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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, 1997

                           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, 1998, was approximately $3,820,233,000.

Number of Common Shares outstanding at March 6, 1998:  58,660,000 shares.

                      Documents Incorporated by Reference:

             Document                                           Location in 10-K
             --------                                           ----------------
Proxy Statement for 1998 Annual Meeting                             Part III

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<PAGE>
                            PHELPS DODGE CORPORATION

                           Annual Report on Form 10-K
                      For the Year Ended December 31, 1997




                                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

                         1997 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 1997, the Corporation
produced  812,100 tons of copper for its own account from its  worldwide  mining
operations and an additional 172,000 tons of copper for the accounts of minority
interest owners.  Gold, silver,  molybdenum,  copper chemicals and sulfuric acid
are also produced as byproducts of the Corporation's copper operations.

         Production  of copper for the  Corporation's  own account from its U.S.
operations  constituted  approximately  30 percent  of the  copper  mined in the
United States in 1997. 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 global energy,  telecommunications,  transportation and specialty  chemicals
sectors  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.  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.

         Effective January 1, 1998,  Phelps Dodge sold Accuride  Corporation and
its subsidiaries  (Accuride),  its division that manufactures steel and aluminum
wheels and rims for medium and heavy trucks, trailers and buses, to an affiliate
of  Kohlberg  Kravis  Roberts  and Co.  (KKR)  and the  existing  management  of
Accuride.  Under  terms of the sale  agreement,  Phelps  Dodge will  retain a 10
percent  interest  in  Accuride  (see  Note  2  to  the  Consolidated  Financial
Statements for a further discussion of this sale).

         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 21 to the  Consolidated
Financial Statements of this report, 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)     Through 1997, the Phelps Dodge Industries segment included the
                  Corporation's  specialty  chemicals  operations,  its wire and
                  cable  operations,   and  its  recently  sold  wheel  and  rim
                  operations.

         Information about sales and earnings of international operations of the
Corporation  is  also  included  in  Note  21  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 people  employed by the Corporation on December 31, 1997,
was 15,869 including 1,480 at Accuride Corporation.

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.  The  Corporation  produces  electrowon  copper
cathode  at  open-pit  mine-for-leach  and  solution   extraction/electrowinning
(SX/EW) operations in Tyrone, New Mexico. In addition,  the Corporation produces
electrowon  copper  cathode at SX/EW  operations  in Morenci,  Arizona and Santa
Rita, New Mexico.

         The Morenci complex in southeastern Arizona comprises an open-pit mine,
two concentrators,  three solution extraction  facilities and two electrowinning
tankhouses. 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 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.

         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.
The project presently  consists of an open-pit copper 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.  That  expansion  was  completed  in the 1997 fourth
quarter at a total cost of $305 million,  and is expected to bring  Candelaria's
average annual production to approximately  380 million pounds.  This results in
an average  annual  increase in production  for the  Corporation  of 130 million
pounds. The expansion included increased mining activity,  the installation of a
second   semi-autogenous  (SAG)  mill  line,  new  and  expanded   concentrating
facilities,  and the  addition  of more than 200  employees.  As a result of the
expansion,  the estimated mine life of Candelaria is expected to 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 1997, the  Corporation  produced a total of 418,000 tons of cathode copper at
its SX/EW  facilities,  compared  with  408,000 tons in 1996 and 364,200 tons in
1995.  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  270,000
tons at the Morenci complex, 75,000 tons at the Santa Rita plant and 75,000 tons
at the Burro Chief plant near Tyrone.

         On February 3, 1998, the Corporation announced the acquisition of Cobre
Mining Company Inc. (Cobre) for approximately $115 million including acquisition
costs. The Corporation  assumed Cobre's  outstanding  debt of approximately  $14
million.  The  acquisition  was  at a  price  of  $3.85  per  common  share  for
substantially all of Cobre's 27 million common shares, including shares issuable
upon the exercise of  outstanding  warrants and options.  The primary  assets of
Cobre include the Continental Mine, which comprises an open-pit copper mine, two
underground  copper mines, two mills,  and the surrounding  11,000 acres of land
located  in  southwestern  New  Mexico  adjacent  to  the  Corporation's   Chino
operations.  Cobre's reported mill ore reserves at year-end 1996 were 48 million
tons averaging more than 1 percent copper.

         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  1997,  the  refinery  operated at capacity
producing  just over  455,000  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 byproducts 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 750,000 tons of refined copper into rod and
other refined copper products. During 1997, combined production of rod and other
refined copper products from the two plants was 747,000 tons.

         The following tables give the Corporation's worldwide copper production
by source for the years 1993 through  1997;  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) an  increase  in  capacity in 1995 of the SX/EW
facilities  at  Morenci;  (2) the  startup of the  Southside  project in 1995 at
Morenci;  (3)  expansion of Chino's  SX/EW plant at Santa Rita in 1993 and 1997;
(4) severe  flooding  problems  at Ojos del  Salado's  Santos  mine in 1993 that
resulted  in  reduced  production  of  copper  concentrate;  (5) the sale of the
Corporation's  interest  in the Santa  Gertrudis  gold  mine in the 1994  second
quarter; (6) commencement of operations at Candelaria in the 1994 fourth quarter
and  achievement  of full  production  in 1995;  and (7) expansion of Candelaria
concentrator operations in 1997.
<PAGE>
<TABLE>
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PHELPS DODGE COPPER PRODUCTION DATA, BY SOURCE
----------------------------------------------
(thousand tons)
<CAPTION>
                                       1997     1996     1995     1994     1993
                                       ----     ----     ----     ----     ----
<S>                                  <C>      <C>      <C>      <C>      <C>    
MATERIAL MINED (a)
 Morenci                             291,698  297,688  261,264  240,700  219,032
 Tyrone                              107,896  102,936   83,935   62,067   49,387
 Chino                               121,639  122,939  115,821  105,057  108,568
 Candelaria                           90,045   83,962   72,068   17,842     --  
 Ojos del Salado                       1,713    1,628    1,855    1,712    1,438
                                     -------  -------  -------  -------  -------
Total material mined                 612,991  609,153  534,943  427,378  378,425
Less minority participants' shares   102,305  102,421   92,211   74,692   69,044
                                     -------  -------  -------  -------  -------
Net Phelps Dodge share               510,686  506,732  442,732  352,686  309,381
                                     =======  =======  =======  =======  =======
                                                                                
MILL ORE MINED                                                                  
 Morenci                              50,951   47,136   44,284   45,240   46,990
 Chino                                18,413   20,061   17,026   17,811   17,436
 Candelaria                           13,055   11,603   11,439    2,685     --  
 Ojos del Salado                       1,551    1,506    1,596    1,536    1,314
                                     -------  -------  -------  -------  -------
Total mill ore mined                  83,970   80,306   74,345   67,272   65,740
Less minority participants' shares    16,392   16,078   14,606   13,260   12,861
                                     -------  -------  -------  -------  -------
Net Phelps Dodge share                67,578   64,228   59,739   54,012   52,879
                                     =======  =======  =======  =======  =======
                                                                                
GRADE OF ORE MINED - PERCENT COPPER                                             
 Morenci                                0.72     0.70     0.64     0.65     0.67
 Chino                                  0.69     0.67     0.76     0.69     0.73
 Candelaria                             1.45     1.40     1.88     1.27     --  
 Ojos del Salado                        1.54     1.57     1.40     1.38     1.43
                                                                                
RECOVERABLE COPPER (b)                                                          
 Morenci:                                                                       
  Concentrate                          269.9    247.1    211.6    217.3    233.3
  Electrowon                           272.3    262.5    225.7    190.1    170.8
 Tyrone:                                                                        
  Precipitate                            2.6      3.7      4.3      4.2      6.0
  Electrowon                            76.6     76.0     70.4     68.9     73.5
 Chino:                                                                         
  Concentrate and precipitate           99.9     99.0    100.6     92.7     95.6
  Electrowon                            69.1     69.5     68.1     66.8     63.9
 Candelaria:                                                                    
  Concentrate                          171.7    150.8    165.7     31.0     --  
 Ojos del Salado:                                                               
  Concentrate                           21.1     21.3     19.6     18.6     16.7
 Bisbee precipitate and                                                         
  miscellaneous                          0.9      3.4      1.6      3.6      1.6
                                     -------  -------  -------  -------  -------
Total recoverable copper               984.1    933.3    867.6    693.2    661.4
Less minority participants' shares     172.0    162.9    154.9    120.4    113.7
                                     -------  -------  -------  -------  -------
Net Phelps Dodge share                 812.1    770.4    712.7    572.8    547.7
                                     =======  =======  =======  =======  =======
--------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
--------------------------------------------------------------------------------

PHELPS DODGE METAL PRODUCTION AND DELIVERIES (b)
------------------------------------------------
<CAPTION>
                                   1997      1996      1995      1994      1993
                                   ----      ----      ----      ----      ----
<S>                              <C>       <C>       <C>       <C>       <C>    
COPPER (THOUSAND TONS)
 Total production                  984.1     933.3     867.6     693.2     661.4
 Less minority participants'                                            
  shares                           172.0     162.9     154.9     120.4     113.7
                                 -------   -------   -------   -------   -------
  Net Phelps Dodge share           812.1     770.4     712.7     572.8     547.7
                                 =======   =======   =======   =======   =======
                                                                        
 Deliveries (c)                    812.8     771.6     696.6     560.6     543.9
                                 =======   =======   =======   =======   =======
                                                                        
GOLD (THOUSAND OUNCES) (d)                                              
 Total production                    139       129       151        93        85
 Less minority participants'                                            
  shares                              30        26        31        28        29
                                 -------   -------   -------   -------   -------
  Net Phelps Dodge share             109       103       120        65        56
                                 =======   =======   =======   =======   =======
                                                                        
 Deliveries (c)                      113       125       125        47        54
                                 =======   =======   =======   =======   =======
                                                                        
SILVER (THOUSAND OUNCES) (d)                                            
 Total production                  3,254     2,636     2,739     1,627     1,387
 Less minority participants'                                            
  shares                             677       564       545       360       273
                                 -------   -------   -------   -------   -------
  Net Phelps Dodge share           2,577     2,072     2,194     1,267     1,114
                                 =======   =======   =======   =======   =======
                                                                        
 Deliveries (c)                    2,637     2,359     1,985     1,039     1,085
                                 =======   =======   =======   =======   =======

MOLYBDENUM (THOUSAND POUNDS)                                            
 Total production                  2,121     2,427     2,024       969     1,200
 Less minority participants'                                            
  shares                             472       501       507       226       394
                                 -------   -------   -------   -------   -------
  Net Phelps Dodge share           1,649     1,926     1,517       743       806
                                 =======   =======   =======   =======   =======
                                                                        
 Deliveries                        1,272     2,141     1,328       698       905
                                 =======   =======   =======   =======   =======
                                                                        
SULFURIC ACID                                                           
 (THOUSAND TONS) (e)                                                    
 Total production                1,263.4   1,235.3   1,252.6   1,276.7   1,379.4
 Less minority participant's                                            
  share                            210.5     191.8     181.3     191.5     193.9
                                 -------   -------   -------   -------   -------
  Net Phelps Dodge share         1,052.9   1,043.5   1,071.3   1,085.2   1,185.5
                                 =======   =======   =======   =======   =======
                                                                        
 Deliveries                        383.5     464.0     554.3     685.2     718.4
                                 =======   =======   =======   =======   =======
--------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                        1997     1996     1995     1994     1993
                                        ----     ----     ----     ----     ----
<S>                                  <C>      <C>      <C>      <C>      <C>    
COMEX COPPER PRICE (f)                 $1.04     1.06     1.35     1.07     0.85

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

PHELPS DODGE SMELTERS, REFINERY AND ROD PRODUCTION
--------------------------------------------------

Smelters (g)
  Total copper (thousand
   tons)                               419.1    428.8    422.5    411.7    376.7
  Less minority
   participant's share                  64.5     62.9     58.6     60.0     51.0
                                     -------  -------  -------  -------  -------
    Net Phelps Dodge share             354.6    365.9    363.9    351.7    325.7
                                     =======  =======  =======  =======  =======
Refinery (h)
  Copper (thousand tons)               455.3    450.1    453.0    453.8    432.4
  Gold (thousand ounces)               107.9    114.4    145.4    118.0     85.8
  Silver (thousand ounces)           2,843.0  3,142.5  3,441.5  2,672.3  3,144.7

Rod (i) (thousand tons)                747.0    711.4    654.2    683.5    621.6

--------------------------------------------------------------------------------
</TABLE>
Footnotes to preceding production 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 a toll basis.  
     (h)  Includes  production from  purchased material  and copper refined  for
          others on a toll basis.
     (i)  Includes rod, wire and other shapes.

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

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

         Phelps Dodge Mining (Pty.) Limited, a wholly owned subsidiary of Phelps
Dodge Corporation, operates the Witkop open-pit fluorspar mine and a 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.  Phelps Dodge Mining (Pty.) Limited  produced a total of 97,800 metric
tons of acid-grade  fluorspar in 1997.  Also,  during 1997, the plant achieved a
record safety  performance  level by completing 26 consecutive  months without a
recordable safety incident.

         Black Mountain Mineral  Development  Company (Pty.) Limited operates an
underground lead-silver-zinc-copper mine and a 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 $3.4  million,  $6.0 million and $5.7 million in dividend
payments from Black Mountain in 1997, 1996 and 1995, respectively.

         Phelps  Dodge owns a 13.9  percent  interest  in  Southern  Peru Copper
Corporation (SPCC), which operates two open-pit copper mines, two concentrators,
an SX/EW  facility,  a smelter and a refinery in Peru.  SPCC's  other  principal
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 1997, Phelps Dodge
received  dividend  payments of $14.1  million  from SPCC,  compared  with $16.4
million in 1996 and $13.6 million in 1995.

         On May 6, 1997,  Phelps  Dodge  acquired an indirect 40 percent  voting
interest, representing an indirect 26.67 percent economic interest, in a leading
Peruvian zinc mining company, Compania San Ignacio de Morococha S.A. (SIMSA) and
its San Vicente mine.  SIMSA's other shareholder with voting shares is the Jesus
Arias family. The underground mine produces  approximately 130 million pounds of
zinc  annually.  Phelps Dodge accounts for its investment in SIMSA on the equity
basis.

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 in 26 countries with an
emphasis in Australia,  Brazil,  Canada,  Chile, CIS,  Eritrea,  eastern Europe,
India, Indonesia,  Madagascar,  Mexico, Peru, the Philippines, the United States
and Zambia. During 1997, a new office was established in Austria.

         The 1997 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  $74.1  million on  worldwide  exploration  during 1997,
compared with $70.7 million in 1996 and $60.3 million in 1995.  Approximately 33
percent of the 1997  expenditures  occurred in the United States with 23 percent
being spent at our mine sites. This compared with 47 percent in 1996 (33 percent
at mine sites) and 32 percent in 1995 (20 percent at mining sites).  The balance
of  exploration  expenditures  was spent  principally  in  Australasia,  Brazil,
Canada, Chile, Mexico, Peru and Madagascar.

         During 1997,  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 Coronado  deposit  where an estimated  180 million tons of sulfide  material
with an  average  grade of 0.69  percent  copper and 310  million  tons of leach
material with an average grade of 0.29 percent  copper have been  delineated and
added  to  reserves.  Additionally,  approximately  140  million  tons of  leach
material with an average grade of 0.25 percent copper have been  identified as a
potential resource in the American Mountain area of the Morenci mining complex.

         Other developments in Arizona included the completion of a resource and
feasibility  study that evaluated the re-opening of the Ajo property.  On May 7,
1997, the  Corporation  announced  plans to resume  production at its Ajo copper
mine in southern Arizona where mining operations have been suspended since 1984.
A $238 million  modernization  of the facility is  anticipated  to begin pending
completion of environmental permitting and market conditions.  When operating at
full  capacity,  Ajo is  expected  to add 135  million  pounds  of copper to the
Corporation's  annual  production.  Studies  incorporating  the  use of  current
technologies  for a new  concentrator  facility  have  indicated  that Ajo would
reopen with a reserve of 150 million tons of 0.56 percent copper.

         In New Mexico during 1997, additional  mine-for-leach ore reserves were
delineated  in the  Tyrone  area  where  exploration  activities  identified  an
estimated  78 million tons of sulfide and oxide leach  material  with an average
grade of 0.34 percent copper.

         A  feasibility  study and  environmental  permitting  is in progress 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.

         Internationally,  Phelps Dodge  Exploration  Corporation  announced the
discovery  of  a  potentially  significant   nickel/cobalt  deposit  in  central
Madagascar. Detailed drilling in the district, which is located approximately 80
kilometers  east of the capital city of  Antananarivo,  combined  with  historic
exploration  in the area,  indicates an overall  resource of  approximately  168
million  metric tons of ore at a grade of 1.11  percent  nickel and 0.10 percent
cobalt. A detailed feasibility study and environmental assessment of the project
are under way.

         The Kafue Consortium,  of which Phelps Dodge is a part, submitted a bid
in 1997 to acquire the Nkana and Nchanga division of Zambia  Consolidated Copper
Mines Limited under the Zambian  privatization  program. The submitted proposal,
if  accepted,  would  result  in a new  company  with  the  following  ownership
composition:  Phelps  Dodge - 26 percent,  AVMIN  Limited - 26 percent,  Noranda
Mining  and  Exploration  Inc.  -  26  percent,  and  Commonwealth   Development
Corporation - 10 percent.  Zambia Consolidated Copper Mines Limited, the present
owner, would retain a 12 percent interest in the new company.

         Phelps Dodge is  completing a  pre-feasibility  study on its 70 percent
owned Piedras Verdes property in Sonora, Mexico, and, during 1997, an additional
160 million tons of leach material at 0.33 percent copper was delineated.

         On September 25, 1997, the Corporation  sold its 72.25 percent interest
in the  Seven-Up  Pete Joint  Venture's  McDonald  gold  project  near  Lincoln,
Montana, and other associated  properties,  to CR Montana Corporation and Canyon
Resources Corporation, the parent of CR Montana.

Ore Reserves
------------

         Ore reserves at each of Phelps Dodge's active copper  operations and at
Dos Pobres and Ajo have been estimated as follows:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                        Estimated at December 31, 1997
                                        ------------------------------
                                 Milling                Leaching
                                 Reserves               Reserves         Phelps
                            ------------------    -------------------    Dodge
                            Million       %       Million        %      Interest
                             Tons       Copper     Tons        Copper     (%)
                            -------     ------    -------      ------   --------
<S>                          <C>         <C>      <C>           <C>      <C> 
Morenci                      543.3       0.68     1,628.1       0.26      85.0
Chino                        368.9       0.62       520.8       0.30      66.7
Tyrone                           -          -       455.0       0.34     100.0
Candelaria*                  475.8       0.88           -          -      80.0
Dos Pobres                   330.0       0.65       285.0       0.39     100.0
Ajo                          150.0       0.56           -          -     100.0
Ojos del Salado*              19.7       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 1997.

                                        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
Ajo
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.

--------------------------------------------------------------------------------
</TABLE>
         The  Corporation's  estimated  share of  aggregate  ore reserves at the
above named properties at December 31 is as follows:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                         1997    1996     1995     1994     1993
                                         ----    ----     ----     ----     ----
<S>                                      <C>     <C>      <C>      <C>      <C>
Milling reserves (billion tons)           1.6     1.3      1.2      1.0      0.9

Leaching reserves (billion tons)          2.5     2.2      1.8      1.7      1.2

Commercially recoverable copper
  (million tons)                         13.7    12.1     12.3     10.6     10.1

--------------------------------------------------------------------------------
</TABLE>
         Ore  reserves at each of Phelps  Dodge's  other mining  operations  and
investments at year-end 1997 are estimated as follows:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                       Ore                                                Phelps
                     Reserves  Silver                              %      Dodge
                     Million   Ounces     %        %       %    Calcium    Int.
                       Tons    Per Ton  Copper    Lead    Zinc  Fluoride   (%)
                     --------  -------  ------    ----    ----  --------  -----
<S>                  <C>         <C>     <C>       <C>     <C>   <C>      <C>  
Black Mountain
  Broken Hill
   deposit               8.9     2.3     0.52      5.7     2.9       -     44.60

Southern Peru
  Copper
   Corporation *     1,735.5       -     0.67        -       -       -     13.90

Phelps Dodge
  Mining Limited        18.9       -        -        -       -   17.44    100.00

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

*    Southern Peru Copper  Corporation  deposits also contain  approximately 680
     million tons of leach material at a grade of 0.21 percent copper.

--------------------------------------------------------------------------------
</TABLE>
         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.

         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, 1997:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                    Sulfide Material   Leach Material    Phelps
                                    ----------------  -----------------   Dodge
                                    Million     %     Million      %    Interest
                      Location       Tons     Copper    Tons     Copper    (%)
                      --------      -------   ------  -------    ------ --------
                                                                        
<S>                    <C>            <C>      <C>     <C>        <C>     <C>  
American                                                                
 Mountain              Arizona          -         -      140      0.25     85.00
                                                                        
Cochise                Arizona          -         -      210      0.40    100.00
                                                                        
Copper Basin           Arizona         70      0.53        -         -    100.00
                                                                        
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
                                                                        
Piedras Verdes         Mexico           -         -      310      0.37     70.00
                                                                        
Southern Peru                                                           
 Copper                                                                 
  Corporation          Peru           370      0.62        -         -     13.90
                                                                        
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 1.61 ounces of silver per
          ton.

--------------------------------------------------------------------------------
</TABLE>
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.  The Chino  Mines  partnership  leases  insignificant  amounts  of real
property under a variety of terms.  This leased real property is not critical to
Chino operations.

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  55  percent  of Phelps  Dodge  Mining
Company's  sales in 1997.  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 20 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.

         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 that  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  principal copper
trader.

         While  the  market  anticipated  a  copper  supply  increase  in  1996,
worldwide  copper  inventories  remained at the 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  economic  expansion in the
United States fueled strong demand in all copper consuming  sectors.  In Europe,
growth was flat compared to 1995,  while Japan emerged from a recession.  Strong
fundamental growth continued in Southeast Asia in 1996, and China imported large
quantities of copper to increase strategic inventories.

         In 1997,  the COMEX  copper  price  averaged  $1.04 per pound of copper
cathode,  2 cents less than the 1996 average  price.  The bullish market of 1996
continued into early 1997, driven by a buoyant North American economy, excellent
growth in the copper rod and brass mill  markets in the United  States,  and the
beginning  of an  economic  recovery  in Europe.  Copper  inventories  increased
steadily during the third quarter of 1997, however, driving prices down. In late
1997,  concern  about excess future  supply from  expansions at existing  copper
operations  and the  start-up  of new  mining  projects,  combined  with  market
volatility  as a result of the collapse of several  Southeast  Asian  economies,
caused  dramatic  decreases  in the price of copper.  Consumption  in the region
dropped sharply and, at the same time,  Asian copper users  liquidated  existing
inventories.  By the  close  of the  year,  copper  prices  had  plummeted  to a
four-year low.

Costs
-----

         Unit  production  costs of copper in 1997 were slightly  higher than in
1996,  principally  as a result of  increased  depreciation  charges from recent
capital  projects,  production  disruptions  at the Hidalgo  smelter,  increased
mining expenses and the December  failure of the ore conveyor system at Morenci.
Unit production  costs of copper  generally  continued to reflect high levels of
production,  ongoing cost containment  programs and increased  amounts of copper
obtained through the SX/EW process.

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

         The  Corporation's  operations  in the  United  States  are  subject to
stringent federal, state and local laws and regulations relating to improving or
maintaining  environmental quality. Global operations are also subject to varied
environmental  protection laws. The federal Clean Air Act, as amended (the Clean
Air Act),  and  regulations  thereunder to date have had a  significant  impact,
particularly on the Corporation's smelters.  Costs associated with environmental
compliance  have increased over time, and are generally  expected to continue to
rise in the future. However, improving environmental performance is a continuing
objective of the Corporation.  Good progress has been made to meet the challenge
of  increasingly   complex   environmental   regulations,   particularly   those
environmental regulations affecting the mining industry.

         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.

         In 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
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
submit  all  required  APP  applications   for  its  remaining   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 (Chino),  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  Chino to study  the  environmental
impacts  and  potential  health  risks  associated  with  portions  of the Chino
property affected by historical mining  operations.  Phelps Dodge acquired Chino
at the end of 1986.  Those  studies  began in 1995 and,  until the  studies  are
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 began submitting the required reclamation plans in 1997.  Reclamation
is an ongoing  activity and the  Corporation  recognizes  estimated  reclamation
costs using a units of production basis calculation.  These laws and regulations
will likely  increase the  Corporation's  regulatory  obligations and compliance
costs with respect to mine closure and reclamation.

         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. 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 full 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  $32 million in 1998 and
from $15 million to $20 million in 1999;  $24 million was spent on such programs
in 1997. The Corporation also anticipates making  significant  capital and other
expenditures   beyond  1999  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  continue to be pursued  legislatively  in the
future. The Secretary of the Interior also 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 the
Corporation'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.

         The  Corporation  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 materially 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 not
subject to such stringent requirements.

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

         Employees in Phelps Dodge Mining Company's Arizona operations,  El Paso
refinery and rod mill, 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, 1998, employees who were covered by the
agreements continued to work without a contract.

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

         Phelps Dodge  Industries  is a business  segment  comprising a group of
companies  that  manufacture  engineered  products  principally  for the  global
energy, telecommunications,  transportation and specialty chemicals sectors. 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 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;  and, until it
was sold  effective  January  1,  1998,  its  wheel and rim  operations  through
Accuride  Corporation  and  its  subsidiaries  (Accuride)  (see  Note  2 to  the
Consolidated Financial Statements for a further discussion of this sale).

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 company also maintains sales offices in 10 countries and makes use
of distributors worldwide.  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.

         Phelps Dodge Magnet Wire Company, headquartered in Fort Wayne, Indiana,
is an  international  producer of magnet wire,  the insulated  conductor used in
most electrical  motors.  Its products are  manufactured in the United States at
plants  in  Fort  Wayne,  Indiana;  Hopkinsville,  Kentucky;  Laurinburg,  North
Carolina; and El Paso, Texas. 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, which began in 1996,
is nearing completion and commercial production is expected in the first quarter
of 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 15  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. 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 11 countries --
Brazil,  Chile,  China,  Costa Rica,  Ecuador,  El Salvador,  Honduras,  Panama,
Thailand,  Venezuela and Zambia.  In December 1997,  Phelps Dodge  International
Corporation  acquired  for $72  million a 60 percent  interest in the copper and
aluminum wire and cable manufacturing business, Alcoa Aluminio, S.A., of Brazil.
Additionally,  Phelps Dodge International  Corporation  inaugurated a copper and
aluminum  power cable  manufacturing  facility in November  1997,  Phelps  Dodge
Yantai Cable  Company  (PDYCC),  in the People's  Republic of China.  PDYCC is a
joint venture in which Phelps Dodge owns 66.67 percent of a holding company that
has a 60 percent interest in PDYCC. The Corporation also 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.

         Accuride   Corporation,    headquartered   in   Henderson,    Kentucky,
manufactures  and markets  wheels and rims for commercial  trucks,  trailers and
buses.  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 Kaiser
Aluminum and Chemicals  Corporation each own 50 percent of AKW Inc., an aluminum
wheel production facility in Erie, Pennsylvania.  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.  Accuride also
owns a 51 percent  interest in a joint venture that was  established  in 1997 in
Mexico  (Accuride de Mexico S.A. de C. V.). The  remaining  interest is owned by
Industria  Automotriz  S.A. de C.V. In January 1998,  Phelps Dodge sold Accuride
Corporation  and its  subsidiaries  to an affiliate of KKR and the management of
Accuride.  (See Note 2 to the  Consolidated  Financial  Statements for a further
discussion of this sale.)

         See Note 21 to the Consolidated Financial Statements of this report for
information   concerning   Phelps  Dodge  Industries'  sales  by  its  specialty
chemicals, wire and cable, and wheel and rim operations.

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

         Phelps Dodge  Industries  owns most of its plants and the land on which
they are  located.  The  exceptions  are the land and  buildings of Phelps Dodge
Magnet Wire in Austria and Nesor at Fairfield and Montville,  New Jersey,  which
are leased. Additionally, the land on which six international plants are located
is leased.  This land is not a material  portion of the  overall  operations  of
Phelps Dodge Industries.

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,  two-thirds 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.

         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 Corporation has a majority interest
in a magnet wire  manufacturing  company in Austria  and,  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
two primary U.S.  competitors and competes with three importers 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 byproduct
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.

         The principal raw materials  used by Phelps Dodge Magnet Wire Company's
manufacturing  operations are copper,  aluminum and various  chemical and resins
used in the manufacture of 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 $12 million in 1998 and from $8 million
to $10 million in 1999;  $11 million  was spent on these  programs in 1997.  The
Corporation also anticipates making  significant  capital and other expenditures
beyond 1999 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.  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, 1998, employees who
were  covered  by the  agreement  have  continued  to work  without a  contract.
Columbian Chemicals' plant in the Philippines has a five-year agreement covering
approximately  50  employees,  with an opener  after  three  years for  economic
issues, that expired on January 31, 1998.  Negotiations are currently under way.
Columbian's  plant in Hamilton,  Ontario,  Canada,  has a  three-year  agreement
covering  approximately 60 employees that expires on September 30, 1998, and its
plant in Hickok,  Kansas, has a three-year  agreement covering 33 employees that
expires  on  December  15,  1998.  Phelps  Dodge  International's  plant in West
Caldwell,  New Jersey,  has a three-year  agreement  covering  approximately 340
employees that expires on September 30, 1998.

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 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  $17.7  million in 1997,  compared with
$16.5 million in 1996 and $15.8 million in 1995.

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  (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 40 sites.
For further information about these proceedings,  see Item 3. Legal Proceedings,
Part III.

         At December 31, 1997,  the  Corporation  had reserves of $122.4 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 currently 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 1998 and 1999, and the  expenditures  for those programs in 1997,
are separate from the reserves and estimates described above.

         The  Environmental,  Health  and  Safety  Committee  of  the  Board  of
Directors comprises four non-employee  directors.  The Committee met three times
in 1997 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 monitoring requirements
for Title V  facilities.  EPA is  expected to attempt to resolve the Title V and
major source  appeals by issuing  regulatory  clarifications  in 1998. The other
matters are proceeding through the appellate process.

     In December of 1997 in National  Mining  Association  v.  Browner,  Federal
District  Court for the  District of Colorado  97-N-2665,  the  National  Mining
Association  challenged  the  final  rule  promulgated  by EPA  on May 1,  1997,
expanding the  application of the Toxics  Release  Inventory  reporting  program
under the Emergency Planning and Community  Right-to-Know Act of 1986 to include
metal mining operations. That litigation is pending.

     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  Nation,  the Hopi  Indian
               Tribe,  the San Juan Southern  Paiute Tribe 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.
                    Negotiations  between the Tribe,  the  Corporation and other
                    parties continued on the comprehensive  settlement and other
                    necessary agreements for several years. In 1997,  additional
                    disputes  arose between  Phelps Dodge and the Tribe.  On May
                    12, 1997,  the Tribe filed suit against the  Corporation  in
                    San Carlos  Apache  Tribal  Court,  seeking  eviction of the
                    Corporation  from  the  Tribe's   Reservation  and  claiming
                    substantial  compensatory and punitive damages,  among other
                    relief.  In May 1997,  Phelps Dodge and the Tribe reached an
                    agreement, and subsequently federal legislation (Pub. L. No.
                    105-18,  Section 5003, 111 stat. 158,  181-87),  was adopted
                    which  mandated  dismissal  of the tribal  court  suit.  The
                    legislation  prescribes  arrangements  intended  to ensure a
                    future  supply of water for the  Morenci  mining  complex in
                    exchange  for  certain  payments  by  the  Corporation.  The
                    legislation  does not  address any  potential  claims by the
                    Tribe relating to the Corporation's historical occupancy and
                    operation of its facilities on the Tribe's  reservation  but
                    does  require  that any such claims be  brought,  if at all,
                    exclusively  in  federal  district  court.  By  order  dated
                    October 13,  1997,  the tribal court  dismissed  the lawsuit
                    with prejudice, as contemplated by the legislation.

                    (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. Prior to January 1, 1983,  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 state court
          adjudication.

     III.  Claims under CERCLA and related state acts involving the  Corporation
have been raised with respect to the  remediation of 40 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 40 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 1997 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, 1998,  the executive
officers of Phelps Dodge Corporation were as follows:
<TABLE>
<CAPTION>
                     Age at                                     Officer of the
           Name      3/1/98             Position               Corporation since
           ----      ------             --------               -----------------

<S>                    <C>    <C>                                    <C>
Douglas C. Yearley     62     Chairman of the Board and
                                Chief Executive Officer              1981

J. Steven Whisler      43     President and Chief Operating
                                Officer                              1987

Manuel J. Iraola       49     Senior Vice President                  1995

Ramiro G. Peru         42     Senior Vice President for
                                Organizational Development and
                                  Information Technology             1995

Thomas M. St. Clair    62     Senior Vice President and
                                Chief Financial Officer              1989
</TABLE>

         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.

                                     Part II

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

         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)
<CAPTION>
                                  1997      1996      1995      1994      1993
                                  ----      ----      ----      ----      ----
<S>                         <C>           <C>       <C>       <C>        <C>    
Sales and other
 operating revenues         $   3,914.3   3,786.6   4,185.4   3,289.2    2,595.9
                                                                       
Net income (a)              $     408.5     461.8     746.6     271.0      187.9
  Per common share -                                                   
   basic (b)                $       6.68      7.02     10.72      3.84      2.67
  Per common share -                                                   
   diluted (b)              $       6.63      6.98     10.66      3.82      2.66
                                                                       
Total assets                $   4,965.2   4,816.4   4,645.9   4,133.8    3,720.9
                                                                       
Long-term debt              $     857.1     554.6     613.1     622.3      547.3
                                                                       
Dividends per common                                                   
 share                      $       2.00      1.95      1.80      1.69      1.65
                                                                      
(a)    For a further discussion of earnings,  please see Management's Discussion
       and Analysis.

(b)    In 1997,  the  Corporation  adopted  Statement  of  Financial  Accounting
       Standards (SFAS) No. 128, "Earnings Per Share." For comparative purposes,
       all  prior  period  earnings  per  common  share  computations  have been
       restated to reflect the effect of SFAS No. 128.

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.
</TABLE>

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

Phelps Dodge reported 1997 consolidated earnings of $440.1 million, or $7.14 per
common share,  before  non-recurring,  after-tax charges of $31.6 million, or 51
cents per common share,  which reflected  provisions for estimated  future costs
associated with environmental matters and an early-retirement  program primarily
at Phelps Dodge Mining Company (all  references to per share earnings or charges
are based on diluted earnings per share as discussed below).  This compares with
1996 earnings of $472.5 million, or $7.14 per common share, before a 1996 fourth
quarter  non-recurring,  after-tax charge of approximately  $10.7 million, or 16
cents per common  share,  resulting  from a  reclamation  provision and interest
charges  related to a Court-ordered  rescission of a 1986 sale of property.  Net
income  after  non-recurring  charges  was $408.5  million,  or $6.63 per common
share, for the year 1997 and $461.8 million,  or $6.98 per common share, for the
year 1996. Note 3 to the  Consolidated  Financial  Statements  contains  further
information to which reference should be made for a fuller  understanding of the
1997 and 1996 non-recurring charges.

         The Corporation reported 1995 earnings of $730.0 million, or $10.42 per
common share,  before an after-tax gain of $16.6 million, or 24 cents per share,
from the sale of Columbian  Chemicals  Company's  MAPICO division that increased
reported 1995 net income to $746.6 million or $10.66 per common share.

         The  Corporation's  consolidated  financial  results for the last three
years are summarized below (in millions except per common share amounts):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                1997          1996         1995
                                                ----          ----         ----

<S>                                       <C>               <C>          <C>    
Sales and other operating revenues        $   3,914.3       3,786.6      4,185.4
Operating income                          $     611.0         712.9      1,100.5
Net income                                $     408.5         461.8        746.6
Net income per common share - basic       $      6.68          7.02        10.72
Net income per common share - diluted     $      6.63          6.98        10.66

--------------------------------------------------------------------------------
</TABLE>
         In 1997,  the  Corporation  adopted  Statement of Financial  Accounting
Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 requires disclosure
of basic earnings per share and diluted  earnings per share.  Basic earnings per
share is computed by dividing  income  available to common  shareholders  by the
weighted  average number of common shares  outstanding  for the period.  Diluted
earnings  per share is  similar  to basic  earnings  per share  except  that the
denominator is increased to include the number of additional  common shares that
would have been  outstanding  if the dilutive  potential  common shares had been
issued.  For  comparative   purposes,   all  prior  period  earnings  per  share
computations have been restated to reflect the effect of SFAS No. 128.

         A significant factor influencing the Corporation's 1997 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 $1.04 in 1997,  compared with
$1.06 in 1996 and $1.35 in 1995. The COMEX price averaged 76 cents per pound for
the first two months of 1998, and closed at 79 cents on March 6, 1998.

         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  share of current annual production is approximately
1.8 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 $18 million.

         Consolidated  1997  revenues  were  $3,914.3  million,   compared  with
$3,786.6 million in 1996. The 1997 increase was a result of higher sales volumes
of copper, and increased sales of steel wheels and wire and cable products.  The
increase was partially  offset by lower average  copper prices and the effect of
weaker  European  currencies  at Columbian  Chemicals  Company.  The decrease in
consolidated  revenues from $4,185.4 million in 1995 to $3,786.6 million in 1996
resulted from 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.

         Anticipated  lower copper prices and the effect of the current economic
disruptions in Asia are expected to reduce the Corporation's operating cash flow
in 1998 and could slow the Corporation's growth initiatives currently under way.

         Copper is an  internationally  traded  commodity,  and its  prices  are
effectively  determined  by the two major metals  exchanges -- the 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
rates.

         Because of the market risk arising from the volatility of copper prices
on the COMEX and the LME, the  Corporation's  objective  and practice is to sell
its copper  cathode and rod at a price based on the COMEX  average  price in the
month of shipment,  and its copper  concentrates at the LME average price in the
month  of  settlement  with  its  customers.   The  Corporation  records  copper
concentrate sales on a provisional basis on the date of shipment and adjusts the
sales on a monthly basis to reflect the latest LME price. A final  adjustment is
made upon settlement with customers.  For cathode and rod sales, 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 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.  The combined
net  effect  of  a  firm  price  customer   contract  and  the  related  futures
transactions  is for the  Corporation  to realize  an amount  based on the COMEX
average  price during the month of shipment.  Swap  contracts are settled at the
COMEX  average  monthly  price in the month  copper is shipped.  At December 31,
1997,  the  Corporation  had  futures  and swap  hedge  contracts  in place  for
approximately 140 million pounds of copper with an approximate net value of $130
million and an aggregate notional principal value of approximately $146 million.
The Corporation had deferred  unrealized  losses of $18.7 million on its futures
and swap contracts at December 31, 1997, as the offsetting customer transactions
had not matured.  With respect to 1996, at year end 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  hedging  losses on its futures and swap contracts of $2.4 million,
again offset by unmatured customer contracts.

         All of the Corporation's copper futures and swap contracts are held for
hedging,  rather  than  trading,  purposes.  The  Corporation  has  performed  a
sensitivity analysis to estimate its exposure to market risk arising from copper
price  fluctuations  using the net futures  positions.  As discussed  above, the
futures  contracts are  liquidated by way of offset  (i.e.,  by taking  opposite
futures  positions) and,  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 copper  futures  contracts.  With
respect  to  copper  futures  contracts  at the end of 1997,  in the  event of a
hypothetical  10 percent  unfavorable  change in copper prices,  the Corporation
would incur a loss of  approximately  $11.1 million (in addition to the deferred
unrealized loss of $18.7 million discussed above).  However, any such additional
loss  would be  substantially  offset  by a  corresponding  gain on the  related
customer contracts being hedged with futures contracts.

         Depending on market  circumstances,  the Corporation  may  periodically
purchase or sell various copper price protection  contracts for a portion of its
expected future mine production to reduce the risk of adverse price changes. The
Corporation had no copper price  protection  contracts as of the end of 1997 and
currently has no copper price protection contracts in place with respect to 1998
production.  During the first quarter of 1997, the Corporation had net positions
in place  with  several  financial  institutions  that  provided  for a  minimum
quarterly  average  price of 90 cents per pound for 85 million  pounds of copper
cathode.  These contracts  expired without payment to Phelps Dodge. With respect
to 1996 production, the Corporation had contracts that provided a combination of
minimum and maximum quarterly average 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 production in the fourth quarter of 1996 and 85 million pounds
of  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 1996 fourth
quarter and $6.8 million for 1997 first  quarter  contracts  was  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.

         The  Corporation  is exposed to changes in foreign  exchange rates as a
result of conducting its normal business  operations in various countries and in
various foreign currencies. In order to minimize such exposures, the Corporation
periodically enters into forward exchange and currency option contracts to hedge
such 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 reduce the  Corporation's  overall exposure to adverse
changes  in  currency  exchange  rate  movements   resulting  from  transactions
denominated in foreign  currencies.  At December 31, 1997, the  Corporation  had
protection in place for  approximately  $158 million of recorded and anticipated
foreign  currency  transactions  through the use of currency options and forward
contracts  with a matching  notional  value.  During 1996, the  Corporation  had
foreign  currency  protection in place for an aggregate  notional  principal and
hedged amount of  approximately  $141 million.  The Corporation did not have any
material deferred unrecognized gains or losses on its foreign exchange contracts
for the year-end  periods 1995 through 1997. The  Corporation's  primary foreign
currency  hedges  involved the Chilean peso,  Canadian dollar and the Thai baht.
The Corporation has performed a sensitivity analysis to estimate its exposure to
market risk with respect to its forward  exchange  contracts at the end of 1997.
In the event of a  hypothetical  10  percent  unfavorable  change in  prevailing
market  exchange  rates,  the  Corporation  would  incur  a  potential  loss  of
approximately  $11.3  million.  Any such  loss  from the  Corporation's  forward
exchange contracts would be substantially  offset by corresponding  gains on the
underlying  transactions  being  hedged.  Notes  1 and  20 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.

         From time to time, the Corporation  takes advantage of opportunities to
obtain  attractively  priced  debt  through the use of  structured  transactions
involving  currency  swaps.  The  Corporation  does  not  hold  these  financial
instruments  for  trading   purposes.   At  year-end  1997,  the   Corporation's
majority-owned  Phelps Dodge Thailand Ltd. cable manufacturing plant in Thailand
had entered into currency swap agreements that  effectively  converted  floating
rate U.S.  dollar loans to fixed rate Thai baht loans. At December 31, 1997, the
Corporation  had currency  swap  contracts  in place for an  aggregate  notional
principal and hedged amount of  approximately  $15 million.  The Corporation has
performed a  sensitivity  analysis to  estimate  its  exposure to market risk at
year-end  1997.  With respect to the currency  swap portion of these  structured
transactions,  a  hypothetical  decrease in the  prevailing  interest  rate of 1
percent (or 100 basis points) would be immaterial,  and a 10 percent unfavorable
change in prevailing  market  exchange  rates would cause Phelps Dodge  Thailand
Ltd. to incur a higher cost of  approximately  $1.5 million over the life of the
debt than it would have incurred had the exposure not been hedged.

         The  Corporation is exposed to interest rate  increases  primarily from
the floating rate debt of its 80 percent-owned  Candelaria copper mine in Chile.
Consequently,  the  Corporation  periodically  enters  into  interest  rate swap
contracts  to hedge  such  recorded  transactions,  firm  commitments  and other
anticipated  transactions.   The  Corporation  does  not  hold  these  financial
instruments for trading  purposes.  The Corporation  caused  Candelaria to enter
into interest rate swaps converting its floating rate dollar-denominated debt to
a fixed rate for the life of the debt which extends through the year 2008. Under
the terms of the floating rate debt  agreement,  the  Candelaria  borrowings are
scheduled  to vary  from  period  to period  during  the life of the debt.  As a
result,  the  notional  value  of the  interest  rate  swap  contract  has  been
established at varying amounts  throughout the life of the swap. The Corporation
has performed a sensitivity  analysis to estimate its exposure to market risk at
year-end  1997.  With  respect  to the  interest  rate  swap,  in the event of a
hypothetical decrease in the prevailing interest rate of 1 percent (or 100 basis
points),  the Corporation  would incur higher interest  expense of approximately
$12.3 million over the life of Candelaria's debt than it would have incurred had
the exposure not been hedged.

         Phelps  Dodge's  results  for 1997,  1996 and 1995 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.  Through December 31, 1997, Phelps
Dodge Industries included the Corporation's specialty chemicals operations,  its
wire and cable operations and its wheel and rim business.  Effective  January 1,
1998, Phelps Dodge sold its wheel and rim business, Accuride Corporation and its
subsidiaries,  to an  affiliate  of Kohlberg  Kravis  Roberts  and Co.,  and the
existing management of Accuride. Under terms of the sale agreement, Phelps Dodge
retained a 10 percent  interest  in  Accuride.  (See Note 2 to the  Consolidated
Financial Statements for a further discussion of this sale.)

         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 21 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.
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                   1997        1996        1995
                                                   ----        ----        ----
<S>                                          <C>             <C>         <C>    
Copper (from own mines - thousand tons) *
   Production                                      812.1       770.4       712.7
   Deliveries                                      812.8       771.6       696.6
COMEX average spot copper price
   per pound - cathodes                      $      1.04        1.06        1.35

                                                       (millions of dollars)

Sales and other operating revenues           $   2,173.3     2,091.1     2,488.7
Operating income                             $     457.2       526.6       896.8

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

*    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 in Chile held by SMMA Candelaria, Inc., a jointly owned indirect
     subsidiary  of Sumitomo  Metal Mining Co.,  Ltd. and Sumitomo  Corporation.
     Excluded  production  amounts  for 1997,  1996 and 1995 were  81,300  tons,
     76,500  tons and  65,600  tons  produced  at  Morenci  for the  account  of
     Sumitomo,  56,300 tons,  56,200 tons and 56,200 tons  produced at Chino for
     the  account of Heisei  and 34,400  tons,  30,200  tons and 33,100  tons at
     Candelaria for the account of Sumitomo.

--------------------------------------------------------------------------------
</TABLE>

         Phelps Dodge Mining Company  reported 1997  operating  income of $497.7
million before $40.5 million of non-recurring,  pre-tax charges comprising $18.0
million of estimated future costs associated with environmental  matters,  $18.7
million for an early-retirement program and $3.8 million for other non-recurring
charges. This compares with 1996 operating income of $536.6 million before $10.0
million  of  non-recurring,  pre-tax  charges  resulting  from a fourth  quarter
reclamation  provision  related to a Court-ordered  rescission of a 1986 sale of
property,  and 1995  operating  income of $896.8  million.  The decrease in 1997
operating  income  reflected  higher  copper  production  costs and lower copper
prices,  partially offset by higher volumes of copper sold from mine production.
The decrease in 1996 operating income,  compared with 1995,  resulted from lower
average  copper prices,  partially  offset by higher volumes of copper sold from
mine production. Unit production costs of copper in 1997 were impacted adversely
by the failure of a section of the ore conveyor system at the Morenci,  Arizona,
copper  facility  that  occurred in late  December,  reduced  throughput  at the
Hidalgo  Smelter  resulting from 27 days of lost  production due to boiler leaks
and 150 days of  reduced  capacity  due to  converter  problems,  and  increased
exploration  expense  associated  with advanced  project  development  work. The
Morenci ore conveyor  system was repaired and fully  operational in late January
1998. Unit production costs of copper in 1996 were slightly higher than in 1995,
principally as a result of increased depreciation charges from capital projects,
increased  mining expenses and costs  associated with a maintenance  overhaul at
the Hidalgo smelter.

         Copper  unit  production  costs  generally  have  been  stable  for the
three-year period ended December 31, 1997, primarily as a result of ongoing cost
containment programs and 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 1997,  the  Corporation  produced a total of 418,000 tons of cathode
copper at its SX/EW  facilities,  compared with 408,000 tons in 1996 and 364,200
tons in 1995. 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  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.  In the 1997
fourth quarter, the expansion of the Candelaria  operation,  including increased
mining activity,  the installation of a second  semi-autogenous  (SAG) mill line
and new and expanded concentrating facilities,  was completed eight months ahead
of schedule and more than $45 million below the budgeted cost. At full capacity,
the $305 million  expansion (the  Corporation's  share was $244 million with the
remainder provided by its  co-participant)  will result in average annual copper
production of  approximately  380 million pounds,  increasing the  Corporation's
share of copper  production at Candelaria by nearly 130 million pounds  annually
and boosting the Corporation's  worldwide copper  production by 9 percent.  As a
result of the expansion, the estimated mine life of Candelaria is expected to 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.

         The  Corporation  announced  on May 7,  1997,  that it plans to  resume
production at its Ajo copper mining  operation in southern  Arizona where mining
operations  have been  suspended  since 1984. An open pit and much of the needed
infrastructure  already exist at the operation.  A $238 million modernization of
the  facility  is  anticipated  to begin  pending  completion  of  environmental
permitting and market conditions.  When operating at full capacity, Ajo will add
135 million  pounds of copper to the  Corporation's  annual  production and will
employ 400 people.

         On February 3, 1998, the Corporation announced the acquisition of Cobre
Mining Company Inc. (Cobre) for approximately $115 million including acquisition
costs. The Corporation  assumed Cobre's  outstanding  debt of approximately  $14
million.  The  acquisition  was  at a  price  of  $3.85  per  common  share  for
substantially all of Cobre's 27 million common shares, including shares issuable
upon the exercise of  outstanding  warrants and options.  The primary  assets of
Cobre include the Continental Mine, which comprises an open-pit copper mine, two
underground  copper mines, two mills,  and the surrounding  11,000 acres of land
located  in  southwestern  New  Mexico  adjacent  to  the  Corporation's   Chino
operations.  Cobre's reported mill ore reserves at year end 1996 were 48 million
tons averaging more than 1 percent copper.

         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.

         On May 6, 1997, the Corporation  acquired an indirect 40 percent voting
interest, representing an indirect 26.67 percent economic interest, in a leading
Peruvian zinc mining company, Compania San Ignacio de Morococha S.A. (SIMSA) and
its San Vicente mine.  SIMSA's other shareholder with voting shares is the Jesus
Arias family. The underground mine produces  approximately 130 million pounds of
zinc annually.

         Phelps Dodge Mining Company announced on January 7, 1998, the discovery
of a  potentially  significant  nickel/cobalt  deposit  in  central  Madagascar.
Detailed drilling in the district,  which is located approximately 80 kilometers
east of the capital city of Antananarivo,  combined with historic exploration in
the area, indicates an overall resource of approximately 168 million metric tons
of ore at a grade of 1.11  percent  nickel and 0.10 percent  cobalt.  A detailed
feasibility study and environmental assessment of the project are under way.

         On September 25, 1997, the Corporation  announced it had sold its 72.25
percent interest in the McDonald gold project and other associated properties to
CR  Montana  Corporation  and  Canyon  Resources  Corporation,  the parent of CR
Montana.  The terms of the  transaction  included  the  immediate  payment of $5
million  with an  additional  payment to Phelps Dodge of between $95 million and
$145 million when  permitting  for the project is completed or  construction  is
commenced.  The final amount of the $150 million  total  purchase  price will be
based, if necessary, on quarterly production payments.

         In 1997,  operations  outside the United  States  provided 9 percent of
Phelps  Dodge Mining  Company's  sales,  compared  with 8 percent in 1996 and 10
percent  in  1995.  During  the  year,  operations  outside  the  United  States
contributed 9 percent of the segment's operating income, compared with 8 percent
in 1996 and 19 percent in 1995.

         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 was 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. In August 1997,  the  Corporation  returned
$14.8  million to the Postal  Service  for the  Maspeth  property  and paid $6.6
million of interest to the Postal Service.

         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, 1998, 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.
Negotiations  between the Tribe, the Corporation and other parties  continued on
the comprehensive  settlement and other necessary  agreements for several years.
In 1997,  additional  disputes arose between Phelps Dodge and the Tribe.  On May
12, 1997,  the Tribe filed suit  against the  Corporation  in San Carlos  Apache
Tribal Court,  seeking eviction of the Corporation from the Tribe's  Reservation
and claiming substantial  compensatory and punitive damages, among other relief.
In May 1997,  Phelps Dodge and the Tribe reached an agreement,  and subsequently
federal  legislation (Pub. L. No. 105-18,  Section 5003, 111 stat. 158, 181-87),
was adopted which mandated  dismissal of the tribal court suit. The  legislation
prescribes  arrangements  intended  to  ensure a future  supply of water for the
Morenci mining complex in exchange for certain payments by the Corporation.  The
legislation  does not address any potential  claims by the Tribe relating to the
Corporation's  historical  occupancy  and  operation  of its  facilities  on the
Tribe's Reservation but does require that any such claims be brought, if at all,
exclusively  in federal  district  court.  By order dated October 13, 1997,  the
tribal  court  dismissed  the lawsuit with  prejudice,  as  contemplated  by the
legislation.

RESULTS OF PHELPS DODGE INDUSTRIES

Phelps Dodge  Industries is a business  segment  comprising a group of companies
that  manufacture   engineered  products  principally  for  the  global  energy,
telecommunications,   transportation  and  specialty   chemicals  sectors.   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 wire and cable and specialty conductor
operations  through  Phelps  Dodge  International  Corporation  and Phelps Dodge
Magnet Wire Company and their subsidiaries and affiliates, and its recently sold
wheel and rim  operations  through  Accuride  Corporation  and its  subsidiaries
(Accuride).

         Effective January 1, 1998, the Corporation sold its Accuride subsidiary
to an  affiliate  of  Kohlberg  Kravis  Roberts and Co.  (KKR) and the  existing
management of Accuride. Under the terms of the sale agreement, Phelps Dodge will
retain a 10  percent  interest  in  Accuride.  (See  Note 2 to the  Consolidated
Financial Statements for a further discussion of this sale.)
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                 1997         1996        1995
                                                 ----         ----        ----
                                                      (millions of dollars)
<S>                                            <C>           <C>         <C>    
Sales and other operating revenues:
   Specialty chemicals                         $  429.5        437.0       420.8
   Wheels and rims                                333.0        307.8       357.8
   Wire and cable                                 978.5        950.7       918.1
                                               --------     --------    --------
                                               $1,741.0      1,695.5     1,696.7
                                               ========     ========    ========

Operating income:
   Specialty chemicals                         $   74.3         79.8       103.9
   Wheels and rims                                 48.7         41.4        45.6
   Wire and cable                                  81.9        104.6        93.8
                                               --------     --------    --------
                                               $  204.9        225.8       243.3
                                               ========     ========    ========

--------------------------------------------------------------------------------
</TABLE>
         Phelps  Dodge  Industries  reported  1997  operating  income  of $204.9
million,  compared with 1996 operating income of $225.8 million.  Decreased 1997
earnings  reflected  the  economic   difficulties  in  Asia,   generally  weaker
currencies in the European  market and the effects of a first quarter  strike at
the  Corporation's  Canadian wheel and rim plant,  and were partially  offset by
continued  strength in the U.S. wheel and rim market.  Operating  income in 1995
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
operating income in 1996 compared with 1995 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.

         Columbian  Chemicals'  1997 earnings were lower than those in 1996 as a
result of lower sales  volumes in Europe,  partially  offset by higher sales and
production  volumes  in North  America.  Exports  from the U.K.  were  adversely
affected by its strong currency,  while weaker currencies in continental  Europe
raised the  effective  price of  dollar-denominated  feedstock.  Also  affecting
Europe were weak  demand and  competitive  import  pressures  which  deferred an
increase in selling prices until the end of the year. In North America,  several
major expansion  projects  completed during 1997 allowed Columbian  Chemicals to
meet the strong demand for carbon black.

         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 were ongoing in 1996 and
resulted in a record level of annual capital investment.

         Accuride had record earnings in 1997 despite a 53-day strike that began
January 21,  1997,  and ended March 15,  1997,  at its  Canadian  plant.  Strong
industry  demand and higher  sales  resulted  in a 24 percent  increase in steel
wheel sales volumes over 1996.

         Accuride's  1996 earnings fell below 1995 earnings  primarily due to an
18 percent drop in overall sales  volumes,  partially  offset by higher  prices.
Reduced  North  American  demand  for heavy  trucks and  trailers  was the major
contributor  to the  drop in  sales  volumes.  Demand  increased  for  specialty
products,  such as light wheels for smaller  trucks and sport utility  vehicles,
partially  offsetting the effects of the downturn in the heavy truck and trailer
markets.

         During 1997,  Accuride was restructured to enhance its value. On May 1,
Accuride and Kaiser  Aluminum and Chemical  Corporation  (Kaiser) formed a joint
venture  company,  Accuride Kaiser Wheel Inc. (AKW), to produce  aluminum wheels
for the  commercial  transportation  industry.  Accuride  and Kaiser each own 50
percent of the new company. This venture replaced the previous arrangement under
which Kaiser  manufactured  finished  aluminum wheels for Accuride.  In October,
Accuride purchased a vacant plant in Columbia,  Tennessee, in order to establish
a greenfield  operation to produce steel cladded light wheels.  Expansion in the
light-wheel  market is  expected  to  enhance  Accuride's  defense of its strong
position in heavy wheels, to partially counter the impact of the cyclical nature
of the heavy vehicle  market on earnings and to improve  Accuride's  status as a
full-line  supplier.  In  November,  Accuride's  joint  venture  with  Industria
Automotriz, S.A. (IaSa) officially commenced business to produce steel wheels in
Monterrey,  Mexico.  Under the joint venture agreement,  Accuride will hold a 51
percent  majority  interest in the new business which  initially will be derived
from IaSa's existing wheel assets. Accuride's primary objectives in this venture
are to expand  its North  American  manufacturing  base into  Mexico in order to
profitably serve its current customers who are expanding there and to capitalize
on an emerging and growing maquiladora marketplace.  These value enhancing steps
contributed to the successful sale of Accuride to KKR in early 1998.

         Lower  1997  earnings  in the wire and  cable  business  resulted  from
adverse  economic  conditions  in  Asia.  The  Asian  currency  crisis  and  its
associated  economic  slowdown resulted in 1997 operating income from the region
that was 55 percent lower than 1996.  Partially  offsetting the lower  operating
income in Asia was a 44  percent  increase  in  operating  income  from  Central
America and a 21 percent  increase in operating  income from North America.  The
increase  in  Central  American  operating  income  was the result of a stronger
market presence in the building wire and aluminum power cables market.  In North
America,  sales of specialty  conductors to the commercial  aerospace market and
magnet wire sales were boosted by a robust U.S. economy.

         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 expansion of
Phelps Dodge Magnet Wire Company's 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 due to the strict foreign exchange controls instituted
in 1994 by the Venezuelan government.

         In December 1997, the Corporation acquired for $72 million a 60 percent
interest in the copper and  aluminum  wire and cable  manufacturing  business of
Alcoa  Aluminio,  S.A.,  of  Brazil.  Its  product  line is  focused  on  energy
transmission and distribution,  with dominance in aluminum  conductors and solid
participation in the copper wire and cable business.  Phelps Dodge International
Corporation,  a wholly  owned  subsidiary,  will manage and  operate  this joint
venture.

         In November 1997, the Corporation  announced the inauguration of Phelps
Dodge Yantai Cable Company's (PDYCC) manufacturing facility in China. PDYCC is a
joint  venture   consisting  of  several   investors   including   Phelps  Dodge
Corporation.  Phelps Dodge owns 66.67 percent of a holding company that has a 60
percent interest in PDYCC. The $18 million modern facility will produce annually
approximately  7,000 metric tons of copper and aluminum medium- and high-voltage
insulated  power  cables,   mostly  for  underground   installation,   replacing
traditional overhead power lines in China's  high-density  cities.  Phelps Dodge
International  Corporation  will manage and operate  this joint  venture for the
Corporation.

         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.

         In August 1996, the  Corporation  announced plans to construct a magnet
wire manufacturing plant in Monterrey,  Mexico.  Construction of the $42 million
project, which began in 1996, is nearing completion and commercial production is
expected in the first quarter of 1998.

         In 1997,  operations  outside the United States  provided 49 percent of
Phelps Dodge Industries' sales,  compared with 50 percent in 1996 and 51 percent
in 1995. During the year,  operations  outside the United States  contributed 43
percent of the segment's operating income,  compared with 57 percent in 1996 and
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).

OTHER MATTERS RELATING TO THE STATEMENT OF CONSOLIDATED OPERATIONS

The  Corporation's  1997  depreciation,  depletion and amortization  expense was
$283.7 million, compared with $249.5 million in 1996 and $223.5 million in 1995.
The 14 percent  increase in 1997 resulted from  increased  mine  production  and
depreciation rates for both U.S. and international  mining  operations,  and the
recent completion of several expansion  projects within Phelps Dodge Industries.
(Please  refer  to  Note  1 to  the  Consolidated  Financial  Statements  for  a
discussion of depreciation  methods.) The 12 percent  increase in 1996 over 1995
reflected  increased mine production and  depreciation  rates at the U.S. mining
operations and the effect of acquisitions by Phelps Dodge Industries.

         The Corporation's 1997 selling and general  administrative  expense was
$141.8 million, compared with $125.9 million in 1996 and $123.6 million in 1995.
The 13 percent  increase in 1997  reflected  the effect of  acquisitions  by the
international  wire and cable  group and an increase  in  unallocated  Corporate
expenses for information processing,  training and development,  incentive plans
and other general administrative expenses.

         The Corporation's 1997 exploration and research and development expense
was $87.8  million,  compared  with $83.9  million in 1996 and $73.2  million in
1995.  The  increase  in 1997  primarily  resulted  from  increased  exploration
expenditures in Africa and Mexico.  The 1995 to 1996 increase primarily resulted
from  increased  exploration  expenditures  at  the  Corporation's  U.S.  mining
operations.

         The Corporation reported net interest expense in 1997 of $62.5 million,
compared with $66.1 million in 1996 and $62.0 million in 1995. 1997 net interest
expense  decreased  principally as a result of  capitalization of interest costs
for the Candelaria  expansion  project in Chile.  The 1996 increase  principally
resulted  from  a  $5.9  million   interest  charge   resulting  from  the  1996
Court-ordered  rescission  of a 1986 sale of property.  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  1997  miscellaneous  income,  net of  miscellaneous
expense,  was $33.4  million,  compared  with  $40.7  million  in 1996 and $37.2
million in 1995. The decrease in 1997 primarily resulted from decreased interest
income and less dividend  income from the  Corporation's  13.9 percent  minority
interest in Southern Peru Copper Corporation, partially offset by a $6.0 million
pre-tax,  non-cash gain from the exchange of shares from a cost basis investment
in a wire and cable business  located in Greece.  The increase from 1995 to 1996
primarily  resulted from an increase of $2.8 million in dividends  received from
Southern Peru Copper Corporation.

         For the year  ended  December  31,  1997,  the  Corporation  recorded a
provision for taxes of $180.4 million (an effective rate of  approximately  31.0
percent).  This compares with a 1996  provision for taxes of $220.0  million (an
effective  rate of  approximately  32.0 percent) and a 1995  provision of $322.7
million (an effective rate of  approximately  30.0 percent).  The 1997 effective
rate was lower than the 1996 rate  primarily due to the increase in the U.S. tax
benefit for percentage depletion.  Despite a slight decrease in average realized
copper prices in 1997, the benefit from the  Corporation's  allowable  deduction
for  percentage  depletion  increased  from 1996 due to a more  favorable mix of
income subject to percentage depletion.  The 1996 effective rate was higher than
the 1995 rate  primarily due to the effect of a change in the income mix between
U.S. and  international  operations.  (See Note 7 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 proposed
assessments  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. 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 an 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,  1997.  Better than  expected  returns on plan
assets during 1997 increased the excess of plan assets over pension  liabilities
at December 31, 1997.  (For a further  discussion of these issues,  see Notes 16
and 17 to the Consolidated Financial Statements.)

         The  Corporation  is in the  process of  reviewing  its  computer-based
systems and the year 2000  computer  application  design issues  utilizing  both
internal and external resources to identify,  correct or reprogram, and test its
systems to ensure year 2000  compliance.  The  Corporation  is in the process of
implementing  the  required  changes  to  its  internal  computer  systems.  The
Corporation  continues to evaluate the  estimated  costs  associated  with these
efforts  based on actual  experience  and does not expect  the  future  costs of
resolving  its internal year 2000  problems to exceed $10 million.  However,  no
assurance can be given that the Corporation's computer systems will be year 2000
compliant in a timely manner or that the Corporation will not incur  significant
additional  expenses  pursuing year 2000 compliance.  Even if the  Corporation's
systems are year 2000 compliant,  there can be no assurance that the Corporation
will not be  adversely  affected by the failure of vendors,  customers,  service
providers,   shippers  or  other  third-party  providers  to  become  year  2000
compliant.  In an effort to evaluate and reduce its  exposure in this area,  the
Corporation has inquired of its vendors and other providers about their progress
in identifying and addressing  problems that their computer  systems may face in
correctly processing date information related to the year 2000. However, despite
the Corporation's  efforts to date, there can be no assurance that the year 2000
problem  will not have a  material  adverse  effect  on the  Corporation  in the
future.

CHANGES IN FINANCIAL CONDITION; CAPITALIZATION

At the end of 1997,  the  Corporation  had cash and cash  equivalents  of $157.9
million,  compared  with  $470.1  million  at the  beginning  of the  year.  The
Corporation's  operating  activities  provided $764.6 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.

         During 1997,  decreases in current  assets  (exclusive of cash and cash
equivalents and adjustments for foreign currency exchange rate changes) exceeded
decreases in current liabilities  (exclusive of current debt and adjustments for
foreign currency exchange rate changes) resulting in a $16.8 million decrease in
net working capital.  This decrease in net working capital resulted  principally
from a $36.5  million  decrease  in  accounts  receivable  and a  $21.1  million
increase in accounts  payable,  partially  offset by a $13.4 million decrease in
accrued income taxes and a $12.0 million decrease in other accrued expenses. The
$36.5 million decrease in accounts  receivable was primarily the result of lower
copper sales prices which were  partially  offset by higher copper sales volumes
and higher  sales  volumes of wheels and rims.  The $21.1  million  increase  in
accounts  payable  principally  resulted  from the  timing of raw  material  and
equipment  purchases.  The $13.4  million  decrease in accrued  income taxes was
principally  the result of higher tax  payments in 1997.  The  decrease in other
accrued expenses was primarily due to the completion of the expansion project at
Candelaria and a reduction in the current portion of environmental reserves.

         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.

         Investing  activities  during 1997  included  capital  expenditures  of
$661.6 million, compared with $513.0 million in 1996 and $404.9 million in 1995.
Capital expenditures  included $156.1 million for the expansion of Candelaria in
1997 and $76 million in 1996.  Investments in 1997 included the acquisition of a
copper and aluminum  wire and cable  manufacturing  business in Brazil for $72.0
million, the acquisition of an indirect 40 percent voting interest in a Peruvian
zinc mining  company,  Compania San Ignacio de Morococha S.A.  (SIMSA) for $15.0
million,  $22.6 million for an investment in a joint venture  formed by Accuride
Corporation  and Kaiser  Aluminum and Chemical  Corporation to produce  aluminum
wheels for the  commercial  transportation  industry,  and $14.8 million for the
Laurel Hill  property as a result of the 1996  Court-ordered  rescission  of the
1986 sale of the property.  Investing activities in 1996 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  reflected  cash proceeds of $45.0 million from the  divestiture of
Columbian Chemicals Company's synthetic iron oxide facility (MAPICO).

         The Corporation expects capital expenditures and investments in 1998 to
be approximately  $350 million for Phelps Dodge Mining Company and approximately
$150  million  for Phelps  Dodge  Industries.  These  capital  expenditures  and
investments  will be funded  from cash  reserves,  operating  cash flow and from
borrowings.

         On May 7, 1997, the  Corporation  announced that its board of directors
had  authorized  the  purchase  of up to an  additional  6 million of its common
shares,   approximately  10  percent  of  its  then  outstanding   shares.  This
authorization  followed a 5 million share purchase program that was initiated in
1995 and extended to 10 million shares in 1996. Under that program,  9.9 million
shares were purchased by the Corporation. The Corporation purchased 6,554,000 of
its common shares in 1997 at a total cost of $511.5 million, including 3,606,000
shares at a cost of $292.9 million under the new 6 million share  authorization.
There were  58,634,000  common  shares  outstanding  on December 31,  1997.  The
Corporation  may continue to make purchases in the open market as  circumstances
warrant,  and will  also  consider  purchasing  shares in  privately  negotiated
transactions.

         The $5.9  million  decrease in dividend  payments on the  Corporation's
common shares, from $128.6 million in 1996 to $122.7 million in 1997,  reflected
the decreased  number of common  shares  outstanding  due to the share  purchase
program. The dividend was $2.00 per common share in 1997 versus $1.95 per common
share in 1996.

         The Corporation's total debt was $1,003.3 million at December 31, 1997,
compared with $659.3 million at the end of 1996. Total debt increased  primarily
as a  result  of  non-recourse  project  financing  for  the  expansion  of  the
Candelaria  mine,  and the  November 5, 1997,  issuance of $100 million of 6.375
percent  seven-year notes and $150 million of 7.125 percent 30-year  debentures.
The ratio of total debt to total  capitalization  was 27.7 percent at the end of
1997, compared with 18.8 percent at the end of 1996.

         During  the  1995  second  quarter,  the  Corporation's  majority-owned
subsidiary,  Compania Contractual Minera Candelaria (Candelaria),  satisfied all
operating,  financial,  construction and legal tests and conditions as set forth
in the completion  agreement  associated with the $290 million project financing
of its  Candelaria  mine in Chile.  As a result,  borrowings  under  these  debt
facilities are non-recourse to Phelps Dodge.  Financing  agreements for the $290
million debt were  executed  during  1993.  The debt  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. The floating rate  peso-denominated  debt was prepaid in December
1996 at a cost  of  $37.6  million  including  exchange  losses  and  prepayment
penalties;  this  debt was  replaced  during  the  second  quarter  of 1997 when
Candelaria  borrowed $30 million of 12-year,  floating  rate  dollar-denominated
debt.  The  1993  financing  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.  During 1997,
Candelaria  borrowed $72 million of a $150 million,  12-year  dollar-denominated
facility  arranged in order to partially  finance the $305 million  expansion of
the  Candelaria  mine.  Both of the 1997  facilities are based on floating rates
tied to six-month London Interbank  Offered Rate (LIBOR) and are non-recourse to
the Corporation.  The Corporation  also caused  Candelaria to sell the 9 percent
and 11 percent  interest rate caps purchased in 1993 that were intended to limit
the effect of increases in the cost of the $200 million of floating  rate dollar
debt. In turn,  the  Corporation  caused  Candelaria to enter into interest rate
swaps  with  certain  financial  institutions  to  effectively  convert  all  of
Candelaria's  floating rate dollar debt to 7.84 percent,  fixed rate dollar debt
for the life of the debt.  The  obligations  under the  interest  rate swaps are
non-recourse to the Corporation.

         An existing  revolving  credit  agreement  between the  Corporation and
several  lenders was amended on June 25,  1997.  The  agreement,  as amended and
restated,  permits  borrowings  of up to $1 billion  from time to time until its
scheduled  maturity on June 25,  2002.  The  agreement  allows for two  one-year
renewals  beyond the  scheduled  maturity date if the  Corporation  requests and
receives  approval from those lenders  representing  at least  two-thirds of the
commitments  provided  by the  facility.  In the event of such  approval,  total
commitments  under the  facility  would  depend  upon the  willingness  of other
lenders to assume the  commitments of those lenders  electing not to participate
in the  renewal.  Interest is payable at a  fluctuating  rate based on the agent
bank's  prime  rate,  or a fixed  rate,  based on the LIBOR,  or at fixed  rates
offered  independently by the several  lenders,  for maturities of between seven
and 360 days.  This  agreement  provides  for a facility fee of six and one-half
basis points (0.065 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, 1997, or December 31, 1996.

         The  Corporation  established a commercial  paper program on August 15,
1997, under a private placement agency agreement between the Corporation and two
placement  agents.  The  agreement  permits  the  Corporation  to issue up to $1
billion of short-term  promissory notes (generally known as commercial paper) at
any one time.  Commercial  paper may bear interest or be sold at a discount,  as
mutually agreed by the Corporation and the placement  agents at the time of each
issuance.  The Corporation's  commercial paper rating requires that issuances of
commercial  paper be backed by an undrawn line of credit;  the revolving  credit
agreement described above provides such support.  There were no borrowings under
the commercial paper program at December 31, 1997.

         The  Corporation  had other lines of credit  totaling $100.0 million at
December 31,  1997,  and December  31,  1996.  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, 1997, or December
31, 1996.

         The Corporation had $91.4 million in short-term borrowings,  all by its
international  operations,  at December 31, 1997, compared with $66.5 million at
December  31, 1996.  The increase in  short-term  borrowings  principally  was a
result of borrowings at Accuride's new Mexican operations  (Accuride de Mexico).
The weighted average  interest rate on total  short-term  borrowings at December
31,  1997,   and  December  31,  1996,   was  13.0  percent  and  15.3  percent,
respectively.

         On  November 5, 1997,  the  Corporation  issued  $100  million of 6.375
percent  notes  maturing on November 1, 2004,  and $150 million of 7.125 percent
debentures  maturing  on  November  1,  2027,  under  an  Indenture  dated as of
September 22, 1997,  between the  Corporation  and The Chase  Manhattan Bank, as
Trustee.  Interest on these  securities  is payable  semi-annually  on May 1 and
November 1 of each year. The notes are not redeemable  prior to maturity and are
not entitled to any sinking fund. The debentures are redeemable,  in whole or in
part,  at the option of the  Corporation,  at a  redemption  price  equal to the
greater  of (i) 100  percent  of their  principal  amount or (ii) the sum of the
present  values of the  remaining  scheduled  payments of principal and interest
thereon  discounted  to the date of redemption at a rate equal to the sum of the
yield of a United States Treasury  security having a comparable  maturity to the
remaining  term of the debentures  plus 10 basis points.  The debentures are not
entitled to any sinking fund. The Corporation  applied most of the proceeds from
the sale of the offered securities to repay outstanding  commercial paper, which
had been issued for general corporate purposes.

         The current portion of the Corporation's  long-term debt, scheduled for
payment in 1998, is $54.8 million  including $12.6 million for its international
manufacturing  operations,  $27.2 million primarily for its international mining
operations and $15.0 million for Corporate debt repayments.

         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 from individual states under CERCLA or a state equivalent and is
participating in environmental  assessment and remediation activity at 40 sites.
The Corporation does not consider the number of CERCLA sites or comparable state
sites at which it has been notified as being  involved to be a relevant  measure
of exposure.  Although the liability of a potentially  responsible  party (PRP),
and in many cases its equivalent under state law, may be joint and several,  the
Corporation is usually one of many  companies  cited as a PRP at these sites and
has, to date, been  successful in sharing  cleanup costs with other  financially
sound companies.  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, 1997,  the  Corporation  had reserves of $122.4 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. Moreover, 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 currently  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 1998 and 1999, and the  expenditures  for those programs in 1997,
are separate from the reserves and estimates described previously.

         On December 23, 1994, Chino Mines Company (Chino),  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  Chino to study  the  environmental
impacts  and  potential  health  risks  associated  with  portions  of the Chino
property affected by historical mining  operations.  Phelps Dodge acquired Chino
at the end of 1986.  Those  studies  began in 1995 and,  until the  studies  are
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  began  submitting  the  required  reclamation  plans in March  1997.
Reclamation  is an ongoing  activity and the  Corporation  currently  recognizes
estimated reclamation costs using a units of production basis calculation. These
laws  and  regulations  will  likely  increase  the   Corporation's   regulatory
obligations and compliance costs with respect to mine closure and reclamation.

         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 1998. The Secretary
of the Interior also 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.

         In 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards  (SFAS)  Nos.  130,  "Reporting   Comprehensive
Income,"  and 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information." The statements will have no effect on the Corporation's results of
operations, financial position, capital resources or liquidity.

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.
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                    1997        1996       1995
                                                    ----        ----       ----
                                                        (millions of dollars)
<S>                                                <C>          <C>        <C>  
Phelps Dodge Mining Company:
  Southside project (Morenci mine)                 $    -         5.8      112.6
  Azco acquisition                                      -           -       40.2
  Candelaria                                        161.7        89.5       15.1
  Other                                             293.6       234.9      153.7
                                                   ------      ------     ------
                                                    455.3       330.2      321.6
                                                   ------      ------     ------
Phelps Dodge Industries:
  Specialty chemicals                                75.7        72.2       22.6
  Wheels and rims                                    24.0         9.6        6.9
  Wire and cable                                    102.5        97.8       52.8
                                                   ------      ------     ------
                                                    202.2       179.6       82.3
                                                   ------      ------     ------
Corporate and other                                   4.1         3.2        1.0
                                                   ------      ------     ------
                                                   $661.6       513.0      404.9
                                                   ======      ======     ======

--------------------------------------------------------------------------------
</TABLE>
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, 1998, there were 10,538
holders of record of the  Corporation's  common  shares.  The  Corporation  paid
quarterly  dividends  of 45 cents on each common  share for each quarter in 1995
and for the first  quarter of 1996.  In the 1996 second  quarter,  the quarterly
dividend  was  increased  by 11  percent  to 50 cents on each  common  share and
continued at that rate throughout 1997.

         The  following  table sets forth the high,  low and closing  prices per
common share (composite quotation) in the periods indicated.
<TABLE>
--------------------------------------------------------------------------------

Market Price Ranges*
<CAPTION>
                                  High            Low           Close
                                  -----          -----          -----
<S>                         <C>                  <C>            <C>  
1997
 First Quarter              $     79.00          68.00          73.13
 Second Quarter                   89.63          70.25          85.19
 Third Quarter                    87.94          75.06          77.63
 Fourth Quarter                   79.81          59.88          62.25

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

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

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

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

--------------------------------------------------------------------------------
<CAPTION>
                                             First    Second     Third   Fourth
                                            Quarter   Quarter   Quarter  Quarter
                                            -------   -------   -------  -------
<S>                                     <C>           <C>        <C>      <C>  
1997

 Sales and other operating revenues     $   1,021.7   1,065.0    961.7    865.9

 Operating income                             206.0     190.7    150.0     64.3

 Net income                                   137.5     134.8    104.2     32.0

 Net income per common share -
  basic (a)                                     2.14      2.18     1.74    0.55

 Net income per common share -
  diluted (a)                                   2.13      2.16     1.72    0.54

1996

 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 -
  basic (a)                                     2.28      1.91     1.23    1.58

 Net income per common share -
  diluted (a)                                   2.26      1.90     1.22    1.57

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

     (a)  In 1997, the  Corporation  adopted  Statement of Financial  Accounting
          Standards  (SFAS) No.  128,  "Earnings  Per  Share."  For  comparative
          purposes, all prior period earnings per common share computations have
          been restated to reflect the effect of SFAS No. 128.

--------------------------------------------------------------------------------
</TABLE>
<PAGE>
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, 1997 and 1996, 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,  1997,  and  notes  thereto,  together  with  the  report  thereon  of Price
Waterhouse  LLP dated  January  15,  1998,  except as to Note 2,  which is as of
February 3, 1998, 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,
1997.  Separate  financial  statements  of  subsidiaries  not  consolidated  and
investments  accounted  for by the  equity  method,  other  than those for which
summarized  financial  information  is  provided  in Note 4 to the  Consolidated
Financial Statements, have been omitted because, if considered in the aggregate,
such subsidiaries and investments would not constitute a significant subsidiary.

                            ADDITIONAL FINANCIAL DATA

Financial  statement  schedule for the years ended  December 31, 1997,  1996 and
1995:

         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, 1998, except as to Note 2, which is as of February 3, 1998, of
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, 1998


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, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended  December 31, 1997, 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, 1998, except as to Note 2, which is as of February 3, 1998.
</AUDIT-REPORT>
<PAGE>
<TABLE>
STATEMENT OF CONSOLIDATED INCOME
--------------------------------
(In thousands except per share data)
<CAPTION>
                                             For the years ended December 31,
                                            1997          1996           1995
                                            ----          ----           ----
<S>                                     <C>           <C>           <C>      
SALES AND OTHER OPERATING REVENUES      $ 3,914,300     3,786,600     4,185,400
                                        -----------   -----------   -----------
OPERATING COSTS AND EXPENSES
 Cost of products sold                    2,744,100     2,604,400     2,691,400
 Depreciation, depletion and
  amortization                              283,700       249,500       223,500
 Selling and general administrative
  expense                                   141,800       125,900       123,600
 Exploration and research expense            87,800        83,900        73,200
 Provision for environmental costs,
  asset dispositions and other
   non-recurring charges                     45,900        10,000       (26,800)
                                        -----------   -----------   -----------
                                          3,303,300     3,073,700     3,084,900
                                        -----------   -----------   -----------
OPERATING INCOME                            611,000       712,900     1,100,500
 Interest expense                           (74,200)      (68,000)      (65,100)
 Capitalized interest                        11,700         1,900         3,100
 Miscellaneous income and expense, net       33,400        40,700        37,200
                                        -----------   -----------   -----------
INCOME BEFORE TAXES, MINORITY
 INTERESTS AND EQUITY IN NET EARNINGS
 OF AFFILIATED COMPANIES                    581,900       687,500     1,075,700
 Provision for taxes on income             (180,400)     (220,000)     (322,700)
 Minority interests in consolidated
  subsidiaries                               (4,700)      (16,200)      (12,900)
 Equity in net earnings of affiliated
  companies                                  11,700        10,500         6,500
                                        -----------   -----------   -----------
NET INCOME                              $   408,500       461,800       746,600
                                        ===========   ===========   ===========


BASIC EARNINGS PER SHARE                $      6.68          7.02         10.72

DILUTED EARNINGS PER SHARE              $      6.63          6.98         10.66

AVERAGE NUMBER OF SHARES OUTSTANDING
 - BASIC                                     61,100        65,800        69,700

AVERAGE NUMBER OF SHARES OUTSTANDING
 - DILUTED                                   61,600        66,200        70,000

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
--------------------------
(In thousands except per share values)
<CAPTION>
                                                         December       December
                                                            31,            31,
                                                           1997           1996
                                                           ----           ----
<S>                                                   <C>           <C>      
ASSETS
 Current assets:
  Cash and cash equivalents                           $   157,900       470,100
  Accounts receivable, less allowance for
   doubtful accounts (1997 - $13,800;
    1996 - $14,200)                                       420,500       489,100
  Inventories                                             297,800       293,000
  Supplies                                                115,100       117,000
  Prepaid expenses                                          7,800         6,100
  Deferred income taxes                                    52,000        46,200
                                                      -----------   -----------
   Current assets                                       1,051,100     1,421,500
  Investments and long-term accounts receivable           131,800        86,400
  Property, plant and equipment, net                    3,445,100     3,020,500
  Other assets and deferred charges                       337,200       288,000
                                                      -----------   -----------
                                                      $ 4,965,200     4,816,400
                                                      ===========   ===========

LIABILITIES
 Current liabilities:
  Short-term debt                                     $    91,400        66,500
  Current portion of long-term debt                        54,800        38,200
  Accounts payable and accrued expenses                   553,200       564,900
  Income taxes                                              1,700        16,300
                                                      -----------   -----------
   Current liabilities                                    701,100       685,900
  Long-term debt                                          857,100       554,600
  Deferred income taxes                                   439,200       424,900
  Other liabilities and deferred credits                  344,100       309,600
                                                      -----------   -----------
                                                        2,341,500     1,975,000
                                                      -----------   -----------
COMMITMENTS AND CONTINGENCIES
 (SEE NOTES 18 AND 19)

MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES           113,300        85,500
                                                      -----------   -----------
COMMON SHAREHOLDERS' EQUITY
 Common shares, par value $6.25; 100,000
   shares authorized; 58,634 outstanding
   (1996 - 64,711) after deducting 16,554 shares
   (1996 - 10,478) held in treasury                       366,500       404,400
 Retained earnings                                      2,301,000     2,465,000
 Cumulative translation adjustments                      (143,900)      (98,800)
 Other                                                    (13,200)      (14,700)
                                                      -----------   -----------
                                                        2,510,400     2,755,900
                                                      -----------   -----------
                                                      $ 4,965,200     4,816,400
                                                      ===========   ===========

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(In thousands)
<CAPTION>
                                               For the years ended December 31,
                                                 1997        1996        1995
                                                 ----        ----        ----
<S>                                           <C>         <C>         <C>    
OPERATING ACTIVITIES
 Net income                                   $ 408,500     461,800     746,600
 Adjustments to reconcile net income
  to net cash provided by operating
  activities:
  Depreciation, depletion and
   amortization                                 283,700     249,500     223,500
  Deferred income taxes                          40,700      61,900     107,600
  Equity earnings net of dividends
   received                                      (6,500)     (3,800)       (400)
  Changes in current assets and
   liabilities:
    (Increase) decrease in accounts
     receivable                                  36,500      (6,200)     (2,300)
    (Increase) decrease in inventories           (6,200)      3,600     (15,800)
    (Increase) decrease in supplies                (100)      3,800     (11,900)
    (Increase) decrease in prepaid
     expenses                                    (2,300)     10,700         100
    (Increase) decrease in deferred
     income taxes                                (5,800)     (1,800)     (6,000)
    Increase (decrease) in interest
     payable                                     (1,000)      5,900        (100)
    Increase (decrease) in other
     accounts payable                            21,100      38,300     (55,500)
    Increase (decrease) in income
     taxes                                      (13,400)       (300)    (29,500)
    Increase (decrease) in other
     accrued expenses                           (12,000)     10,000      36,800
  Non-recurring and
   other adjustments, net                        21,400       4,100     (34,100)
                                              ---------   ---------   ---------
    Net cash provided by operating
     activities                                 764,600     837,500     959,000
                                              ---------   ---------   ---------
INVESTING ACTIVITIES
 Capital outlays                               (661,600)   (513,000)   (404,900)
 Capitalized interest                           (11,700)     (1,900)     (3,100)
 Investment in subsidiaries                    (127,600)    (47,400)       (300)
 Proceeds from asset dispositions
  and other                                       7,100       5,000      40,900
                                              ---------   ---------   ---------
    Net cash used in investing
     activities                                (793,800)   (557,300)   (367,400)
                                              ---------   ---------   ---------
FINANCING ACTIVITIES
 Increase in debt                               418,400      16,100      30,800
 Payment of debt                                (66,900)    (54,100)    (22,800)
 Common dividends                              (122,700)   (128,600)   (125,600)
 Purchase of common shares                     (511,500)   (273,200)   (162,700)
 Other, net                                        (300)     21,200      10,300
                                              ---------   ---------   ---------
    Net cash used in financing
     activities                                (283,000)   (418,600)   (270,000)
                                              ---------   ---------   ---------
INCREASE (DECREASE) IN CASH AND
 CASH EQUIVALENTS                              (312,200)   (138,400)    321,600
CASH AND CASH EQUIVALENTS AT
 BEGINNING OF YEAR                              470,100     608,500     286,900
                                              ---------   ---------   ---------
CASH AND CASH EQUIVALENTS AT END
 OF YEAR                                      $ 157,900     470,100     608,500
                                              =========   =========   =========

See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF COMMON SHAREHOLDERS' EQUITY
(In thousands)
<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, 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
  Stock options exercised                463      2,900                    11,400                     14,300
  Tax benefit from stock options                                            8,400                      8,400
  Common shares purchased             (6,554)   (40,900)                 (470,600)                  (511,500)
  Restricted shares issued, net           14        100                     1,000        1,300         2,400
  Net income                                                              408,500                    408,500
  Dividends on common shares                                             (122,700)                  (122,700)
  Translation adjustment                                                               (45,200)      (45,200)
  Additional pension liability                                                           1,000         1,000
  Other                                                                                   (700)         (700)
                                      ------   --------    ---------   ----------    ---------    ----------
BALANCE AT DECEMBER 31, 1997          58,634   $366,500    $       -   $2,301,000    ($157,100)   $2,510,400
                                      ======   ========    =========   ==========    =========    ==========

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, and for which the Corporation does not exercise  significant control, 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.

Mine Closure Costs.  Reclamation is an ongoing  activity and the  Corporation is
currently  recognizing  estimated  reclamation  costs on a units  of  production
basis.

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, foreign exchange and interest rate
risks.

         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 rates.

         Because of the market risk arising from the volatility of copper prices
on the COMEX and the LME,  the  Corporation's  objective  is to sell its  copper
cathodes  and rod at a price  based on the COMEX  average  price in the month of
shipment,  and its copper  concentrate  at the LME average price in the month of
settlement with its customers.  The Corporation records copper concentrate sales
on a  provisional  basis on the date of  shipment  and  adjusts  the  sales on a
monthly basis to reflect the latest LME price.  A final  adjustment is made upon
settlement with customers. For its copper cathode and rod sales, 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 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.

         Depending on market  circumstances,  the Corporation  may  periodically
purchase or sell various  copper option  contracts to reduce the risk of adverse
price  changes 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  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 reduce  the
Corporation's  overall  exposure to adverse  changes in currency  exchange  rate
movements  resulting from transactions  denominated in foreign  currencies.  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  protecting  anticipated
transactions are recognized in the period incurred.

         The  Corporation  periodically  enters into currency swap  contracts to
hedge  certain  recorded  transactions.  The  Corporation  does not  hold  these
financial  instruments for trading  purposes.  The  Corporation's  currency swap
agreements  are employed in  structured  transactions  whose  purpose is to take
advantage of opportunities to obtain  attractively priced foreign currency debt.
Hedging  gains and losses are  deferred and included as part of the basis of the
underlying exposure with hedge premiums amortized over the life of the contract.

         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.  In accordance with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based  Compensation,"
the Corporation applies APB Opinion 25 and related Interpretations in accounting
for its stock option plans and,  accordingly,  does not  recognize  compensation
cost. Note 15 to the Consolidated Financial Statements contains a summary of the
pro forma  effects to reported net income and earnings per share for 1997,  1996
and 1995 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. In 1997, the Corporation adopted SFAS No. 128, "Earnings Per
Share."  Basic  earnings per share is computed by dividing  income  available to
common  shareholders by the weighted average number of common shares outstanding
for the period.  Diluted  earnings  per share is similar to basic  earnings  per
share  except  that the  denominator  is  increased  to  include  the  number of
additional  common  shares  that would  have been  outstanding  if the  dilutive
potential  common shares had been issued.  For comparative  purposes,  all prior
period earnings per share  computations have been restated to reflect the effect
of SFAS No. 128.
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                      1997      1996      1995
                                                      ----      ----      ----
<S>                                                 <C>       <C>       <C>    
BASIC EARNINGS PER SHARE COMPUTATION
  Numerator:
    Net income                                      $408,500   461,800   746,600
                                                    --------  --------  --------
  Denominator:
    Average common shares outstanding                 61,100    65,800    69,700
                                                    --------  --------  --------
  Basic earnings per share                          $   6.68      7.02     10.72
                                                    ========  ========  ========


DILUTED EARNINGS PER SHARE COMPUTATION
  Numerator:
    Net income                                      $408,500   461,800   746,600
                                                    --------  --------  --------
  Denominator:
    Average common shares outstanding                 61,100    65,800    69,700
    Average employee stock options                       300       200       200
    Average restricted stock issued
      to employees                                       200       200       100
                                                    --------  --------  --------
    Total average common shares outstanding           61,600    66,200    70,000
                                                    --------  --------  --------
  Diluted earnings per share                        $   6.63      6.98     10.66
                                                    ========  ========  ========

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

     Stock  options to purchase  131,895,  962,032 and 254,606  shares of common
     stock which were outstanding during 1997, 1996 and 1995,  respectively,  at
     option  prices  greater  than the  average  fair market  value  during each
     respective  year of  $76.45,  $64.36 and $59.77  were not  included  in the
     computation of diluted earnings per share.

--------------------------------------------------------------------------------
</TABLE>
New Accounting Standards. In June 1997, the Financial Accounting Standards Board
issued  SFAS No.  130,  "Reporting  Comprehensive  Income,"  and  SFAS No.  131,
"Disclosures  about  Segments of an Enterprise and Related  Information."  These
statements  become  effective for fiscal  periods  beginning  after December 15,
1997. The  Corporation is evaluating the effects these  statements  will have on
its financial  reporting and disclosures.  The statements will have no effect on
the Corporation's results of operations,  financial position,  capital resources
or liquidity. The Corporation plans to adopt these statements in 1998.

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

2.  SUBSEQUENT EVENTS
In January 1998, the Corporation sold Accuride Corporation and its subsidiaries,
its wheel and rim  manufacturing  business,  to an affiliate of Kohlberg  Kravis
Roberts and Co. (KKR) and the existing  management of Accuride.  The Corporation
retained  a 10  percent  interest  in  Accuride.  Under  the  terms of the sales
agreement,  the  Corporation  received  proceeds  of  $453.2  million  from  KKR
resulting in a pre-tax gain of  approximately  $187.3  million  ($123.6  million
after-tax, or $2.11 per common share).

         On February 3, 1998, the Corporation announced the acquisition of Cobre
Mining Company Inc. (Cobre) for approximately $115 million including acquisition
costs. The Corporation  assumed Cobre's  outstanding  debt of approximately  $14
million.  The  acquisition  was  at a  price  of  $3.85  per  common  share  for
substantially all of Cobre's 27 million common shares, including shares issuable
upon the exercise of  outstanding  warrants and options.  The primary  assets of
Cobre include the Continental Mine, which comprises an open-pit copper mine, two
underground  copper mines, two mills,  and the surrounding  11,000 acres of land
located  in  southwestern  New  Mexico  adjacent  to  the  Corporation's   Chino
operations.

3.  PROVISION FOR ENVIRONMENTAL COSTS AND OTHER NON-RECURRING CHARGES
During 1997, the Corporation  recorded  non-recurring,  pre-tax charges of $45.9
million  primarily  in  Phelps  Dodge  Mining  Company.  These  charges  reflect
additional  provisions of $23.0 million for  estimated  future costs  associated
with  environmental  matters,  $19.1  million for a  voluntary  early-retirement
program and $3.8  million for  estimated  losses on the  disposition  of certain
facilities.  These charges reduced net income by $31.6 million,  or 51 cents per
common share, after taxes.

         The  pre-tax  charge  of  $23.0  million  for  estimated  future  costs
associated with  environmental  matters  comprised  $18.0 million  applicable to
Phelps Dodge Mining Company and $5.0 million of unallocated  Corporate  charges.
The Corporation's reserves for such costs totaled $122.4 million at December 31,
1997,  compared  with $117.0  million at December 31,  1996.  (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 $19.1  million  associated  with the  voluntary
early-retirement  program included $18.7 million for Phelps Dodge Mining Company
and $0.4 million of unallocated Corporate charges.

         The pre-tax charge of $3.8 million is for losses recognized in the 1997
third  quarter  when the  Corporation  sold its 72.25  percent  interest  in the
McDonald gold project in Montana and other  associated  properties to CR Montana
Corporation and Canyon Resources Corporation, the parent of CR Montana. The sale
included the  immediate  payment of $5.0 million to the  Corporation.  Under the
sales agreement,  the Corporation would receive an additional payment of between
$95.0 million and $145.0 million upon  commencement  of construction or issuance
of permits necessary for the project. This final component of the purchase price
would be based, if necessary, on quarterly production payments.

         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 was 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. In 1996,  the  Corporation  recorded  $10.0
million in reclamation  reserves and $5.9 million in accrued interest related to
this  property.  In August 1997, the  Corporation  returned $14.8 million to the
Postal Service for the Maspeth property and paid $6.6 million of interest to the
Postal Service.

         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.

4. EQUITY  EARNINGS AND INVESTMENTS  AND LONG-TERM  RECEIVABLES  
Equity earnings were as follows:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                       1997      1996      1995
                                                       ----      ----      ----
<S>                                                  <C>       <C>       <C>  
International wire and cable manufacturers           $ 3,900     2,600     1,000
Black Mountain                                         3,700     6,600     4,500
Other                                                  4,100     1,300     1,000
                                                     -------   -------   -------
                                                     $11,700    10,500     6,500
                                                     =======   =======   =======

--------------------------------------------------------------------------------
</TABLE>
         Dividends were received as follows:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                   1997        1996        1995
                                                   ----        ----        ----
<S>                                              <C>         <C>         <C>   
Equity investments:
 International wire and cable
  manufacturers                                  $   300         300         300
 Black Mountain                                    3,400       6,000       5,700
 SIMSA                                               800        --          --
 Other                                               600         500         100
                                                 -------     -------     -------
                                                 $ 5,100       6,800       6,100
                                                 =======     =======     =======
Cost basis investments:
 Southern Peru Copper Corporation                $14,100      16,400      13,600
 Other                                               100         300         300
                                                 -------     -------     -------
                                                 $14,200      16,700      13,900
                                                 =======     =======     =======

--------------------------------------------------------------------------------
</TABLE>
         Investments and long-term receivables were as follows:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                 1997         1996         1995
                                                 ----         ----         ----
<S>                                           <C>          <C>          <C>   
Equity basis:
 International wire and cable
  manufacturers                               $ 18,600       20,300       18,200
 Black Mountain                                  8,800        9,000       11,300
 Accuride Kaiser Wheel Inc.                     22,600         --           --
 SIMSA                                          14,500         --           --
 Other                                          16,500       16,100       12,200
Cost basis:
 Southern Peru Copper Corporation               13,200       13,200       13,200
 Other                                          37,600       27,800       24,100
                                              --------     --------     --------
                                              $131,800       86,400       79,000
                                              ========     ========     ========

--------------------------------------------------------------------------------
</TABLE>
         Retained earnings of the Corporation include undistributed  earnings of
equity investments of (in millions): 1997 - $69.3; 1996 - $62.8; 1995 - $59.0.

         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:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                1997         1996          1995
                                                ----         ----          ----
<S>                                         <C>          <C>          <C>    
Sales                                       $ 868,700      764,100      771,200
Net income                                     40,100       56,000       42,000
--------------------------------------------------------------------------------

Net current assets                          $  84,500       85,600       66,600
Fixed assets, net                             368,600      290,800      259,100
Long-term debt                                (42,400)     (54,500)     (40,500)
Other assets and liabilities, net              41,100       (8,000)      (3,900)
                                            ---------    ---------    ---------
Net assets                                  $ 451,800      313,900      281,300
                                            =========    =========    =========

--------------------------------------------------------------------------------
</TABLE>
5. INTEREST EXPENSE, NET OF AMOUNT CAPITALIZED
The Corporation reported net interest expense in 1997 of $62.5 million, compared
with $66.1  million  in 1996 and $62.0  million in 1995.  Net  interest  expense
decreased in 1997 despite a $344.0  million  increase in debt due to an increase
in the capitalization of interest costs of $9.8 million primarily as a result of
the Candelaria  expansion  project in Chile. 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  (see Note 3).  Included  in 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.

6. MISCELLANEOUS INCOME AND EXPENSE, NET
Interest   income   totaled  $22.3  million  in  1997,   principally   from  the
Corporation's  short-term  investments,  compared  with $34.3  million and $31.5
million  in 1996 and  1995,  respectively.  Miscellaneous  income  in 1997  also
included a $6.0 million pre-tax,  non-cash gain from the exchange of shares of a
cost basis investment in a wire and cable business located in Greece and pre-tax
dividends  of $14.1  million on its 13.9 percent  minority  interest in Southern
Peru Copper  Corporation,  compared with $16.4 million and $13.6 million in 1996
and  1995,  respectively.  Losses  from  changes  in  currency  exchange  rates,
principally  in Thailand and Chile,  amounted to $9.6 million in 1997,  compared
with losses of $11.7 million and $10.2 million in 1996 and 1995, respectively.

7. 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:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                         1997             1996             1995
                                         ----             ----             ----
<S>                                  <C>              <C>              <C>    
United States                        $ 468,600          536,100          816,200
Foreign                                113,300          151,400          259,500
                                     ---------        ---------        ---------
                                     $ 581,900          687,500        1,075,700
                                     =========        =========        =========

--------------------------------------------------------------------------------
</TABLE>
         The provision for income taxes for the years ended  December 31 were as
follows:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                           1997            1996            1995
                                           ----            ----            ----
<S>                                     <C>             <C>             <C>    
Currently payable:
   Federal                              $ 89,900          99,000         157,800
   State                                  15,000          16,100          23,900
   Foreign                                34,800          43,000          38,100
                                        --------        --------        --------
                                         139,700         158,100         219,800
                                        --------        --------        --------
Deferred:
   Federal                                22,400          45,200          78,400
   State                                   6,000           6,400             400
   Foreign                                12,300          10,300          24,100
                                        --------        --------        --------
                                          40,700          61,900         102,900
                                        --------        --------        --------
                                        $180,400         220,000         322,700
                                        ========        ========        ========

--------------------------------------------------------------------------------
</TABLE>
         A reconciliation  of the U.S.  statutory tax rate to the  Corporation's
effective tax rate is as follows:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                    1997        1996       1995
                                                    ----        ----       ----
<S>                                                 <C>         <C>        <C> 
Statutory tax rate                                  35.0%       35.0       35.0
Depletion                                           (7.5)       (7.0)      (5.3)
State and local income taxes                         2.3         2.1        1.5
Effective international tax rate                     1.0         0.9       (1.9)
Other items, net                                     0.2         1.0        0.7
                                                    ----        ----       ----
Effective tax rate                                  31.0%       32.0       30.0
                                                    ====        ====       ====

--------------------------------------------------------------------------------
</TABLE>
         The Corporation paid federal,  state, local and foreign income taxes of
approximately $173 million in 1997,  compared with approximately $160 million in
1996 and  approximately  $247  million in 1995.  As of December  31,  1997,  the
Corporation had  alternative  minimum tax credits of  approximately  $85 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; $4.5 million will expire in 1998.

         The  Corporation's  federal income tax returns for the years 1992, 1993
and 1994 are currently under examination.  The Corporation has received proposed
assessments   from  the  Internal   Revenue   Service  (IRS)   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 IRS. 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 an 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 IRS or litigate the issues involved.

         Deferred income tax assets and (liabilities) comprised the following at
December 31:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                            1997           1996
                                                            ----           ----
<S>                                                     <C>           <C>   
Minimum tax credits                                     $  85,200        78,400
Postretirement and postemployment benefits                 60,000        58,000
Reserves                                                   81,200        69,700
Mining costs                                               56,600        45,000
Inventories                                                 4,700         4,800
Other                                                       5,200         4,400
                                                        ---------     ---------
  Deferred tax assets                                     292,900       260,300
                                                        ---------     ---------
Depreciation                                             (640,600)     (596,100)
Mining properties                                          (6,000)       (8,900)
Exploration and mine development costs                     (3,600)       (3,700)
Pensions                                                  (29,900)      (30,300)
                                                        ---------     ---------
  Deferred tax liabilities                               (680,100)     (639,000)
                                                        ---------     ---------
                                                        $(387,200)     (378,700)
                                                        =========     =========

--------------------------------------------------------------------------------
</TABLE>
         Income taxes have not been  provided on the  Corporation's  share ($462
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 lent 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 withholdings and U.S. tax, net of foreign
tax credit, in the amounts of $82 million and $47 million, respectively.

8. INVENTORIES AND SUPPLIES
Inventories at December 31 were as follows (in millions):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                            1997           1996
                                                            ----           ----
<S>                                                        <C>            <C>  
Metals and other raw materials                             $191.8          194.1
Work in process                                              24.7           19.2
Finished manufactured goods                                  77.3           75.2
Other                                                         4.0            4.5
                                                           ------         ------
                                                           $297.8          293.0
                                                           ======         ======

--------------------------------------------------------------------------------
</TABLE>
         Inventories  valued by the  last-in,  first-out  method would have been
greater  if valued at  current  costs by  approximately  $109  million  and $117
million at December 31, 1997 and 1996, respectively.

         Supplies in the amount of $115.1 million and $117.0 million at December
31, 1997 and 1996, respectively, are stated net of a reserve for obsolescence of
$8.7 million and $8.9 million, respectively.

9.  PROPERTY, PLANT AND EQUIPMENT
Property,  plant and  equipment  at  December 31  comprised  the  following  (in
millions):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                            1997           1996
                                                            ----           ----
<S>                                                       <C>           <C>    
Buildings, machinery and equipment                        $5,265.9       4,669.7
Mining properties                                            166.4         173.1
Capitalized mine development                                 312.3         290.4
Land and water rights                                         91.5          72.7
                                                          --------      --------
                                                           5,836.1       5,205.9
Less accumulated depreciation, depletion
 and amortization                                          2,391.0       2,185.4
                                                          --------      --------
                                                          $3,445.1       3,020.5
                                                          ========      ========

--------------------------------------------------------------------------------
</TABLE>
         The net increases in property, plant and equipment of $424.6 million in
1997 and $291.8 million in 1996 are summarized below (in millions):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                             1997         1996
                                                             ----         ----
<S>                                                       <C>          <C>    
Balance at beginning of year                              $3,020.5      2,728.7
                                                          --------     --------
Capital expenditures                                         661.6        513.0
Depreciation, depletion and amortization                    (277.3)      (243.7)
Property, plant and equipment of acquired
 companies                                                    57.2         37.2
Asset sales, currency translation adjustments
 and other                                                   (16.9)       (14.7)
                                                          --------     --------
                                                             424.6        291.8
                                                          --------     --------
Balance at end of year                                    $3,445.1      3,020.5
                                                          ========     ========

--------------------------------------------------------------------------------
</TABLE>
10.  OTHER ASSETS AND DEFERRED CHARGES
Other assets and deferred charges at December 31 were as follows (in millions):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                              1997         1996
                                                              ----         ----
<S>                                                          <C>          <C>  
Goodwill, less accumulated amortization
 (1997 - $45.2; 1996 - $39.4)                                $178.0        130.6
Employee benefit plans                                        122.9        121.7
Debt issue costs                                               29.0         25.6
Intangible pension asset                                        2.0          4.0
Other intangible assets                                         3.6          4.0
Other                                                           1.7          2.1
                                                             ------       ------
                                                             $337.2        288.0
                                                             ======       ======

--------------------------------------------------------------------------------
</TABLE>
11.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts  payable  and  accrued  expenses  at  December  31 were as follows  (in
millions):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                              1997          1996
                                                              ----          ----
<S>                                                         <C>           <C>  
Accounts payable                                            $297.7         292.1
Employee benefit plans                                        26.3          31.5
Insurance and loss reserves                                   13.8          11.8
Salaries, wages and other compensation                        47.1          48.3
Environmental reserves                                        38.2          43.6
Smelting, refining and freight                                23.0          20.9
Other accrued taxes                                           15.7          16.1
Candelaria expansion                                           0.8          15.3
Shutdown, relocation and restructuring                         7.7          10.3
Interest *                                                    16.3          17.5
Returnable containers                                          7.0           3.6
Other                                                         59.6          53.9
                                                            ------        ------
                                                            $553.2         564.9
                                                            ======        ======

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

*    Interest paid by the  Corporation in 1997 was $72.6 million,  compared with
     $67.2 million in 1996 and $70.4 million in 1995.

--------------------------------------------------------------------------------
</TABLE>
12.  OTHER LIABILITIES AND DEFERRED CREDITS
Other  liabilities  and  deferred  credits at  December  31 were as follows  (in
millions):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                                1997        1996
                                                                ----        ----
<S>                                                           <C>         <C>  
Postretirement and postemployment benefit plans               $168.9       157.5
Other employee benefit plans                                    56.9        41.5
Environmental reserves                                          84.2        71.8
Shutdown, relocation and restructuring                           4.4         5.4
Insurance and loss reserves                                     23.0        22.5
Other                                                            6.7        10.9
                                                              ------      ------
                                                              $344.1       309.6
                                                              ======      ======

--------------------------------------------------------------------------------
</TABLE>
13.  LONG-TERM DEBT AND OTHER FINANCING
Long-term debt at December 31 is summarized below (in millions):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                              1997         1996
                                                              ----         ----
<S>                                                         <C>          <C>  
6.375% Notes due 2004                                       $ 100.0            -
7.125% Debentures due 2027                                    150.0            -
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
Chilean Mining Operations                                     271.6        214.0
Columbian Tiszai Carbon Ltd. (Hungary)                         16.0         25.0
Columbian Carbon Spain, S.A.                                    7.6         10.9
Sevalco (United Kingdom)                                       11.2            -
Columbian Chemicals Canada                                      7.0            -
Phelps Dodge International Corporation                         25.1         17.8
Other                                                           2.3          4.0
                                                            -------      -------
Long-term debt including current portion                      911.9        592.8
Less current portion                                           54.8         38.2
                                                            -------      -------
Long-term debt excluding current portion                    $ 857.1        554.6
                                                            =======      =======

--------------------------------------------------------------------------------
</TABLE>
Annual  maturities of debt  outstanding at December 31, 1997, are as follows (in
millions):  1998 - $54.8;  1999 -  $65.3;  2000 -  $55.1;  2001 - $39.7;  2002 -
$147.8.

         An existing  revolving  credit  agreement  between the  Corporation and
several  lenders was amended on June 25,  1997.  The  agreement,  as amended and
restated,  permits  borrowings  of up to $1 billion  from time to time until its
scheduled  maturity on June 25,  2002.  The  agreement  allows for two  one-year
renewals  beyond the  scheduled  maturity date if the  Corporation  requests and
receives  approval from those lenders  representing  at least  two-thirds of the
commitments  provided  by the  facility.  In the event of such  approval,  total
commitments  under the  facility  would  depend  upon the  willingness  of other
lenders to assume the  commitments of those lenders  electing not to participate
in the  renewal.  Interest is payable at a  fluctuating  rate based on the agent
bank's prime rate or at a fixed rate, based on the London Interbank Offered Rate
(LIBOR) or at fixed rates  offered  independently  by the several  lenders,  for
maturities of between seven and 360 days. This agreement provides for a facility
fee of six and one-half basis points (0.065 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, 1997, or December 31, 1996.

         The  Corporation  established a commercial  paper program on August 15,
1997, under a private placement agency agreement between the Corporation and two
placement  agents.  The  agreement  permits  the  Corporation  to issue up to $1
billion of short-term  promissory notes (generally known as commercial paper) at
any one time.  Commercial  paper may bear interest or be sold at a discount,  as
mutually agreed by the Corporation and the placement  agents at the time of each
issuance.  The Corporation's  commercial paper rating requires that issuances of
commercial  paper be backed by an undrawn line of credit;  the revolving  credit
agreement described above provides such support.  There were no borrowings under
the commercial paper program at December 31, 1997.

         The  Corporation  had other lines of credit  totaling $100.0 million at
December 31, 1997,  and at December 31, 1996.  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, 1997, or December
31, 1996.

         The Corporation had $91.4 million in short-term borrowings,  all by its
international  operations,  at December 31, 1997, compared with $66.5 million at
December  31, 1996.  The increase in  short-term  borrowings  principally  was a
result of borrowings at Accuride's new Mexican operations  (Accuride de Mexico).
The weighted average  interest rate on total  short-term  borrowings at December
31,  1997,   and  December  31,  1996,   was  13.0  percent  and  15.3  percent,
respectively.

         On  November 5, 1997,  the  Corporation  issued  $100  million of 6.375
percent  notes  maturing on November 1, 2004,  and $150 million of 7.125 percent
debentures  maturing  on  November  1,  2027,  under  an  Indenture  dated as of
September 22, 1997,  between the  Corporation  and The Chase  Manhattan Bank, as
Trustee.  Interest on these  securities  is payable  semi-annually  on May 1 and
November 1 of each year. The notes are not redeemable  prior to maturity and are
not entitled to any sinking fund. The debentures are redeemable,  in whole or in
part,  at the option of the  Corporation,  at a  redemption  price  equal to the
greater  of (i) 100  percent  of their  principal  amount or (ii) the sum of the
present  values of the  remaining  scheduled  payments of principal and interest
thereon  discounted  to the date of redemption at a rate equal to the sum of the
yield of a United States Treasury  security having a comparable  maturity to the
remaining  term of the debentures  plus 10 basis points.  The debentures are not
entitled to any sinking fund. The Corporation  applied most of the proceeds from
the sale of the offered securities to repay outstanding  commercial paper, which
had been issued for general corporate purposes.

         The  Corporation's  80  percent-owned   Compania   Contractual   Minera
Candelaria  (Candelaria)  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
started 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; this
debt was replaced during the second quarter of 1997 when Candelaria borrowed $30
million of 12-year, dollar-denominated debt. In addition, during 1997 Candelaria
borrowed  $72 million of a $150  million,  12-year  dollar-denominated  facility
arranged in order to  partially  finance  Candelaria's  $305  million  expansion
project.  Both of the 1997  facilities  are  based  on  floating  rates  tied to
six-month LIBOR and are  non-recourse to the  Corporation.  The Corporation also
caused  Candelaria  to sell the 9  percent  and 11  percent  interest  rate caps
purchased  in 1993 that were  intended to limit the effect of  increases  in the
cost of  Candelaria's  floating  rate  debt.  In turn,  the  Corporation  caused
Candelaria to enter into interest rate swaps with certain financial institutions
to effectively  convert all of Candelaria's  floating rate debt to 7.84 percent,
fixed rate debt for the life of the debt.  The  obligations  under the  interest
rate swaps are non-recourse to the Corporation.

14.  SHAREHOLDERS' EQUITY
On May 7, 1997, the Corporation  announced an additional  share purchase program
of up to 6 million of its common shares. This authorization  follows a 5 million
share  purchase  program  that was  initiated in 1995 and extended to 10 million
shares in 1996.  Under that  program  9,920,800  shares  were  purchased  by the
Corporation.  During 1997,  the  Corporation  purchased  6,554,000 of its common
shares at a total cost of $511.5 million,  including  3,606,000 shares at a cost
of $292.9  million  under  the new 6 million  share  authorization.  There  were
58,634,000 shares outstanding on December 31, 1997. During 1996, the Corporation
purchased 4,297,300 of its common shares at a total cost of $273.2 million.

         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, 1997, or
December 31, 1996.

         The  Corporation  has in place a Preferred  Share Purchase Rights Plan.
The  Preferred  Share  Purchase  Rights  Plan  contains  provisions  to  protect
stockholders  in the event of  unsolicited  offers or  attempts  to acquire  the
Corporation,  including  acquisitions in the open market of shares  constituting
control without  offering fair value to all  stockholders  and other coercive or
unfair  takeover  tactics that could impair the Board of  Directors'  ability to
represent the stockholders' interests fully.

15.  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 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, 1997,  options for 139,416  shares,  48,208  shares and
1,719,158  shares were  exercisable  under the 1987 plan,  the 1989 plan and the
1993  plan,  respectively,  at average  prices of $44.22,  $45.22 and $65.68 per
share.  In addition,  242,150  shares of Restricted  Stock issued under the 1993
plan were outstanding at December 31, 1997. Also at December 31, 1997, 1,263,782
shares were available for option grants (including  734,308 shares as restricted
stock  awards)  under  the 1993  plan.  These  amounts  are  subject  to  future
adjustment as described in the plan agreement. No further options may be granted
under the 1987 or 1989 plans.  There were no options  outstanding under the 1979
plan as of December 31, 1997, December 31, 1996, or December 31, 1995.

         Changes  during  1995,  1996 and 1997 in  options  outstanding  for the
combined plans were as follows:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                                 Average option
                                                      Shares     price per share
                                                      ------     ---------------
<S>                                                 <C>          <C>       
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
  Granted                                           1,110,431         69.33
  Exercised                                          (827,243)        52.30
  Expired or terminated                               (47,891)        69.63
                                                    ---------
Outstanding at December 31, 1997 *                  3,434,491         65.44
                                                    =========

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

*    Exercise prices for options  outstanding at December 31, 1997, range from a
     minimum of approximately  $21 per share to a maximum of  approximately  $89
     per share.  The average  remaining  maximum term of options  outstanding is
     approximately eight years.

--------------------------------------------------------------------------------
</TABLE>
     Changes during 1995, 1996 and 1997 in Restricted Stock were as follows:
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                                  Shares
                                                                  ------
<S>                                                              <C>    
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
  Granted                                                          15,250
  Terminated                                                         (800)
                                                                 --------
Outstanding at December 31, 1997                                  242,150
                                                                 ========

--------------------------------------------------------------------------------
</TABLE>
         In  accordance  with the  provisions of SFAS No. 123,  "Accounting  for
Stock-Based  Compensation,"  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):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                   1997       1996       1995
                                                   ----       ----       ----
<S>                                           <C>            <C>        <C>  
Net income - as reported                      $   408.5      461.8      746.6
Net income - pro forma                            402.4      456.2      741.6

Earnings per share - as reported
  (diluted)                                         6.63       6.98      10.66
Earnings per share - pro forma
  (diluted)                                         6.54       6.89      10.60

--------------------------------------------------------------------------------
</TABLE>
         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:
<TABLE>
<CAPTION>
                                         1997            1996             1995
                                         ----            ----             ----
<S>                                     <C>             <C>              <C>  
Expected dividend yield                  3.02%           3.32%            3.34%
Expected stock price volatility          23.0%           24.0%            22.1%
Risk-free interest rate                   5.8%            5.7%             6.0%
Expected life of options                3 years         3 years          3 years
</TABLE>
The weighted  average fair value of options  granted  during 1997 was $10.62 per
share, compared with $12.68 in 1996 and $11.04 in 1995.

16.  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 either at the time of
employment or after one year of service,  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.  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 Corporation also maintains  pension plans for certain  employees of
international subsidiaries following the legal requirements in those countries.

         The  status  of  employee  pension  benefit  plans  at  December  31 is
summarized below (in millions):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                   Overfunded     Underfunded
                                                     Plans           Plans
                                                  ------------    ------------
                                                  1997    1996    1997    1996
                                                  ----    ----    ----    ----
<S>                                              <C>     <C>      <C>    <C>
Actuarial  present value of projected  
 benefit  obligation,  based on employment
 service to date and current 
 salary levels:
  Vested employees                               $ 561     507       27     41
  Non-vested employees                              45      34        2      6
                                                 -----   -----    -----  -----
  Accumulated benefit obligation                   606     541       29     47
  Additional amounts related to projected                               
   salary increases                                 59      43        5      6
                                                 -----   -----    -----  -----
  Total projected benefit obligation               665     584       34     53
                                                                        
Plan assets at fair value                          774     681        4     22
                                                 -----   -----    -----  -----
Projected pension benefit obligation in                                 
 excess of (less than) plan assets                (109)    (97)      30     31
Unamortized net asset (liability)                                       
  existing at January 1, 1985                        3       5       (1)     -
Unrecognized prior service cost                    (42)    (22)      (2)    (5)
Unrecognized net gain (loss) from                                       
 actuarial experience                               66      23       (7)    (9)
                                                 -----   -----    -----  -----
Accrued (prepaid) pension cost                   $ (82)    (91)      20     17
                                                 =====   =====    =====  =====

--------------------------------------------------------------------------------
</TABLE>
         The  Corporation's  pension plans were valued between December 1, 1995,
and January 1, 1996,  and between  December  1, 1996,  and January 1, 1997.  The
obligations  were  projected to and the assets were valued as of the end of 1996
and 1997.  Of its ten U.S.  pension  plans at  December  31,  1997,  eight  were
overfunded  while  two  were  underfunded.  Effective  November  30,  1997,  two
non-bargained  hourly  pension plans were merged into an existing  plan, and one
salaried  plan of an  acquired  company was  terminated  and  participants  were
provided future benefits under an existing  Corporate plan. Of the Corporation's
13 U.S. pension plans at December 31, 1996, nine were overfunded while four 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):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                      1997       1996      1995
                                                      ----       ----      ----
<S>                                                 <C>        <C>       <C>    
Benefits earned during the year                     $ 17.5       14.2      11.2
Interest accrued on projected benefit
 obligation                                           46.8       43.4      42.9
Return on assets - actual                           (117.3)    (108.4)   (119.6)
                 - unrecognized gain                  56.3       51.8      66.6
Net amortization                                       3.0        1.5       1.0
                                                    ------     ------    ------
   Net periodic pension cost for the year           $  6.3        2.5       2.1
                                                    ======     ======    ======

--------------------------------------------------------------------------------
</TABLE>
         Assumptions  used to develop the net periodic  pension cost  included a
7.25 percent discount rate in 1997 and 1996,  compared with 8.5 percent in 1995.
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 1997, 1996 and 1995.
For the valuation of pension  obligations,  the discount rate at the end of 1997
was 7.25 percent, equivalent to the discount rate at the end of 1996 and 1995.

         The  Corporation  recognizes  a  minimum  liability  in  its  financial
statements for its underfunded  plans.  "Other liabilities and deferred credits"
at December 31, 1997,  included $7 million  relating to this minimum  liability,
compared  with $10 million at December 31, 1996.  This amount was offset by a $2
million  intangible  asset,  a $3 million  reduction  in  "Common  Shareholders'
Equity" and a $2 million  deferred tax benefit at December  31,  1997,  compared
with  a  $4  million  intangible  asset,  a  $4  million  reduction  in  "Common
Shareholders'  Equity" and a $2 million  deferred  tax  benefit at December  31,
1996.

         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."

17.  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):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                              1997       1996
                                                              ----       ----
<S>                                                           <C>       <C>
Accumulated Postretirement Benefit Obligation:
  Retirees                                                    $ 76        74
  Fully eligible active plan participants                       12        14
  Other active plan participants                                74        64
                                                              ----      ----
  Total accumulated postretirement benefit
   obligation                                                  162       152

Plan assets at fair value                                       10        11
                                                              ----      ----
Accumulated postretirement benefit obligation in
 excess of plan assets                                         152       141
Unrecognized prior service cost                                  4         7
Unrecognized net gain (loss) from actuarial
 experience                                                      4        (1)
                                                              ----      ----
Accrued postretirement benefit cost                           $160       147
                                                              ====      ====

--------------------------------------------------------------------------------
</TABLE>
         The  components  of net  periodic  postretirement  benefit cost were as
follows (in millions):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                    1997      1996       1995
                                                    ----      ----       ----
<S>                                                 <C>       <C>       <C>
Benefits attributed to service during
 the year                                           $  4         4         4
Interest cost on accumulated postretirement
 benefit obligation                                   11        10        11
Return on assets - actual                             (1)       (1)       (1)
Net amortization                                       -         -        (1)
                                                    ----      ----      ----
Net periodic postretirement benefit cost
 for the year                                       $ 14        13        13
                                                    ====      ====      ====

--------------------------------------------------------------------------------
</TABLE>
         For 1997  measurement  purposes,  annual  rates of  increase in the per
capita cost of covered  health care benefits were assumed to average 7.6 percent
for 1998 decreasing gradually to 5.3 percent by 2008 and remaining at that level
thereafter.  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.  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, 1997,  by  approximately
$11.3 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 1997, the same as that
used for 1996.  Assumptions used to develop net periodic  postretirement benefit
cost  included a 7.25  percent  discount  rate in 1997,  equivalent  to the 7.25
percent  discount rate used in 1996 and a decrease from 8.5 percent in 1995. The
expected long-term rate of return on plan assets was 8 percent for both 1997 and
1996.

18.  COMMITMENTS
Rent expense for the years 1997, 1996 and 1995 was (in millions):  $18.6,  $15.6
and $18.8,  respectively.  Future minimum lease  payments for all  noncancelable
operating  leases  having a remaining  term in excess of one year totaled  $47.4
million at  December  31,  1997.  These  commitments  for future  periods are as
follows (in millions):  1998 - $12.0;  1999 - $10.6;  2000 - $6.5;  2001 - $5.3;
2002 - $1.2; 2003 and thereafter - $11.7.

19.  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  (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 40 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 currently  estimate the total additional
loss it may incur for such  environmental  liabilities,  but such loss  could be
substantial.  (See Notes 1 and 3 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
adopted  rules for the Arizona  program in January 1997,  and the  Corporation's
operations began submitting the required reclamation plans in 1997.  Reclamation
is an ongoing  activity and the Corporation is currently  recognizing  estimated
reclamation costs using a units of production basis calculation.  These laws and
regulations will likely increase the  Corporation's  regulatory  obligations and
compliance costs with respect to mine closure and reclamation.

         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.
Negotiations  between the Tribe, the Corporation and other parties  continued on
the comprehensive  settlement and other necessary  agreements for several years.
In 1997,  additional  disputes arose between Phelps Dodge and the Tribe.  On May
12, 1997,  the Tribe filed suit  against the  Corporation  in San Carlos  Apache
Tribal Court,  seeking eviction of the Corporation from the Tribe's  Reservation
and claiming substantial  compensatory and punitive damages, among other relief.
In May 1997,  Phelps Dodge and the Tribe reached an agreement,  and subsequently
federal  legislation (Pub. L. No. 105-18,  Section 5003, 111 stat. 158, 181-87),
was adopted which mandated  dismissal of the tribal court suit. The  legislation
prescribes  arrangements  intended  to  ensure a future  supply of water for the
Morenci mining complex in exchange for certain payments by the Corporation.  The
legislation  does not address any potential  claims by the Tribe relating to the
Corporation's  historical  occupancy  and  operation  of its  facilities  on the
Tribe's Reservation but does require that any such claims be brought, if at all,
exclusively  in federal  district  court.  By order dated October 13, 1997,  the
tribal  court  dismissed  the lawsuit with  prejudice,  as  contemplated  by the
legislation.

         On September 25, 1997, the Corporation  announced it had sold its 72.25
percent interest in the McDonald gold project and other associated properties to
CR  Montana  Corporation  and  Canyon  Resources  Corporation,  the parent of CR
Montana.  The terms of the  transaction  included  the  immediate  payment of $5
million  with an  additional  payment to Phelps Dodge of between $95 million and
$145 million when  permitting  for the project is completed or  construction  is
commenced.  The final amount of the $150 million  total  purchase  price will be
based, if necessary, on quarterly production payments.

20.  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, as summarized
in the table at the end of this  note,  are based on quoted  market  prices  for
similar financial  instruments.  A summary of derivative  financial  instruments
held by the Corporation is as follows:

         COPPER FUTURES  CONTRACTS - Because of the market risk arising from the
volatility  of  copper  prices  on the  COMEX  and the  LME,  the  Corporation's
objective  and practice is to sell its copper  cathodes and rod at a price based
on the COMEX average price in the month of shipment, and its copper concentrates
at the LME average  price in the month of  settlement  with its  customers.  The
Corporation  records copper concentrate sales on a provisional basis on the date
of shipment  and adjusts the sales on a monthly  basis to reflect the latest LME
price. A final  adjustment is made upon settlement  with customers.  For cathode
and rod sales, 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 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  combined  net  effect of a firm price  customer  contract  and the  related
futures  transactions  is for the  Corporation to realize an amount based on the
COMEX average price during the month of shipment.  Swap contracts are settled at
the COMEX average monthly price in the month copper is shipped.  At December 31,
1997,  the  Corporation  had  futures  and swap  hedge  contracts  in place  for
approximately 140 million pounds of copper with an approximate net value of $130
million and an aggregate  notional  value of  approximately  $146  million.  The
copper  futures and swap contracts  acquired by the  Corporation at year end had
maturities of 18 months or less. The Corporation had deferred  unrealized losses
of $18.7  million on its futures and swap  contracts at December 31, 1997.  With
respect to 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 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.

         COPPER PRICE  PROTECTION  AGREEMENTS - Depending on market  conditions,
the  Corporation  may  periodically  purchase  or  sell  various  copper  option
contracts  to reduce  the risk of  adverse  price  changes  on a portion  of its
expected  future  mine  production.   With  respect  to  1998  production,   the
Corporation has not entered into any option contracts. For 1997 production,  the
Corporation  had hedge  contracts  that  provided  for a minimum  first  quarter
average  price of 90 cents per  pound for a net  position  of  approximately  85
million  pounds of copper that expired  without  payment to Phelps Dodge.  There
were no copper price  protection  contracts as of the end of 1997.  During 1996,
the Corporation sold copper price  protection  contracts that covered 94 million
pounds  of  production  in the 1996  fourth  quarter  and 85  million  pounds of
production in the 1997 first  quarter.  This resulted in immediate cash payments
to the Corporation of $15.6 million.  Consequently,  $8.8 million was recognized
in  income  in the  1996  fourth  quarter  and $6.8  million  was  deferred  and
recognized in income during the 1997 first quarter.

         With respect to 1996  production,  the  Corporation  had contracts that
provided a combination of minimum and maximum  quarterly  average 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.

         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.

         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 reduce the Corporation's overall exposure to adverse changes in
currency  exchange rate  movements  resulting from  transactions  denominated in
foreign currencies. 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,
1997, the Corporation had protection in place for approximately  $158 million of
recorded  and  anticipated  foreign  currency  transactions  through  the use of
currency  options and forward  contracts  with a matching  notional  value.  The
currency  option  and  forward  contracts   acquired  by  the  Corporation  have
maturities  of less than one year.  The  Corporation  did not have any  material
deferred  unrecognized gains or losses on its foreign exchange contracts for the
year-end  periods 1995 through 1997.  With respect to 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.

         CURRENCY SWAP  CONTRACTS - During 1997,  the  Corporation  entered into
currency swap contracts to hedge certain recorded transactions.  The Corporation
did not hold these financial instruments for trading purposes. The Corporation's
currency swap agreements are employed in structured  transactions  whose purpose
is to take  advantage of  opportunities  to obtain  attractively  priced foreign
currency  debt.  At year end,  the  Corporation's  majority-owned  Phelps  Dodge
Thailand Ltd.  cable  manufacturing  plant in Thailand had entered into currency
swap agreements that  effectively  converted  floating rate U.S. dollar loans to
fixed rate Thai baht loans.  At December 31, 1997, the  Corporation had currency
swap  contracts  in  place  for  approximately  $15  million  of  currency  swap
contracts.  The  currency  swap  contracts  acquired  by  the  Corporation  have
maturities of 19 months or less.

         INTEREST  RATE  SWAP  AGREEMENT  -  The   Corporation   caused  its  80
percent-owned  Candelaria  copper mine in Chile to enter into an  interest  rate
swap converting  $280.8 million of floating rate  dollar-denominated  debt to an
average  fixed  rate of 7.84  percent  for the  life of the debt  which  extends
through  the year 2008.  Under the terms of the  floating  rate debt  agreement,
Candelaria's  borrowings  are expected to vary from period to period  during the
life of the debt.  As a result,  the notional  value of the  interest  rate swap
contract has been  established  at varying  amounts  throughout  the life of the
swap.

         CREDIT RISK - The Corporation is exposed to credit loss in the event of
nonperformance by  counterparties  to its commodity price,  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 routine 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 cash  equivalents  -- 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.

         Financial  hedge  instruments  -- the fair  values of  financial  hedge
         instruments  are based on quotes  from  brokers or  calculations  using
         market prices for those or similar instruments.

         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 $89.2 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 carrying  amounts and  estimated  fair values of the  Corporation's
financial instruments as of December 31, 1997, were as follows (in millions):
<TABLE>
--------------------------------------------------------------------------------
<CAPTION>
                                                          Carrying      Fair
                                                           Amount       Value
                                                          --------     -------
<S>                                                        <C>          <C>  
Cash and short-term investments                            $157.9       157.9
Currency swap agreements - assets                               -         3.7
Investments and long-term receivables (including
 amounts due within one year) for which it is
 practicable to estimate fair value *                        51.4       186.5
Long-term debt (including amounts due
 within one year)                                           911.9       834.2
Interest rate swap agreements - assets                          -       (10.8)
Foreign currency exchange contracts - assets
 (liabilities)                                               (3.0)        0.2

-----------

     *    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,  1997,  the  estimated  fair value of the  Corporation's
          investment  in SPCC is  approximately  $149  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.

--------------------------------------------------------------------------------
</TABLE>
21.  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  global
energy, telecommunications,  transportation and specialty chemicals sectors. 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 wire and cable and  specialty  conductor  operations  through  Phelps  Dodge
International  Corporation  and  Phelps  Dodge  Magnet  Wire  Company  and their
subsidiaries  and affiliates;  and until it was sold effective  January 1, 1998,
its wheel and rim operations through Accuride Corporation and its subsidiaries.

         The  Corporation's  total 1997 sales included  exports of $89.3 million
from U.S.  operations to  unaffiliated  foreign  customers,  compared with $60.2
million  in 1996 and $93.7  million  in 1995.  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 1995 through 1997. Major unusual items
during the  three-year  period  included (i) a 1997  pre-tax  provision of $40.5
million  included in Phelps Dodge Mining  Company's  operating  income for costs
associated with a voluntary early-retirement program,  environmental matters and
other,  (ii) a 1997 pre-tax  provision of $5.4 million included in Corporate and
Other's operating income for costs associated with  environmental  matters and a
voluntary  early-retirement  program,  (iii) 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,  and (iv) 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.  (See Note 3 to the  Consolidated
Financial Statements for a further discussion of these issues.)
<PAGE>
<TABLE>
FINANCIAL DATA BY BUSINESS SEGMENT
(In millions)

<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>    
1997
 Sales and other operating revenues:
   Unaffiliated customers             $2,173.3      429.5     333.0    978.5  1,741.0         -   3,914.3

   Intersegment                          288.4          -         -      2.6      2.6         -     291.0

 Operating income (loss)                 457.2       74.3      48.7     81.9    204.9     (51.1)    611.0

 Identifiable assets at
  December 31                          3,083.4      502.8     356.7    896.8  1,756.3     125.5   4,965.2

 Depreciation, depletion and
  amortization                           172.4       37.2      20.7     51.4    109.3       2.0     283.7

 Capital outlays                         455.4       75.7      24.0    102.5    202.2       4.0     661.6

 Equity earnings                           4.5       (0.1)      2.7      4.6      7.2         -      11.7
---------------------------------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
FINANCIAL DATA BY GEOGRAPHIC AREA
(In millions)

--------------------------------------------------------------------------------
<CAPTION>
                                                  1997         1996        1995
                                                  ----         ----        ----
<S>                                            <C>          <C>         <C>    
SALES AND OTHER OPERATING REVENUES:
 Unaffiliated customers
  United States                                $2,870.9      2,773.5     3,072.6
  Latin America                                   464.8        414.6       537.3
  Other                                           578.6        598.5       575.5
                                               --------     --------    --------
                                               $3,914.3      3,786.6     4,185.4
                                               ========     ========    ========
 Intergeographic areas *
  United States                                $   26.4         11.9        13.1
  Latin America                                    --           14.9        23.7
  Other                                            39.7         43.5        47.9
                                               --------     --------    --------
                                               $   66.1         70.3        84.7
                                               ========     ========    ========
OPERATING INCOME:
 United States                                 $  483.5        544.9       810.4
 Latin America                                     75.7         64.5       196.8
 Other                                             51.8        103.5        93.3
                                               --------     --------    --------
                                               $  611.0        712.9     1,100.5
                                               ========     ========    ========
IDENTIFIABLE ASSETS AT DECEMBER 31:
 United States                                 $3,184.7      3,196.2     3,157.1
 Latin America                                  1,232.1      1,000.1       931.3
 Other                                            548.4        620.1       557.5
                                               --------     --------    --------
                                               $4,965.2      4,816.4     4,645.9
                                               ========     ========    ========

-----------

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

--------------------------------------------------------------------------------
</TABLE>
<PAGE>
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 6, 1998 (the 1998 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 1998 Proxy  Statement  is being
prepared  and will be filed with the  Securities  and  Exchange  Commission  and
furnished to shareholders on or about April 1, 1998.



                                     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   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))  and
            Certificate   of  Amendment   of  such   Restated   Certificate   of
            Incorporation, effective June 19, 1997 (incorporated by reference to
            Exhibit 3.1 to the  Corporation's  Form 10-Q for the  quarter  ended
            June 30, 1997 (SEC File No. 1-82)).

      3.2   By-Laws  of the  Corporation,  as  amended  effective  May  7,  1997
            (incorporated by reference to Exhibit 3.2 to the Corporation's  Form
            10-Q for the quarter ended June 30, 1997 (SEC File No. 1-82)).

      4.1   Reference is made to Exhibits 3.1 and 3.2 above.

      4.2   Second Amended and Restated Credit  Agreement,  dated as of June 25,
            1997,  among  the  Corporation,  several  banks  and  other  lending
            institutions,  and The Chase Manhattan Bank, as administrative agent
            (incorporated by reference to Exhibit 4.2 to the Corporation's  Form
            10-Q for the quarter ended June 30, 1997 (SEC File No. 1-82)).

      4.3   Rights  Agreement,   dated  as  of  February  5,  1998  between  the
            Corporation  and The Chase Manhattan Bank (which replaces the Rights
            Agreement  dated as of July 29, 1988 as amended  and  restated as of
            December 6, 1989, the rights issued  thereunder having been redeemed
            by the  Corporation),  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 and in the  Corporation's  Form 8-A,  both filed on  February 6,
            1998 (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.

      4.4   Form of  Indenture,  dated as of  September  22,  1997,  between the
            Corporation and The Chase  Manhattan Bank, as Trustee  (incorporated
            by  reference  to  the  Corporation's   Registration  Statement  and
            Post-Effective  Amendment  No.  1 on  Form  S-3  (Registration  Nos.
            333-36415  and  33-44380))  filed with the  Securities  and Exchange
            Commission  on  September  25, 1997  (incorporated  by  reference to
            Exhibit 4.3 to the  Corporation's  Form 10-Q for the  quarter  ended
            September 30, 1997 (SEC File No. 1-82)).

      4.5   Form of 6.375 percent Note, due November 1, 2004, of the Corporation
            issued on November 5, 1997,  pursuant to the Indenture,  dated as of
            September 22, 1997,  between the Corporation and The Chase Manhattan
            Bank,  as Trustee  (incorporated  by reference to the  Corporation's
            Current  Report on Form 8-K filed with the  Securities  and Exchange
            Commission  on November 3, 1997 and Exhibit 4.4 of Form 10-Q for the
            quarter ended September 30, 1997 (SEC File No. 1-82)).

      4.6   Form of 7.125  percent  Debenture,  due  November  1,  2027,  of the
            Corporation  issued on November 5, 1997,  pursuant to the Indenture,
            dated as of September  22,  1997,  between the  Corporation  and The
            Chase Manhattan Bank, as Trustee  (incorporated  by reference to the
            Corporation's  Current  Report on Form 8-K filed with the Securities
            and Exchange  Commission  on November 3, 1997 and Exhibit 4.5 of the
            Corporation's  Form 10-Q for the quarter  ended  September  30, 1997
            (SEC File No. 1-82)).

      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)).  Amendment  to 1993  Plan  effective  May 7,  1997
            (incorporated  by  reference to Exhibit  10.15 to the  Corporation's
            Form 10-Q for the quarter ended June 30, 1997 (SEC File No.  1-82)).
            Amended and restated form of Stock Option Agreement, amended through
            February  5,  1997  (SEC  File  No.  1-82).  Form of  Reload  Option
            Agreement,  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 June 25, 1997,  effective  September  30,
            1997 (incorporated by reference to Exhibit 10.5 to the Corporation's
            Form 10-Q for the quarter ended June 30, 1997 (SEC File No. 1-82)).

      10.6  Amended and restated 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 1998 Proxy Statement (SEC File No. 1-82).

      10.7  Amended  and  restated  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 1998 Proxy Statement (SEC File No. 1-82).

      10.8  The Corporation's  Retirement Plan for Directors,  effective January
            1, 1988, terminated for active directors effective December 31, 1997
            (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   Supplemental  Retirement  Plan  (which  amends,
            restates   and  re-names  the   provisions   of  the   Corporation's
            Comprehensive  Executive  Nonqualified  Retirement  and Savings Plan
            other  than  the  supplemental  savings  provisions  of such  plan),
            effective  (except as otherwise noted therein) as of January 1, 1997
            (SEC File No. 1-82).

      10.10 The Corporation's Supplemental Savings Plan (which amends, restates,
            and   replaces   the   supplemental   savings   provisions   of  the
            Corporation's  Comprehensive  Executive Nonqualified  Retirement and
            Savings Plan),  effective  (except as otherwise noted therein) as of
            January 1, 1997 (SEC File No. 1-82).

      10.11 The  Corporation's  Directors  Stock Unit Plan effective  January 1,
            1997   (incorporated   by   reference   to  Exhibit   10.10  to  the
            Corporation's  1996 Form 10-K (SEC File No.  1-82)) as  amended  and
            restated, effective January 1, 1998 (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:

      The  Corporation  filed a Current  Report on Form 8-K on November 3, 1997,
      with respect to the issuance of debt securities  pursuant to an Indenture,
      dated as of September  22,  1997,  between the  Corporation  and The Chase
      Manhattan Bank, as Trustee.
<PAGE>
Schedule VIII
<TABLE>
PHELPS DODGE CORPORATION AND CONSOLIDATED SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
------------------------------------------------------

(In thousands)
<CAPTION>
                                           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:                                                          
<S>                       <C>           <C>        <C>       <C>        <C>
Accounts Receivable:                                                  
                                                                      
 December 31, 1997        $14,200       1,500      (600)     1,300      13,800
                                                                      
 December 31, 1996         12,000       4,300      (200)     1,900      14,200
                                                                      
 December 31, 1995         11,800       2,000      (800)     1,000      12,000
                                                                      
                                                                      
                                                                      
Supplies:                                                             
                                                                      
 December 31, 1997        $ 8,900         600       200      1,000       8,700
                                                                      
 December 31, 1996         10,500       1,300       100      3,000       8,900
                                                                      
 December 31, 1995         14,000         600       200      4,300      10,500
</TABLE>
<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, 1998                                  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,
                        Chief Executive Officer
                        and Director
Douglas C. Yearley      (Principal Executive Officer)           March 17, 1998
-------------------
Douglas C. Yearley

                        Senior Vice President
                        and Chief Financial Officer
Thomas M. St. Clair     (Principal Financial Officer)           March 17, 1998
-------------------
Thomas M. St. Clair

                        Vice President and Controller
Gregory W. Stevens      (Principal Accounting Officer)          March 17, 1998
-------------------
Gregory W. Stevens

Robert N. Burt, Paul W. Douglas, William A. Franke,  )
Paul Hazen, Manuel J. Iraola, Marie L. Knowles,      )
Robert D. Krebs, Southwood J. Morcott,               )         March 17, 1998
Gordon R. Parker, J. Steven Whisler, Directors       )

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