 1995 and $76.2  million  in 1994.  Intersegment  sales  reflect  the
transfer of copper from Phelps Dodge Mining  Company to Phelps Dodge  Industries
at the same prices charged to outside customers.

         The  following  tables  give a summary of  financial  data by  business
segment and geographic area for the years 1994 through 1996. Major unusual items
during the  three-year  period  included (i) a 1996  pre-tax  provision of $10.0
million  included in Phelps Dodge Mining  Company's  operating  income resulting
from a reclamation  provision related to the Court ordered  rescission of a 1986
sale of property,  (ii) a 1995 pre-tax gain of $26.8 million  included in Phelps
Dodge Industries'  operating income from the sale by its carbon black operations
of a synthetic iron oxide facility, (iii) a 1994 pre-tax charge of $94.4 million
to Phelps Dodge Mining  Company's  operating  income for costs  associated  with
environmental matters and asset dispositions,  and (iv) a 1994 pre-tax charge of
$44.6 million to Phelps Dodge Industries'  operating income for costs associated
with environmental  matters and asset dispositions,  including $17.6 million for
carbon  black  facilities  and $27.0  million  for wire and cable and  specialty
conductor facilities. (See Note 2 to the Consolidated Financial Statements for a
further discussion of these issues.)
<PAGE>
FINANCIAL DATA BY BUSINESS SEGMENT
(In millions)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                          Phelps Dodge Industries
                                       Phelps     --------------------------------
                                       Dodge    Specialty Wheels     Wire           Corporate
                                       Mining   Chemicals & Rims  & Cable   Total   & Other    Total
                                       ------    ------   ------  -------   -----    -------   -----
<S>                                   <C>          <C>      <C>   <C>       <C>      <C>       <C>    
1996
 Sales and other operating revenues:
   Unaffiliated customers             $ 2,091.1    437.0    307.8  950.7   1,695.5          -  3,786.6

   Intersegment                           265.8        -        -    0.5       0.5          -    266.3

 Operating income (loss)                  526.6     79.8     41.4  104.6     225.8      (39.5)   712.9
 
 Identifiable assets at
  December 31                           2,938.2    476.0    285.4  802.9   1,564.3      313.9  4,816.4

 Depreciation, depletion and
  amortization                            150.7     34.3     20.1   42.8      97.2        1.6    249.5

 Capital outlays                          330.2     72.2      9.6   97.8     179.6        3.2    513.0

 Equity earnings                            6.9      0.1      0.1    3.4       3.6          -     10.5
-------------------------------------------------------------------------------------------------------
1995
 Sales and other operating revenues:
   Unaffiliated customers             $ 2,488.7    420.8    357.8  918.1   1,696.7          -  4,185.4

   Intersegment                           275.0        -        -    0.6       0.6          -    275.6

 Operating income (loss)                  896.8    103.9     45.6   93.8     243.3      (39.6) 1,100.5

 Identifiable assets at
  December 31                           2,839.2    424.0    299.5  632.0   1,355.5      451.2  4,645.9

 Depreciation, depletion and
  amortization                            134.0     33.2     21.1   33.9      88.2        1.3    223.5

 Capital outlays                          321.6     22.6      6.9   52.8      82.3        1.0    404.9

 Equity earnings                            4.5        -      0.3    1.7       2.0          -      6.5
-------------------------------------------------------------------------------------------------------
1994
 Sales and other operating revenues:
   Unaffiliated customers             $ 1,820.7    335.0    333.6  799.9   1,468.5          -  3,289.2

   Intersegment                           218.5        -        -    1.7       1.7          -    220.2

 Operating income (loss)                  326.4     20.0     42.3   43.8     106.1      (32.1)   400.4

 Identifiable assets at
  December 31                           2,450.2    439.9    341.8  621.5   1,403.2      280.4  4,133.8

 Depreciation, depletion and
  amortization                            105.1     34.1     20.5   34.5      89.1        1.1    195.3

 Capital outlays                          299.2     19.6      6.4   29.1      55.1        0.7    355.0

 Equity earnings                            5.6      0.3      0.3    2.4       3.0          -      8.6
-------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FINANCIAL DATA BY GEOGRAPHIC AREA
(In millions)

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

                                                1996          1995         1994
                                                ----          ----         ----

SALES AND OTHER OPERATING REVENUES:
 Unaffiliated customers
  United States                        $     2,773.5       3,072.6      2,485.9
  Latin America                                414.6         537.3        346.7
  Other                                        598.5         575.5        456.6
                                          ----------    ----------   ----------
                                       $     3,786.6       4,185.4      3,289.2
                                          ==========    ==========   ==========
 Intergeographic areas *
  United States                        $        11.9          13.1         19.3
  Latin America                                 14.9          23.7            -
  Other                                         43.5          47.9         54.4
                                          ----------    ----------   ----------
                                       $        70.3          84.7         73.7
                                          ==========    ==========   ==========
OPERATING INCOME:
 United States                         $       544.9         810.4        337.2
 Latin America                                  64.5         196.8         30.0
 Other                                         103.5          93.3         33.2
                                          ----------    ----------   ----------
                                       $       712.9       1,100.5        400.4
                                          ==========    ==========   ==========
IDENTIFIABLE ASSETS AT DECEMBER 31:
 United States                         $     3,196.2       3,157.1      2,789.0
 Latin America                               1,000.1         931.3        798.2
 Other                                         620.1         557.5        546.6
                                          ----------    ----------   ----------
                                       $     4,816.4       4,645.9      4,133.8
                                          ==========    ==========   ==========
-----------

         * Intracompany  sales from the geographic  area referenced to the other
           geographic areas listed.

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

Item 9.  Disagreements on Accounting and Financial Disclosure
-------------------------------------------------------------

         None.




                                    Part III

Items 10, 11, 12 and 13.
------------------------

         The  information  called  for by Part III  (Items 10, 11, 12 and 13) is
incorporated  herein by reference from the material  included under the captions
"Election  of  Directors,"  "Beneficial  Ownership  of  Securities,"  "Executive
Compensation" and "Other Matters" in Phelps Dodge Corporation's definitive proxy
statement  (to be filed  pursuant to Regulation  14A) for its Annual  Meeting of
Shareholders to be held May 7, 1997 (the 1997 Proxy Statement),  except that the
information  regarding  executive  officers called for by Item 401 of Regulation
S-K is  included in Part I of this  report.  The 1997 Proxy  Statement  is being
prepared  and will be filed with the  Securities  and  Exchange  Commission  and
furnished to shareholders on or about April 1, 1997.

                                     Part IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
---------------------------------------------------------------------------

(a)   1.   Financial Statements.

      2.   Financial Statement Schedule.

      3.   Exhibits:

      3.1      Restated   Certificate  of   Incorporation  of  the  Corporation,
               effective June 16, 1987 (incorporated by reference to Exhibit 3.1
               to the  Corporation's  Form 10-Q for the  quarter  ended June 30,
               1987 (SEC  File No.  1-82)).  Certificate  of  Amendment  of such
               Restated Certificate of Incorporation,  effective August 4, 1988,
               and  Certificate  of Amendment of such  Restated  Certificate  of
               Incorporation,   effective   August  9,  1988   (incorporated  by
               reference to Exhibits 3.1 and 3.2 to the Corporation's  Form 10-Q
               for the quarter ended  September  30, 1988 (SEC File No.  1-82)).
               Complete  composite copy of the Certificate of  Incorporation  of
               the Corporation as amended to date  (incorporated by reference to
               Exhibit  3.1 to the  Corporation's  1992  Form 10-K (SEC File No.
               1-82)).

      3.2      By-Laws  of the  Corporation, as  amended effective March 5, 1997
               (SEC File No. 1-82).

      4.1      Reference is made to Exhibits 3.1 and 3.2 above.

      4.3      Rights  Agreement,  dated as of July 29,  1988  and  Amended  and
               Restated  as of December 6, 1989,  between  the  Corporation  and
               Chase Bank (formerly  Chemical Bank),  which includes the form of
               Certificate  of Amendment  setting  forth the terms of the Junior
               Participating  Cumulative  Preferred Shares,  par value $1.00 per
               share,  as Exhibit A, the form of Right  Certificate as Exhibit B
               and the Summary of Rights to Purchase Preferred Shares as Exhibit
               C  (incorporated  by reference to Exhibit 1 to the  Corporation's
               Current  Report on Form 8-K filed on  December  7, 1989 (SEC File
               No. 1-82)).

               Note:  Certain  instruments with respect to long-term debt of the
               Corporation  have not been filed as Exhibits to this Report since
               the  total  amount  of  securities   authorized  under  any  such
               instrument  does not exceed 10 percent of the total assets of the
               Corporation  and its  subsidiaries on a consolidated  basis.  The
               Corporation agrees to furnish a copy of each such instrument upon
               request of the Securities and Exchange Commission.

      10.      Management contracts and compensatory plans and agreements.

      10.1     The  Corporation's  1987 Stock Option and  Restricted  Stock Plan
               (the 1987 Plan),  as amended to and including  June 3, 1992,  and
               form  of  Stock  Option  Agreement  and  form  of  Reload  Option
               Agreement, both as modified through June 3, 1992 (incorporated by
               reference to Exhibit 10.2 of the Corporation's  Form 10-Q for the
               quarter  ended  June  30,  1992  (SEC  File No.  1-82)).  Form of
               Restricted  Stock  letter  under the 1987 Plan  (incorporated  by
               reference  to Exhibit  10.1 to the  Corporation's  1990 10-K (SEC
               File No.  1-82)) and the  amendment  thereto  dated June 25, 1992
               (incorporated  by reference to Exhibit 10.2 to the  Corporation's
               1992 Form 10-K (SEC File No. 1-82)).

      10.2     The  Corporation's  1989  Directors  Stock  Option Plan (the 1989
               Directors  Plan),  as  amended  to and  including  June 3,  1992,
               suspended  effective  November 6, 1996 (incorporated by reference
               to Exhibit  10.3 to the  Corporation's  Form 10-Q for the quarter
               ended June 30, 1992 (SEC File No.  1-82)).  Form of Stock  Option
               Agreement  under  the  1989  Directors  Plan   (incorporated   by
               reference to the Corporation's Registration Statement on Form S-8
               (Reg. No. 33-34363)).

      10.3     The  Corporation's  1993 Stock Option and  Restricted  Stock Plan
               (the 1993 Plan), as amended through December 1, 1993, and form of
               Restricted  Stock  letter  under the 1993 Plan  (incorporated  by
               reference  to Exhibit  10.4 to the  Corporation's  1993 Form 10-K
               (SEC File No. 1-82)).  Form of Stock Option Agreement and form of
               Reload  Option  Agreement,  both as amended  through  November 2,
               1994,  under the 1993 Plan  (incorporated by reference to Exhibit
               10.3 to the Corporation's 1994 Form 10-K (SEC File No. 1-82)).

               Note:  Omitted from filing  pursuant to the  Instruction  to Item
               601(b)  (10) are  actual  Stock  Option  Agreements  between  the
               Corporation  and  certain  officers,  under the 1987 Plan and the
               1993 Plan, and certain Directors,  under the 1989 Directors Plan,
               which contain  substantially similar provisions to Exhibits 10.1,
               10.2 and 10.3 above.

      10.4     Description  of the  Corporation's  Incentive  Compensation  Plan
               (incorporated  by reference to Exhibit 10.5 to the  Corporation's
               1993 Form 10-K (SEC File No. 1-82)).

      10.5     Deferred  Compensation Plan for the Directors of the Corporation,
               amended and restated as of December 4, 1996 (SEC File No. 1-82).

      10.6     Form of  Change-of-Control  Agreement between the Corporation and
               certain  executives,  including  all  of  the  current  executive
               officers  to be listed in the summary  compensation  table to the
               1997 Proxy Statement  (incorporated  by reference to Exhibit 10.7
               to the Corporation's 1992 Form 10-K (SEC File No. 1-82)).

      10.7     Form of Severance  Agreement  between the Corporation and certain
               executives, including all of the current executive officers to be
               listed  in the  summary  compensation  table  to the  1997  Proxy
               Statement  (incorporated  by  reference  to Exhibit  10.11 to the
               Corporation's 1988 Form 10-K (SEC File No. 1-82)).

      10.8     The  Corporation's  Retirement  Plan  for  Directors,   effective
               January 1, 1988  (incorporated  by reference to Exhibit  10.13 to
               the Corporation's 1987 Form 10-K (SEC File No. 1-82)).

      10.9     The Corporation's Comprehensive Executive Nonqualified Retirement
               and Savings Plan (the Nonqualified  Plan), as amended November 7,
               1990   (incorporated   by  reference  to  Exhibit  10.14  to  the
               Corporation's  1990 Form 10-K  (SEC File No.  1-82)).  Amendment,
               effective January 1, 1991, to the Nonqualified Plan (incorporated
               by reference to Exhibit 10.2 to the  Corporation's  Form 10-Q for
               the  quarter  ended  June 30,  1991  (SEC File No.  1-82)).  Four
               amendments, one effective as of January 1, 1991, one effective as
               of November 15, 1993 (both  incorporated  by reference to Exhibit
               10.13 of the  Corporation's  1993 Form 10-K (SEC File No. 1-82)),
               one effective as of September 7, 1994  (incorporated by reference
               to Exhibit  10.11 of the  Corporation's  1994 Form 10-K (SEC File
               No.  1-82)),  and one  effective  June 7, 1995  (incorporated  by
               reference to Exhibit 10.11 of the Corporation's Form 10-Q for the
               quarter ended June 30, 1995 (SEC File No. 1-82)).

      10.10    The  Corporation's  1997  Directors  Stock  Unit  Plan  effective
               January 1, 1997 (SEC File No. 1-82).

      12   Statement  re computation   of   ratios   of   total  debt  to  total
           capitalization.

      21   List of Subsidiaries and Investments.

      23   Consent of Price Waterhouse LLP.

      24   Powers of  Attorney  executed  by  certain officers and directors who
           signed this Annual Report on Form 10-K.

               Note:  Shareholders  may  obtain  copies  of  Exhibits  by making
                      written  request to the Secretary of the  Corporation  and
                      paying copying costs of 10 cents per page, plus postage.

(b)   Reports on Form 8-K:

      No current  Reports on Form 8-K were filed by the  Corporation  during the
quarter ended December 31, 1996.
<PAGE>
Schedule VIII

PHELPS DODGE CORPORATION AND CONSOLIDATED SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
--------------------------------------------------------------------------------

(In thousands)

                                             Additions
                                         -----------------
                            Balance at   Charged to                    Balance
                            beginning    costs and           Deduc-    at end
                            of period    expenses    Other   tions     of period
                            ---------    --------    -----   -----     ---------


Reserve deducted in 
balance sheet from 
the asset to which 
applicable:

Accounts Receivable:

 December 31, 1996       $  12,000       4,300       (200)    1,900    14,200

 December 31, 1995          11,800       2,000       (800)    1,000    12,000

 December 31, 1994          12,200       1,900          -     2,300    11,800



Supplies:

 December 31, 1996       $  10,500       1,300        100     3,000     8,900

 December 31, 1995          14,000         600        200     4,300    10,500

 December 31, 1994          12,700         700      3,100     2,500    14,000
<PAGE>
                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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.

                                               PHELPS DODGE CORPORATION
                                                         (Registrant)

March 17, 1997                                 By:   Thomas M. St. Clair
                                                     --------------------
                                                     Thomas M. St. Clair
                                                     Senior Vice President
                                                     and Chief Financial 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 dates indicated.

                           Chairman of the Board, President,
                           Chief Executive Officer
                           and Director
Douglas C. Yearley         (Principal Executive Officer)          March 17, 1997
-------------------
Douglas C. Yearley

                           Senior Vice President
                           and Chief Financial Officer
Thomas M. St. Clair        (Principal Financial Officer)          March 17, 1997
-------------------
Thomas M. St. Clair

                           Vice President and Controller
Gregory W. Stevens         (Principal Accounting Officer)         March 17, 1997
-------------------
Gregory W. Stevens

Robert N. Burt, Paul W. Douglas,                   )
William A. Franke, Paul Hazen, Marie L. Knowles    )
Robert D. Krebs, Southwood J. Morcott,             )              March 17, 1997
Gordon R. Parker, J. Steven Whisler, Directors     )

By:      Thomas M. St. Clair
         -------------------
         Thomas M. St. Clair
         Attorney-in-fact