<PAGE>


================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K/A
                                (AMENDMENT NO. 1)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

           FOR THE TRANSITION PERIOD FROM ____________ TO ___________

                        COMMISSION FILE NUMBER: 1-12091

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

                            MILLENNIUM CHEMICALS INC.
             (Exact name of registrant as specified in its charter)

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

<TABLE>
<S>                                         <C>
                Delaware                                22-3436215
    (State or other jurisdiction of         (I.R.S. Employer Identification No.)
     incorporation or organization)

      20 Wight Avenue, Suite 100                          21030
            Hunt Valley, MD                             (Zip Code)
(Address of principal executive offices)
</TABLE>

        Registrant's telephone number, including area code: 410-229-4400

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

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

<TABLE>
<CAPTION>
                                                    Name of each exchange
         Title of each class                         on which registered
         -------------------                         -------------------
<S>                                               <C>
       Common Stock, par value                     New York Stock Exchange
           $0.01 per share
</TABLE>

        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 is 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]
       Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ].
       The aggregate market value of voting stock held by non-affiliates as of
March 19, 2003 (based upon the closing price of $11.90 per common share as
quoted on the New York Stock Exchange), is approximately $740 million. For
purposes of this computation, the shares of voting stock held by directors,
officers and employee benefit plans of the registrant and its wholly owned
subsidiaries were deemed to be stock held by affiliates. The number of shares of
common stock outstanding at March 19, 2003, was 63,440,462 shares, excluding
14,456,124 shares held by the registrant, its subsidiaries and certain Company
trusts, which are not entitled to be voted.

                       Documents Incorporated by Reference

       Portions of the registrant's definitive Proxy Statement relating to the
2003 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission, are incorporated by reference in Part III of this Annual
Report on Form 10-K as indicated herein.

================================================================================






<PAGE>


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
Item                                                                                          Page
----                                                                                          ----
<S>     <C>                                                                                   <C>
        Explanatory Note...................................................................     2

                                     PART I

1.      Business...........................................................................     6

3.      Legal Proceedings..................................................................    23


                                     PART II

6.      Selected Financial Data............................................................    26

7.      Management's Discussion and Analysis of Financial Condition and Results of
         Operations........................................................................    31

7A.     Quantitative and Qualitative Disclosures about Market Risk.........................    54

8.      Financial Statements and Supplementary Data........................................    55


                                    PART III

14.     Controls and Procedures............................................................   101


                                     PART IV

15.     Exhibits, Financial Statement Schedule and Reports on Form 8-K.....................   102

        Signatures.........................................................................   106

</TABLE>

Explanatory Note

       Millennium Chemicals Inc. (the "Company") is filing this amendment to its
Annual Report on Form 10-K for the year ended December 31, 2002 to reflect
restatements of its financial statements for the years ended December 31, 1998
through 2002. Included herein are restated consolidated statements of operations
and consolidated statements of cash flows for each of the three years in the
period ended December 31, 2002, and restated consolidated balance sheets as of
December 31, 2002 and 2001, as well as selected financial data for the five
years ended December 31, 2002. The restatements correct errors in:

       o    the accounting for deferred taxes relating to the Company's
            investment in Equistar Chemicals, LP ("Equistar"), a partnership in
            which the Company owns a 29.5% interest;

       o    the calculation of the Company's minimum pension benefit liability
            as reflected in its balance sheet at December 31, 2002 and its
            pension expense for the year then ended, as a result of actuarial
            valuation errors by the Company's independent actuarial valuation
            firm; and

       o    the accounting for a five-year precious metals agreement entered
            into in April 1998 that had been characterized as an operating lease
            and should have been characterized as a secured financing.

These errors, all of which were discovered in July 2003, were initially reported
by the company on August 6, 2003, in a press release, a copy of which was
appended as an exhibit to a Current Report on Form 8-K of the same date. The
Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2003 filed with the Securities and Exchange Commission on August 19, 2003,
included restated financial statements which reflected adjustments for these
errors.

       Subsequent to the announcement of these errors, and during the course of
preparing the restatements of its financial statements, the Company commenced an
analysis of comments of the staff of the Securities and Exchange Commission with
respect to the accounting in the Company's financial statements for the years
2000 through 2002




                                       2





<PAGE>

for previously established reserves for legal and environmental contingencies.
In connection with the Company's preparation of a proposed response to these
comments, the Company's independent auditors, which, in the course of their
annual audits of the Company's financial statements beginning in 1996 had
previously reviewed these reserves and changes therein, raised various questions
with respect to these reserves and thereafter brought these questions to the
attention of the Audit Committee of the Company's Board of Directors. The Audit
Committee, with the assistance of independent legal counsel and accountants,
conducted a review of the questions raised by the Company's auditors, as well as
the accounting by the Company for legal, environmental and other reserves
established for certain of the Company's predecessor businesses. As a
consequence of this review, which was completed in early November 2003, the
Company determined to include in its restated financial statements adjustments
to the timing of income and expense recognition associated with those reserves.
These adjustments had the effect of increasing income in the years prior to 1998
by $38 million and increasing expense in financial statements for the years
ended December 31, 1998 through 2001 by $38 million. These adjustments also are
reflected in this Amendment.

       In addition, during the course of its review of its deferred tax assets
related to its investment in Equistar, the Company reexamined the deferred tax
asset associated with its French subsidiaries and concluded that, due to the
unlikelihood of realizing the value of that asset, it should be eliminated as of
December 31, 2002.

       Finally, as a consequence of its review of its accounting with respect to
its investment in Equistar, the Company elected to further amend its
Consolidated Statements of Operations for the years 1998 through 2002 to
reclassify to Selling, development and administrative expense various costs
allocated to its investment in Equistar and previously included in (Loss)
earnings on Equistar investment in those Consolidated Statements of Operations.

       A detailed discussion of the restatements of the Company's financial
statements reflected in this amended Annual Report, including a summary of the
aggregate effect of the changes implemented by the restatements, as well as the
reclassification of costs associated with the Company's investment in Equistar,
is set forth in Note 2 to the Consolidated Financial Statements included in this
amended Annual Report. Those financial statements, as well as Management's
Discussion and Analysis of Financial Condition and Results of Operations, also
reflect changes made in response to comments of the staff of the Securities and
Exchange Commission following its review of the Company's Annual Report on Form
10-K for the year ended December 31, 2002, as initially filed with the
Securities and Exchange Commission in March 2003. Changes also have been made to
the following additional items of the Annual Report on Form 10-K as a result of
the changes to the financial statements, principal among which are the
following:

       o    Item 1, Business, has been revised to reflect the changes to
            financial information in the Consolidated Financial Statements as a
            result of the restatements and the reclassification and to reflect
            changes to the numbering of the Notes to the Consolidated Financial
            Statements that are referenced in Item 1. In addition, the phrase
            "other environmental proceedings" has been deleted to reflect the
            fact that there are no environmental proceedings other than those
            involving environmental remediation activities, and the subsection
            entitled "Executive Officers" has not been repeated in this
            Amendment;

       o    Item 3, Legal Proceedings, has been revised only to change the
            cross-reference to Note 15 to the Consolidated Financial Statements
            in the penultimate paragraph;

       o    Item 6, Selected Financial Data, has been revised to reflect the
            restatements and the reclassification;

       o    Item 7, Management's Discussion and Analysis of Financial Condition
            and Results of Operations, has been revised to reflect the
            restatements and the reclassification. In addition, Item 7 has been
            revised to delete the presentation of financial results that exclude
            unusual items;

       o    Item 7A, Quantitative and Qualitative Disclosures About Market Risk,
            has been revised to reflect the changes to the numbering of the
            Notes to the Consolidated Financial Statements;

       o    Item 8, Financial Statements and Supplementary Data, has been
            revised to reflect the restatements and the reclassification; and

       o    Item 14, Controls and Procedures, has been updated to reflect the
            evaluation made by the Company in connection with this Amendment.





                                       3





<PAGE>

       This Amendment does not reflect events that have occurred after March 25,
2003, the date the Annual Report on Form 10-K was originally filed. Information
with respect to those events has been or will be set forth, as appropriate, in
the Company's Quarterly Reports on Form 10-Q for the three-month periods ended
March 31, 2003, June 30, 2003, and September 30, 2003. The Company will file
with the Securities and Exchange Commission an amendment to its Quarterly Report
on Form 10-Q for the three months ended March 31, 2003 to reflect changes
therein required as a consequence of the above-described financial statement
restatements and reclassification.

Disclosure Concerning Forward-Looking Statements

       The statements in this Annual Report on Form 10-K/A (the "Annual Report")
that are not historical facts are, or may be deemed to be, "forward-looking
statements" ("Cautionary Statements") as defined in the Private Securities
Litigation Reform Act of 1995. Some of these statements can be identified by the
use of forward-looking terminology such as "prospects," "outlook," "believes,"
"estimates," "intends," "may," "will," "should," "anticipates," "expects" or
"plans," or the negative or other variation of these or similar words, or by
discussion of trends and conditions, strategy or risks and uncertainties. In
addition, from time to time, the Company or its representatives have made or may
make forward-looking statements in other filings that the Company makes with the
Securities and Exchange Commission, in press releases or in oral statements made
by or with the approval of one of its authorized executive officers.

       These forward-looking statements are only present expectations as at the
time of the initial filing of the Company's Annual Report on Form 10-K for the
year ended December 31, 2002. Actual events or results may differ materially.
Factors that could cause such a difference include:

       o   the cyclicality and volatility of the chemical industries in which
           the Company and Equistar operate, particularly fluctuations in the
           demand for ethylene, its derivatives and acetyls and the sensitivity
           of these industries to capacity additions;

       o   general economic conditions in the geographic regions where the
           Company and Equistar generate sales, and the impact of government
           regulation and other external factors, in particular, the events in
           the Middle East;

       o   the ability of Equistar to distribute cash to its partners and
           uncertainties arising from the Company's shared control of Equistar
           and the Company's contractual commitments regarding possible future
           capital contributions to Equistar;

       o   changes in the cost of energy and raw materials, particularly
           natural gas and ethylene, and the ability of the Company and
           Equistar to pass on cost increases to their customers;

       o   the ability of raw material suppliers to fulfill their commitments;

       o   the ability of the Company and Equistar to achieve their productivity
           improvement, cost reduction and working capital targets, and the
           occurrence of operating problems at manufacturing facilities of the
           Company or Equistar;

       o   risks of doing business outside the United States, including currency
           fluctuations;

       o   the cost of compliance with the extensive environmental regulations
           affecting the chemical industry and exposure to liabilities for
           environmental remediation and other environmental matters relating to
           the Company's and Equistar's current and former operations;

       o   pricing and other competitive pressures;

       o   legal proceedings relating to present and former operations
           (including proceedings based on alleged exposure to lead-based paints
           and lead pigments, asbestos and other materials), ongoing or future
           tax audits and other claims;

       o   the Company's substantial indebtedness and its impact on the
           Company's cash flow, business operations and ability to obtain
           additional financing.



                                       4





<PAGE>

       A further description of these risks, uncertainties and other matters can
be found in Exhibit 99.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002, as initially filed with the Securities and
Exchange Commission on March 25, 2003.

       Some of these Cautionary Statements are discussed in more detail under
"Business" and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in this Annual Report. Readers are cautioned not to
place undue reliance on forward-looking or Cautionary Statements, which reflect
management's opinions only as of the date of the initial filing of the Company's
Annual Report on Form 10-K for the year ended December 31, 2002. The Company
undertakes no obligation to update any forward-looking or Cautionary Statement.
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on behalf of the Company are expressly qualified in
their entirety by the Cautionary Statements in this Annual Report. Readers are
advised to consult any further disclosures the Company may make on related
subjects in subsequent 10-Q, 8-K, and 10-K reports to the Securities and
Exchange Commission

                           Non-GAAP Financial Measures

       Financial measures based on accounting principles generally accepted in
the United States of America ("GAAP") are commonly referred to as GAAP financial
measures. For this purpose, a non-GAAP financial measure is generally defined by
the Securities and Exchange Commission as one that purports to measure
historical or future financial performance, financial position, or cash flows,
but excludes or includes amounts that would not be so adjusted in the most
comparable GAAP measure. From time to time the Company discloses so-called
non-GAAP financial measures, primarily EBITDA, Pro Forma EBITDA, Pro Forma
Operating Income, Pro Forma Net Sales and Pro Forma Depreciation and
Amortization. EBITDA represents income from operations before interest, taxes,
depreciation and amortization, other income items, equity earnings and the
cumulative effect of accounting changes. EBITDA is a key measure used by the
banking and investing communities in their evaluation of economic performance.
Accordingly, management believes that disclosure of EBITDA provides useful
information to investors because it is frequently cited by financial analysts in
evaluating companies' performance. Pro Forma EBITDA and Pro Forma Operating
Income include the Company's underlying interest (29.5%) in Equistar's results.
Pro Forma Net Sales and Pro Forma Depreciation and Amortization include net
sales and depreciation and amortization, respectively, in accordance with GAAP
together with the Company's underlying interest in Equistar's corresponding
amounts. The Company believes this pro forma information provides useful
information to investors regarding its underlying interest in Equistar. EBITDA
and the pro forma measures identified above are not a measure of operating
performance computed in accordance with GAAP and should not be considered as a
substitute for GAAP measures. Additionally, these measures may not be comparable
to similarly named measures of other companies.

       The Company also periodically reports adjusted net or operating income
(loss) or adjusted EBITDA, excluding certain items that are unusual in nature or
not comparable from period to period and that are included in GAAP measures of
earnings. Management believes that excluding these items generally helps
investors to compare operating performance between two periods. Such adjusted
data is not reported without an explanation of the items that are excluded.




                                       5





<PAGE>

                                     PART I

Item 1. Business

       The Company is a major international chemical company, with leading
market positions in a broad range of commodity, industrial, performance and
specialty chemicals.

       The Company has three business segments: Titanium Dioxide and Related
Products, Acetyls, and Specialty Chemicals. The Company also owns a 29.5%
interest in Equistar, a joint venture owned by the Company and Lyondell Chemical
Company ("Lyondell"). The Company accounts for its interest in Equistar as an
equity investment.

       The Company has leading market positions in the United States and the
world:

       o   Through its Titanium Dioxide and Related Products business segment,
           the Company is the second-largest producer of titanium dioxide
           ("TiO[u]2") in the world, with manufacturing facilities in the United
           States, the United Kingdom, France, Brazil and Australia. The Company
           is also the largest merchant seller of titanium tetrachloride
           ("TiCl[u]4") in North America and Europe and a leading producer of
           zirconia, silica gel and cadmium-based pigments;

       o   Through its Acetyls business segment, the Company is the
           second-largest producer of vinyl acetate monomer ("VAM") and acetic
           acid in North America, and through its 85% interest in La Porte
           Methanol Company, LP ("La Porte Methanol Company"), a partner in a
           leading US producer of methanol;

       o   Through its Specialty Chemicals business segment, the Company is a
           leading producer of terpene-based fragrance and flavor chemicals;

       o   Through its 29.5% interest in Equistar, the Company is a partner in
           the second-largest producer of ethylene and the third-largest
           producer of polyethylene in North America, and a leading producer of
           performance polymers, oxygenated chemicals, aromatics and specialty
           petrochemicals.

       The Company's management strategy is based on "Operational Excellence"
and "Growth and Development" models. The Operational Excellence model focuses on
optimizing cash flow and disciplined growth for the Company's more mature
businesses. The Company's high-volume TiO[u]2 and acetyls businesses, as well
as its interest in Equistar, are managed pursuant to the Operational Excellence
model. The Growth and Development model focuses on developing the Company's
current and prospective higher margin, higher growth-potential businesses to
achieve operating margins that exceed chemical industry averages. The businesses
within the Company's Specialty Chemicals segment, as well as the specialty and
performance chemicals businesses within the Titanium Dioxide and Related
Products segment, are managed pursuant to the Growth and Development model. The
Company's centralized Shared Services organization is responsible for providing
finance, human resources, certain manufacturing services, research and
development, strategic planning, supply chain, legal, information technology,
quality, safety, health and environmental services to all Company businesses.
The Company is testing its business plan with an independent third party to help
drive optimal performance.

       The Company's Titanium Dioxide and Related Products segment is operated
through Millennium Inorganic Chemicals Inc. and its non-United States affiliates
(collectively, "Millennium Inorganic Chemicals"); the Company's Acetyls segment
is operated through Millennium Petrochemicals Inc. ("Millennium Petrochemicals")
and the Company's Specialty Chemicals segment is operated through Millennium
Specialty Chemicals Inc. ("Millennium Specialty Chemicals"). In addition to its
29.5% interest in Equistar, the Company owns an 85% interest in La Porte
Methanol Company, a Delaware limited partnership, which owns a methanol plant
located in La Porte, Texas and certain related facilities that were contributed
to the partnership by Millennium Petrochemicals. La Porte Methanol Company is
included in the Company's Consolidated Financial Statements.

       The Company was incorporated in Delaware on April 18, 1996 and became a
publicly traded company following its demerger (i.e., spin-off) from Hanson plc
("Hanson"), a company incorporated in the United Kingdom, on October 1, 1996
(the "Demerger"). The Company's principal executive offices are located at 230
Half Mile Road, Red Bank, NJ 07701. Its telephone number is (732) 933-5000 and
its fax number is (732) 933-5240. Its website is http://www.millenniumchem.com.
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, Proxy Statements and all amendments thereto are
available free of charge through the Company's website as soon as reasonably
practicable after they are electronically filed with or furnished to the
Securities and Exchange Commission. Information contained on the Company's
website or any other website is not incorporated into this Annual Report and
does not constitute a part of this Annual Report.



                                       6





<PAGE>

       In this Annual Report:

       o   References to the Company are to the Company and its consolidated
           subsidiaries, except as the context otherwise requires.

       o   References to "tpa" are to metric tons per annum (a metric ton is
           equal to 1,000 kilograms or 2,204.6 pounds).

       o   References to the Company's and Equistar's market positions, with the
           exception of the Company's market position in the Specialty Chemicals
           business segment, are based on estimates of their respective
           production capacities, as compared to the production capacities of
           other industry participants. The reference to the Company's market
           position with respect to the Specialty Chemicals business segment is
           based on sales volumes of the Specialty Chemicals business segment,
           as compared to the estimated sales volumes of its competitors.

       o   Estimates of the Company's and Equistar's production capacities are
           based upon engineering assessments made by the Company and Equistar,
           respectively, and estimates of the production capacities and sales
           volumes of other industry participants are based on available
           information from a variety of sources. Actual production may vary
           depending on a number of factors including feedstocks, product mix,
           unscheduled maintenance and demand.

                                Business Segments

       The Company's principal operations are grouped into three business
segments: Titanium Dioxide and Related Products, Acetyls and Specialty
Chemicals. Operating income and expense not identified with the three separate
business segments, including certain of the Company's selling, development and
administrative ("S,D&A") costs not allocated to its three business segments,
employee-related costs from predecessor businesses and certain other expenses,
are reflected as Other. See Note 17 to the Consolidated Financial Statements
included in this Annual Report. The Company also holds a 29.5% interest in
Equistar that is accounted for under the equity method. See Notes 1 and 5 to the
Consolidated Financial Statements included in this Annual Report.

                               Principal Products

       The following is a description of the principal products of the Company's
business segments:

<TABLE>
<CAPTION>

                        Product                                                       Uses
                        -------                                                       ----
<S>                                                      <C>
Titanium Dioxide and Related Products:
   Titanium dioxide ("TiO[u]2")......................    A white pigment used to provide whiteness, brightness,
                                                         opacity and durability in paint and coatings, plastics,
                                                         paper and elastomers.

   Titanium tetrachloride ("TiCl[u]4")...............    The intermediate product used in making TiO[u]2. TiCl[u]4 is also
                                                         used for: the manufacture of titanium metal, which is used
                                                         to make a wide variety of products including eyeglass
                                                         frames, aerospace parts and golf clubs; the manufacture of
                                                         catalysts and specialty pigments; and, as a surface
                                                         treatment for glass.

   Zirconium-based compounds and chemicals............   Chemicals used in coloring for ceramics, in pigment surface
                                                         treatment, solid oxide fuel cells and to enhance optics.

   Ultra-fine TiO[u]2................................    Nanoparticle and ultra-fine products used in optical,
                                                         electronic, catalyst and ultra-violet absorption
                                                         applications.

   Silica gel.........................................   Inorganic product used to reduce gloss and control flow in
                                                         coatings. Also used to stabilize beer and extend the shelf
                                                         life of plastic films, powdered food products and
                                                         pharmaceuticals.

   Cadmium-based pigments.............................   Inorganic colors used in engineered plastics, artists'
                                                         colors, ceramics, inks, automotive refinish coatings, coil
                                                         and extrusion coatings, aerospace coatings and specialty
                                                         industrial finishes.

</TABLE>




                                       7





<PAGE>

<TABLE>
<S>                                                      <C>
Acetyls:
   Vinyl acetate monomer ("VAM")......................   A petrochemical product used to produce a variety of polymer
                                                         products used in adhesives, water-based paint, textile
                                                         coatings and paper coatings.

   Acetic acid........................................   A feedstock used to produce VAM, terephthalic acid (used to
                                                         produce polyester for textiles and plastic bottles),
                                                         industrial solvents, and a variety of other chemicals.

   Methanol...........................................   A feedstock used to produce acetic acid; methyl tertiary
                                                         butyl ether ("MTBE"), a gasoline additive, formaldehyde, and
                                                         several other products. The Company is a producer of
                                                         methanol through its 85% interest in La Porte Methanol
                                                         Company.

Specialty Chemicals
   Terpene fragrance chemicals........................   Individual components that are blended to make fragrances
                                                         used in detergents, soaps, perfumes, personal-care items and
                                                         household goods.

   Flavor chemicals...................................   Individual components that are blended to impart or enhance
                                                         flavors used in toothpaste, chewing gum and other consumer
                                                         products.

</TABLE>

       For a description of Equistar's principal products, see "Equity Interest
in Equistar," below.


                      Titanium Dioxide and Related Products

Titanium Dioxide

       The Company is the second-largest producer of TiO[u]2 in the world,
based on reported production capacities. TiO[u]2 is a white pigment used for
imparting whiteness, brightness, opacity and durability in a wide range of
products, including paint and coatings, plastics, paper and elastomers.

       The following table sets forth the Company's annual production capacity
(excluding the Hawkins Point, Maryland sulfate-process plant, which has been
idle since September 2001) as of the date of this report, using the chloride
process and the sulfate process discussed below, and the approximate percentage
of its total production capacity represented by each such process.

                    Millennium Chemicals' TiO[u]2 Rated Capacity
                             (metric tons per annum)

<TABLE>
<CAPTION>

                                                                                            Percentage
       Process                                                              Capacity        of Capacity
       -------                                                              --------        -----------
<S>                                                                          <C>                <C>
       Chloride......................................................        505,000            73%
       Sulfate.......................................................        185,000            27%
                                                                             -------           ---
            Total....................................................        690,000           100%
</TABLE>

       TiO[u]2 is produced in two crystalline forms: rutile and anatase. Rutile
TiO[u]2 is a more tightly packed crystal that has a higher refractive index
than anatase TiO[u]2 and, therefore, better opacification and tinting strength
in many applications. Some rutile TiO[u]2 products also provide better
resistance to the harmful effects of weather. Rutile TiO[u]2 is the preferred
form for use in paint and coatings, ink and plastics. Anatase TiO[u]2 has a
bluer undertone and is less abrasive than rutile. It is often preferred for use
in paper, ceramics, rubber and man-made fibers.

       TiO[u]2 producers process titaniferous ores to extract a white pigment
using one of two different technologies. The sulfate process is a wet chemical
process that uses concentrated sulfuric acid to extract TiO[u]2, in either
anatase or rutile form. The sulfate process generates higher volumes of waste
materials, including iron sulfate and spent sulfuric acid. The newer chloride
process is a high-temperature process in which chlorine is used to extract
TiO[u]2 in rutile form, with greater purity and higher control over the size
distribution of the pigment particles than the sulfate process permits. In
general, the chloride process is also less intensive than the sulfate process
in terms of capital



                                       8





<PAGE>

investment, labor and energy. Because much of the chlorine can be recycled, the
chloride process produces less waste subject to environmental regulation. Once
an intermediate TiO[u]2 pigment has been produced by either the chloride or
sulfate process, it is "finished" into a product with specific performance
characteristics for particular end-use applications through proprietary
processes involving surface treatment with various chemicals and combinations of
milling and micronizing.

       The Company's TiO[u]2 plants are located in the four major world markets
for TiO[u]2: North America, South America, Western Europe and the Asia/Pacific
region. The North American plants, consisting of one in Baltimore, Maryland and
two in Ashtabula, Ohio have aggregate production capacities of 260,000 tpa using
the chloride process. The plant in Salvador, Bahia, Brazil has a capacity to
produce approximately 60,000 tpa using the sulfate process. The Company also
owns a mineral sands mine located at Mataraca, Paraiba, Brazil, which supplies
the Brazilian plant with titanium ores. The mine has over two million metric
tons of recoverable reserves and a capacity to produce over 120,000 tpa of
titanium ores, which are generally consumed in the Salvador TiO[u]2 plant,
and 19,000 tpa of zircon and 2,000 tpa rutile TiO[u]2, which are sold to
third parties. The Company's Stallingborough, United Kingdom plant has
chloride-process production capacity of 150,000 tpa. The plants in France at
Le Havre, Normandy and Thann, Alsace have sulfate-process capacities of 95,000
tpa and 30,000 tpa, respectively. The Kemerton plant in Western Australia has
chloride-process production capacity of 95,000 tpa.

       The Company's TiO[u]2 plants operated at an average rate of 89%, 85% and
94% of installed capacity during 2002, 2001 and 2000, respectively. The decline
in the operating rate in 2001 compared to 2000 was primarily due to curtailment
of production at certain facilities in response to reduced market demand. The
increase in operating rate from 2001 to 2002 was primarily due to higher
production driven by increased market demand.

       Titanium-bearing ores used in the TiO[u]2 extraction process (ilmenite,
leucoxene and natural rutile) occur as mineral sands and hard rock in many parts
of the world. Mining companies increasingly treat ilmenite to extract iron and
other minerals and produce slag or synthetic rutile with higher TiO[u]2
concentrations, resulting in lower amounts of wastes and by-products during the
TiO[u]2 production process. Ores are generally shipped by bulk carriers from
terminals in the country of origin to TiO[u]2 production plants, usually
located near port facilities. The Company obtains ores from a number of
suppliers in South Africa, Australia, Canada, Brazil, and Ukraine, generally
pursuant to one-to six-year supply contracts expiring in 2003 through 2006. Rio
Tinto Iron & Titanium Inc. (through its affiliates Richards Bay Iron & Titanium
(Proprietary) Limited and QIT-Fer et Titane Inc.) and Iluka Resources Limited
are the world's largest producers of titanium ores and upgraded titaniferous raw
materials and accounted for approximately 76% of the titanium ores and upgraded
titaniferous raw materials purchased by the Company in 2002.

       Other major raw materials and utilities used in the production of
TiO[u]2 are chlorine, caustic soda, petroleum and metallurgical coke, aluminum,
sodium silicate, sulfuric acid, oxygen, nitrogen, natural gas and electricity.
The number of sources for and availability of these materials is specific to the
particular geographic region in which the facility is located. For the Company's
Australian plant, chlorine and caustic soda are obtained exclusively from one
supplier under a long-term supply agreement. There are certain risks related to
the acquisition of raw materials from less-developed or developing countries.

       A number of the Company's raw materials are provided by only a few
vendors and, accordingly, if one significant supplier or a number of significant
suppliers were unable to meet their obligations under present supply
arrangements, the Company could suffer reduced supplies and/or be forced to
incur increased prices for its raw materials. Such an event could have a
material adverse effect on the consolidated financial condition, results of
operations or cash flows of the Company. At the present time, chloride- and
sulfate-process feedstock is available in sufficient quantities.

       Of the total 627,000 metric tons of TiO[u]2 sold by the Company in 2002,
approximately 62% was sold to customers in the paint and coatings industry,
approximately 23% to customers in the plastics industry, approximately 12% to
customers in the paper industry, and approximately 3% to other customers. The
Company's ten largest customers accounted for approximately 40% of its TiO[u]2
sales volume in 2002. The Company experiences some seasonality in its sales
because its customers' sales of paint and coatings are greatest in the spring
and summer months.

       TiO[u]2 is sold either directly by the Company to its customers or, to a
lesser extent, through agents or distributors. TiO[u]2 is distributed by rail,
truck and ocean carrier in either dry or slurry form.

       The global markets in which the Company's Titanium Dioxide and Related
Products business segment operates are all highly competitive. The Company
competes primarily on the basis of price, product quality and service. Certain
of the Company's competitors are partially vertically integrated, producing
titanium-bearing ores as




                                       9





<PAGE>

well as TiO[u]2. The Company is vertically integrated at its Brazilian
facility, which owns a titanium ore mine that supplies the facility. The
Company's major competitors in the TiO[u]2 business are E. I. DuPont deNemours
and Company ("DuPont"), Kerr-McGee Chemical Corporation (both directly and
through various joint ventures) ("Kerr-McGee Chemicals"), a unit of Kerr-McGee
Corporation, Huntsman Tioxide ("Huntsman"), a business segment of Huntsman
International LLC, and, Kronos, Inc. ("Kronos"), a unit of NL Industries Inc.
Collectively, DuPont, the Company, Kerr-McGee Chemicals, Huntsman and Kronos
account for approximately three-quarters of the world's production capacity.

       In certain applications, TiO[u]2 competes with other whitening agents
that are generally less effective but less expensive. For example, paper
manufacturers have, in recent years, developed alternative technologies that
reduce the amount of TiO[u]2 used in paper by using kaolin and precipitated
calcium carbonate as fillers in medium- and lower-priced products.

       New plant capacity additions in the TiO[u]2 industry are slow to develop
because of the substantial capital expenditure required and the significant lead
time (three to five years typically for a new plant) needed for planning,
obtaining environmental approvals and permits, construction of manufacturing
facilities and arranging for raw material supplies. Debottlenecking and other
capacity expansions at existing plants require substantially less time and
capital and can increase overall industry capacity. As of the date of this
report, no major new plant capacity additions or expansions have been announced
in the TiO[u]2 industry.

Related Products

       The Company produces a number of specialty and performance
TiO[u]2-related products, some of which are manufactured at dedicated plants
and others of which are manufactured at plants that also produce other TiO[u]2
products.

       Titanium Tetrachloride: The Company is the largest merchant seller of
TiCl[u]4 in North America and Europe. It produces TiCl[u]4 for merchant sales
at its plants in Ashtabula, Ohio and Thann, Alsace, France. TiCl[u]4 is
distributed by rail and truck as anhydrous TiCl[u]4 and as an aqueous solution,
titanium oxychloride. These products are sold into a wide variety of markets,
including the titanium metal, catalyst, pearlescent pigment and surface
treatment markets. The Company's principal competitors in the TiCl[u]4 market
are Toho Titanium Co. and Kronos.

       Ultra-fine TiO[u]2 Products: Ultra-fine TiO[u]2 products are produced
at the Company's plant in Thann, Alsace, France. These non-pigmentary products
with a particle size of less than 150 nanometers in size are produced and sold
for their physico-chemical characteristics in various applications. The Company
is a major supplier of ultra-fine TiO[u]2 used to remove nitrogen oxides from
power plant emissions. The principal competitors in the ultra-fine TiO[u]2
products market are Ishihara Sangyo Kaisha, Ltd., Kerr-McGee Chemicals, and
Tayca Corporation.

       Zirconium-based Compounds and Chemicals: A wide range of zirconium
products is produced at the Company's Rockingham, Western Australia plant. These
products are sold globally into the electronics, catalyst, glass, solid oxide
fuel cells and colored pigments markets. In addition, zirconium dioxide is sold
internally to the Company's TiO[u]2 operations and to other TiO[u]2 producers
to enhance the durability and treat the surfaces of various TiO[u]2 products.
The Company's principal competitors in this market are Daiichi Kigenso
Kagakukgyo Co., Ltd. and MEL Chemicals, a subsidiary of Luxfer Holdings, PLC.

       Silica Gel: The Company produces several grades of fine-particle silica
gel at the St. Helena plant in Baltimore, Maryland, and markets them
internationally. Fine-particle silica gel is a chemically and biologically inert
form of silica with a particle size ranging from three to ten microns. The
Company's SiLCRON 'r' brand of fine-particle silica gel is used in coatings as a
flatting or matting (gloss reduction) agent and to provide mar-resistance.
SiLCRON 'r' is also used in food and pharmaceutical applications. SiL-PROOF 'r'
grades of fine-particle silica gel are chill-proofing agents used to stabilize
chilled beer and prevent clouding. Fine-particle silica gel is distributed in
dry form in palletized bags by truck and ocean carrier.

       Cadmium-based Pigments: The Company manufactures a line of cadmium-based
colored pigments at its St. Helena, Maryland plant, and markets them
internationally. In addition to their brilliance, cadmium colors are light and
heat stable. These properties promote their use in such applications as artists'
colors, plastics and glass colors. Due to concern for the toxicity of heavy
metals, including cadmium, the Company has introduced low-leaching cadmium-based
pigments that meet all United States government requirements for landfill
disposal of non-hazardous waste. Colored pigments are distributed in dry form in
drums by truck and ocean carrier.



                                       10





<PAGE>

                                     Acetyls

       The following table sets forth information concerning the annual
production capacity, as of the date of this report, of the Company's principal
Acetyls products:

                  Millennium Chemicals' Acetyls Rated Capacity
                         (millions of pounds per annum)

<TABLE>
<CAPTION>
       Product                                            Capacity
       --------                                          -----------
<S>                                                      <C>
       Vinyl Acetate Monomer...........................         850
       Acetic Acid.....................................       1,200
</TABLE>


       In addition, the Company owns an 85% interest in La Porte Methanol
Company, which owns a methanol plant with an annual production capacity of 207
million gallons per annum. For a description of the plant and La Porte Methanol
Company, see "La Porte Methanol Company" below.

Vinyl Acetate Monomer

       The Company is the second-largest producer of VAM in North America, and
the third-largest producer worldwide, based on reported production capacities.
Its VAM plant is located downstream from the Company's acetic acid plant at La
Porte, Texas. The process used by the Company to produce VAM is proprietary.

       The principal feedstocks for the production of VAM are acetic acid and
ethylene. The Company obtains its entire requirements for acetic acid from its
internal production and buys all of its ethylene requirements from Equistar
under a long-term supply contract based on market prices.

       The Company has a long-term agreement with DuPont to toll acetic acid
produced at the Company's La Porte, Texas plant through DuPont's nearby VAM
plant, thereby acquiring all the VAM production at DuPont's plant not utilized
internally by DuPont. The contract expires on December 31, 2006 but may be
extended by mutual agreement thereafter from year-to-year. The tolling
arrangement provided approximately 35% of the VAM available for sale by the
Company in 2002.

       The Company sells VAM into domestic and export markets under contracts
that range in term from one to seven years, as well as on a spot basis. The
majority of sales are completed under contract. The pricing for domestic
contracts generally is determined by formula or index-based pricing in
accordance with movements in the costs of raw materials. The Company also sells
VAM to Equistar pursuant to a yearly contract at a formula-based price. The
Company ships this product by barge, ocean-going vessel, pipeline, tank car and
tank truck. The Company has bulk storage arrangements for VAM in the
Netherlands, the United Kingdom, Italy, Turkey and several Asian countries to
better serve its customers' requirements in those regions. Sales are made
through the Company's direct sales force and through agents and distributors.
The Company's ten largest VAM customers accounted for approximately 65% of its
VAM sales volume in 2002.

       The global market for VAM is highly competitive. The Company competes
primarily on the basis of price, product quality and service. The Company's
principal competitors in the VAM business are Celanese AG ("Celanese"), BP
P.L.C. ("BP"), The Dow Chemical Company ("Dow"), Acetex Chemie S.A., a
subsidiary of Acetex Corporation ("Acetex") and Dairen Chemical Corporation.

Acetic Acid

       The Company is the second-largest producer of acetic acid in North
America, and the third-largest producer worldwide, based on reported production
capacities. Its acetic acid plant is located at La Porte, Texas. In 2002, the
Company used approximately 62% of its acetic acid production to produce VAM. The
Company utilizes proprietary technology to produce acetic acid.

       The principal starting feedstocks for the production of acetic acid are
carbon monoxide and methanol. The Company purchases its carbon monoxide from
Linde AG ("Linde") pursuant to a long-term contract based primarily on cost of
production. Linde produces this carbon monoxide at the Company's synthesis gas
("syngas") plant at La Porte, Texas, which is owned by the Company and leased to
Linde pursuant to a long-term lease that commenced on January 18, 1999. La Porte
Methanol Company, 85% owned by the Company, supplies all of the Company's
requirements for methanol. See "La Porte Methanol Company" below.




                                       11





<PAGE>

       Acetic acid not consumed internally by the Company is sold into domestic
and export markets under contract and on a spot basis. These contracts range in
term from one to five years. Pricing for domestic sales under these contracts
generally is determined by formula or index-based pricing in accordance with
movements in the costs of raw materials. Acetic acid is shipped by ocean-going
vessel, barge, tank car and tank truck. Sales are made through the Company's
direct sales force and through agents and distributors. The Company's ten
largest acetic acid customers accounted for approximately 85% of its acetic acid
sales volume in 2002.

       The global market for acetic acid is highly competitive. The Company
competes primarily on the basis of price, product quality and service. The
Company's principal competitors in the acetic acid business are Celanese, BP,
Kyodo Sakusan, Acetex and Eastman Chemical Corp ("Eastman").

                               Specialty Chemicals

       The Company is one of the world's leading producers of terpene-based
fragrance ingredients and a major producer of flavor ingredients, primarily for
the oral care markets. In addition, the Company supplies products into a number
of other applications, including initiators to the rubber industry,
intermediates to the vitamin market, and solvents and cleaners like pine oil to
the hard surface cleaner markets.

       The Company operates manufacturing facilities in Jacksonville, Florida
and Brunswick, Georgia. The Jacksonville site has facilities for the
fractionation of crude sulfate turpentine ("CST"), the Company's key raw
material for producing fragrance ingredients. Through fractionation, the
molecular components of CST are separated into relatively pure individual
materials such as alpha- and beta-pinene. The Company believes it is the largest
purchaser and distiller of CST in the world based on the amount of CST
processed. Sophisticated chemical processes are then used to produce a number of
fragrance and flavor ingredients.

       The Jacksonville facility also produces synthetic pine oil, anethole,
l-carvone and coolants. Synthetic pine oil is an active ingredient in cleaning
products. Anethole is a flavor ingredient and sweetener used in mint
formulations primarily in the oral care market. L-carvone is the primary
component in spearmint oil. Coolants are used in confectionery, oral care and
other food and personal care applications. The Brunswick site produces linalool,
geraniol and dihydromyrcenol from the alpha-pinene component of CST. Linalool,
geraniol and dihydromyrcenol are fragrance ingredients used in a wide range of
fragrance applications including soaps, detergents and fine fragrances. Linalool
and geraniol are produced utilizing a proprietary and, the Company believes,
unique technology. Linalool and geraniol produced at the Brunswick site are
generally further processed at the Jacksonville site to produce fragrance
ingredients including citral, citronellol and dimethyloctanol. The Company
believes, based on production capacity, it operates the world's largest
dihydromyrcenol facility at Brunswick, with a rated annual capacity of over
three thousand tons.

       CST is a by-product of the kraft process of papermaking. The Company
purchases CST from approximately 40 pulp mills in North America. Additionally,
the Company purchases quantities of gum turpentine or its derivatives from
Indonesia, China and other Asian countries, Europe and South America, as
business conditions dictate.

       The Company has experienced tightness in CST supply from time to time,
together with corresponding price increases. Generally, the Company seeks to
enter into long-term supply contracts with pulp mills in order to ensure a
stable supply of CST. At the present time, sufficient quantities of CST are
available; however, the price of CST has increased due to a decline in the
quantity of CST available, which is a result of decreased paper production by
North American pulp mills.

       Fragrance ingredients are used primarily in the production of perfumes.
The major consumers of perfumes worldwide are soap and detergent manufacturers.
The Company sells directly worldwide to major soap, detergent and fabric
conditioner producers. It also sells a significant quantity of product to the
major fragrance compounders and to producers of cosmetics and toiletries.
Approximately 70% of the Company's specialty chemical sales are to users of
fragrance ingredients, 20% are to users of flavor ingredients, and 10% are to
users of solvents and cleaners and industrial specialties. Approximately 60% of
the Company's 2002 specialty chemicals sales were made outside the United
States, to more than 45 different countries. Sales are made primarily through
the Company's direct sales force, while agents and distributors are used in
outlying areas where volume does not justify full-time sales coverage.

       The markets in which the Company's Specialty Chemicals business segment
competes are highly competitive. The Company competes primarily on the basis of
price, quality, service and on its ability to produce its products to the
technical and qualitative requirements of its customers. The Company works
closely with many of its customers in developing products to satisfy their
specific requirements. The Company's supply agreements with




                                       12






<PAGE>

customers are typically short-term in duration (up to one year). Therefore, its
Specialty Chemicals business segment is substantially dependent on long-term
customer relationships based upon quality, innovation and customer service.
Customers from time to time change the formulations of an end product in which
one of the Company's fragrance ingredients is used, which may affect demand for
such ingredients. The Company's ten largest Specialty Chemicals business segment
customers accounted for approximately 57% of its total Specialty Chemicals
business segment revenue in 2002. The Company's major Specialty Chemicals
competitors are BASF AG, Givaudan SA, Derives Resiniques Et Terpeniques (DRT),
Kuraray Co. LTD and International Flavors & Fragrances Inc.

                            Research and Development

       The Company's expenditures for research and development totaled $20
million, $20 million and $26 million in 2002, 2001 and 2000, respectively.
Research and development expense decreased by approximately $6 million from 2000
to 2001 due to the Company's efforts to reduce S,D&A costs in the current
economic environment. The Company conducts research at facilities in Baltimore,
Maryland, Stallingborough, United Kingdom, Bunbury, Western Australia, Le Havre,
Normandy and Jacksonville, Florida. The Company's research efforts are
principally focused on improvements in process technology, product development,
technical service to customers, applications research and product quality
enhancements.

                             International Exposure

       The Company generates revenue from export sales (i.e., sales outside the
United States by domestic operations), as well as revenue from the Company's
operations conducted outside the United States. Export sales, which are made to
more than 90 countries, amounted to approximately 14%, 13% and 11% of total
revenues in 2002, 2001 and 2000, respectively. Revenue from non-United States
operations amounted to approximately 45%, 41% and 40% of total revenues in 2002,
2001 and 2000, respectively, principally reflecting the operations of the
Company's Titanium Dioxide and Related Products business segment in Europe,
Australia and Brazil. Identifiable assets of the non-United States operations
represented 36% and 28% of total identifiable assets at December 31, 2002 and
2001, respectively, principally reflecting the assets of these operations.
Identifiable assets of non-United States operations as a percentage of the
Company's total assets increased in 2002 compared to 2001 due to a decrease in
the Company's identifiable assets in the United States, primarily goodwill,
pension assets and the Company's investment in Equistar. See Notes 5 and 12 and
"Goodwill" in Note 1 to the Consolidated Financial Statements included in this
Annual Report.

       The Company obtains a portion of its principal raw materials from sources
outside the United States. The Company obtains ores used in the production of
TiO[u]2 from a number of suppliers in South Africa, Australia, Canada, Brazil
and Ukraine. The Company's Specialty Chemicals business segment obtains a
portion of its requirements of CST and gum turpentine and its derivatives from
suppliers in Indonesia, China and other Asian countries, Europe and South
America.

       The Company's export sales and its non-United States manufacturing and
sourcing are subject to the usual risks of doing business abroad, such as
fluctuations in currency exchange rates, transportation delays and
interruptions, political and economic instability and disruptions, restrictions
on the transfer of funds, the imposition of duties and tariffs, import and
export controls and changes in governmental policies. The Company's exposure to
the risks associated with doing business abroad will increase if the Company
expands its worldwide operations. From time to time, the Company utilizes
derivative financial instruments to hedge the impact of currency fluctuations on
its purchases and sales.

       The functional currency of each of the Company's non-United States
operations is the local currency. As a result of translating the functional
currency financial statements of all its foreign subsidiaries into US dollars,
consolidated Shareholders' equity increased by approximately $27 million during
2002, and decreased by $19 million during 2001 and by $46 million during 2000.
Future events, which may significantly increase or decrease the risk of future
movement in the currencies in which the Company conducts business, including the
Brazilian real or the euro, cannot be predicted.

       The Company generates revenue from export sales and revenue from
operations conducted outside the United States that may be denominated in
currencies other than the relevant functional currency. The Company hedges
certain revenues and costs to minimize the impact of changes in the exchange
rates of those currencies compared to the functional currencies. The Company
does not use derivative financial instruments for trading or speculative
purposes. Net foreign currency transactions aggregated gains of $3 million in
2002 and losses of $7 million and $4 million in 2001 and 2000, respectively.



                                       13


 <PAGE>


                           Equity Interest in Equistar

       Through its 29.5% interest in Equistar, the Company is a partner in one
of the largest chemical producers in the world with total 2002 revenues of $5.5
billion and assets of $5.1 billion at the end of 2002. Equistar is currently the
world's third-largest, and North America's second-largest, producer of ethylene.
Ethylene is the world's most widely used petrochemical. Equistar currently is
also the third-largest producer of polyethylene in North America, and a leading
producer of performance polymers, oxygenated products, aromatics and specialty
products.

       Equistar commenced operations on December 1, 1997, when the Company
contributed substantially all of the assets comprising its former ethylene,
polyethylene, ethanol and related products business to Equistar and Lyondell
contributed substantially all the assets comprising its petrochemical and
polymer business segments to Equistar. On May 15, 1998, the Company and Lyondell
expanded Equistar with the addition of the ethylene, propylene, ethylene oxide,
ethylene glycol and other ethylene oxide derivatives businesses of the chemicals
subsidiary of Occidental Petroleum Corporation ("Occidental"). On August 22,
2002, Occidental sold its 29.5% equity interest in Equistar to Lyondell,
bringing Lyondell's ownership interest in Equistar to 70.5%, with the Company
holding the remaining 29.5% interest. See the description of the Equistar
Partnership Agreement and Equistar Parent Agreement in "Equity Interest in
Equistar -- Management of Equistar; Agreements between Equistar, Lyondell and
the Company".

       Equistar's petrochemical segment manufactures and markets olefins,
oxygenated products, aromatics and specialty products. Equistar's olefins
products are primarily ethylene, propylene and butadiene. Olefins and their
co-products are basic building blocks used to create a wide variety of products.
Ethylene is used to produce polyethylene, ethylene oxide, ethylene dichloride
and ethylbenzene. Propylene is used to produce polypropylene and propylene
oxide. Equistar's oxygenated products include ethylene oxide, ethylene glycol,
ethanol and MTBE. Oxygenated products have uses ranging from paint to cleaners
to polyester fibers to gasoline additives. Equistar's aromatics are benzene and
toluene.

       Equistar's polymer segment manufactures and markets polyolefins,
including high density polyethylene, low density polyethylene, linear low
density polyethylene, polypropylene and performance polymers. Polyethylene is
used to produce packaging film, grocery and trash bags, housewares, toys and
lightweight high-strength plastic bottles and containers for milk, juices,
shampoos and detergents. Polypropylene is used in a variety of products
including carpets, upholstery, housewares, automotive components, rigid
packaging and plastic caps and other closures. Equistar's performance polymers
include enhanced grades of polyethylene, such as wire and cable insulating
resins, polymeric powders, polymers for adhesives, sealants and coatings,
reactive polyolefins, and liquid polyolefins.

Equistar's Petrochemical Segment

       Equistar produces petrochemicals at eleven facilities located in five
states. Equistar's Chocolate Bayou, Corpus Christi and two Channelview, Texas
olefin plants use petroleum liquids, including naphtha, condensates and gas oils
(collectively, "Petroleum Liquids"), to produce ethylene. The use of Petroleum
Liquids results in the production of a significant amount of co-products, such
as propylene, butadiene, benzene and toluene, and specialty products such as
dicyclopentadiene, isoprene, resin oil and piperylenes. Assuming the co-products
are recovered and sold, the cost of ethylene production from Petroleum Liquids
historically has been less than the cost of producing ethylene from natural gas
liquid feedstocks, including ethane, propane and butane (collectively, "NGLs").
For example, facilities using petroleum liquids historically have generated
approximately four cents additional variable margin on average per pound of
ethylene produced compared to using ethane. This margin advantage is based on an
average of historical data over a period of years and is subject to short-term
fluctuations, which can be significant. During the second half of 2001 and in
2002, the advantage has been significantly less than the historical average.
Equistar has the capability to realize this margin advantage due to its ability
to process petroleum liquids at the Channelview, Corpus Christi and Chocolate
Bayou, Texas facilities. Equistar's Channelview and Corpus Christi, Texas
facilities can process 100% and 70% Petroleum Liquids, respectively, or up to
80% and 70% NGLs, respectively, subject to the availability of NGLs. The
Chocolate Bayou facility processes 100% Petroleum Liquids.

       Equistar's Morris, Illinois, Clinton, Iowa, Lake Charles, Louisiana, and,
La Porte, Texas plants are designed to use primarily NGLs, which primarily
produce ethylene with some co-products, such as propylene. Equistar's La Porte,
Texas facility can process heavier NGLs such as butane and natural gasoline. A
comprehensive pipeline system connects Equistar's Gulf Coast plants with major
olefin customers. Raw materials are sourced both internationally and
domestically from a wide variety of sources. The majority of Equistar's
Petroleum Liquids requirements are purchased via contractual arrangements.
Equistar obtains a portion of its olefin raw material


                                       14

<PAGE>

requirements from LYONDELL-CITGO  Refining LP, a joint venture owned by
Lyondell and CITGO Petroleum Corporation ("LCR"), at market-related prices.
Raw materials are shipped via vessel and pipeline.

       Equistar produces ethylene oxide and derivatives thereof, including
ethylene glycol, at facilities located at Pasadena, Texas and through a joint
venture located in Beaumont, Texas that is 50% owned by Equistar and 50% owned
by DuPont. Equistar produces synthetic ethanol at Tuscola, Illinois and
denatures ethanol at facilities in Newark, New Jersey. In March 2002, Equistar
permanently shut down its Anaheim, California facility for denaturing ethanol.

       The following table outlines Equistar's primary petrochemical products
and the annual processing capacity for each product, as of January 1, 2003:

<TABLE>
<CAPTION>
       Product                                                     Annual Capacity
       -------                                                     ---------------
      <S>                                                          <C>
       Olefins:
          Ethylene................................................ 11.6 billion pounds(a)
          Propylene............................................... 5.0 billion pounds(a)(b)
          Butadiene............................................... 1.2 billion pounds
       Oxygenated Products:
          Ethylene oxide.......................................... 1.1 billion pounds
          Ethylene glycol......................................... 1.0 billion pounds
          Ethylene oxide derivatives.............................. 225 million pounds
          MTBE.................................................... 284 million gallons(c)
          Ethanol................................................. 50 million gallons
       Aromatics:
          Benzene................................................. 310 million gallons
          Toluene................................................. 66 million gallons
       Specialty Products:
          Dicyclopentadiene....................................... 130 million pounds
          Isoprene................................................ 145 million pounds
          Resin oil............................................... 150 million pounds
          Piperylenes............................................. 100 million pounds
          Alkylate................................................ 337 million gallons(d)
          Diethyl ether........................................... 5 million gallons
</TABLE>
------------
(a) Includes 850 million pounds/year of ethylene capacity and 200 million
    pounds/year of propylene capacity at Equistar's Lake Charles, Louisiana
    facility. Equistar's Lake Charles facility has been idled since the first
    quarter of 2001.

(b) Does not include refinery-grade material or production from the product
    flexibility unit at Equistar's Channelview facility, which can convert
    ethylene and other light petrochemicals into propylene. This facility has an
    annual processing capacity of one billion pounds per year of propylene.

(c) Includes up to 44 million gallons/year of capacity operated for the
    benefit of LCR.

(d) Includes up to 172 million gallons/year of capacity operated for the benefit
    of LCR.

       Ethylene produced by the La Porte, Morris and Clinton facilities is
generally consumed as raw material by the polymer operations at those sites, or
is transferred to Tuscola from Morris by pipeline for the production of ethanol.
Ethylene produced at Equistar's La Porte facility is consumed as a raw material
by Equistar's polymers operations and the Company's VAM operations in La Porte
and also is distributed by pipeline for other internal uses and to third
parties. Ethylene and propylene produced at the Channelview, Corpus Christi,
Chocolate Bayou and Lake Charles olefin plants are generally distributed by
pipeline or via exchange agreements to Equistar's Gulf Coast polymer and
ethylene oxide and glycol facilities as well as Equistar's affiliates and third
parties. Equistar's Lake Charles facility has been idled since the first quarter
of 2001. For the year ended December 31, 2002, approximately 70% of the ethylene
produced by Equistar, based on sales dollars, was consumed by Equistar's
polymers or oxygenated products business or sold to Equistar's owners and their
affiliates at market-related prices.

                                       15

<PAGE>


       With respect to sales to third parties, Equistar sells a majority of its
olefin products to customers with whom it has had long-standing relationships,
generally pursuant to written agreements that typically provide for monthly
negotiation of price, customer purchase of a specified minimum quantity, and
three to six year terms with automatic one- or two-year extension provisions.
Some contracts may be terminated early if deliveries have been suspended for
several months.

       Most of the ethylene and propylene production of the Channelview,
Chocolate Bayou, Corpus Christi and Lake Charles facilities is shipped via a
pipeline system that has connections to numerous Gulf Coast ethylene and
propylene consumers. Exchange agreements with other olefin producers allow
access to customers who are not directly connected to this pipeline system. Some
ethylene is shipped by railcar from Clinton, Iowa to Morris, Illinois and some
propylene is shipped by ocean-going vessel. A pipeline owned and operated by
Williams Pipeline Company is used to transport ethylene from Morris, Illinois to
Tuscola, Illinois.

       The bases for competition in Equistar's petrochemical products are price,
product quality, product deliverability and customer service. Equistar competes
with other large domestic producers of petrochemicals, including BP, Chevron
Phillips Chemical Company LP ("Chevron Phillips"), Dow, ExxonMobil Chemical
Company ("ExxonMobil"), Huntsman Chemical Company, NOVA Chemicals Corporation
("NOVA Chemicals") and Shell Chemical Company. Industry consolidation has
concentrated North American production capacity under the control of fewer,
although larger and stronger, competitors.

Equistar's Polymer Segment

       Through facilities located at nine plant sites in four states, Equistar's
polymer business unit manufactures a wide variety of polyolefins, including
polyethylene, polypropylene and various performance polymers.

       Equistar currently manufactures polyethylene using a variety of
technologies at five facilities in Texas and at its Morris, Illinois and
Clinton, Iowa facilities. The Morris and Clinton facilities are the only
polyethylene facilities located in the United States Midwest. These facilities
enjoy a freight cost advantage over Gulf Coast producers in delivering products
to customers in the United States Midwest and on the East Coast of the United
States.

       Equistar's Morris, Illinois and Pasadena, Texas facilities manufacture
polypropylene using propylene produced as a co-product of Equistar's ethylene
production as well as propylene purchased from third parties. Equistar produces
performance polymer products, which include enhanced grades of polyethylene and
polypropylene, at several of its polymer facilities. Equistar produces wire and
cable insulating resins and compounds at Morris, Illinois and La Porte, Texas
and wire and cable insulating compounds at Tuscola, Illinois and Fairport
Harbor, Ohio. Wire and cable insulating resins and compounds are used to
insulate copper and fiber optic wiring in power, telecommunication, computer and
automobile applications. In August 2002, Equistar permanently shut down its
Peachtree, Georgia wire and cable insulating compounds facility.

       Equistar's polymers facilities have the capacity to produce annually 3.1
billion pounds of high density polyethylene, 1.5 billion pounds of low density
polyethylene, 1.1 billion pounds linear low density polyethylene and 680 million
pounds of polypropylene. Equistar's polymer facilities also produce wire and
cable insulating resins and compounds, polymeric powders, polymers for
adhesives, sealants and coatings, reactive polyolefins and liquid polyolefins.
These products are enhanced grades of polyethylene. Equistar's capacity to
produce these products is included in the capacity figures for polyethylene,
discussed above.

       With the exception of the Chocolate Bayou polyethylene plant, Equistar's
polyethylene and polypropylene production facilities can receive their ethylene
and propylene directly from Equistar's petrochemical facilities via Equistar's
olefin pipeline system, third party pipelines or Equistar's own on-site
production. The polyethylene plants at Chocolate Bayou, La Porte and Pasadena,
Texas are connected to third parties and can receive ethylene via exchanges or
purchases. The polypropylene facility at Morris, Illinois receives propylene
from third parties.

       Equistar's polymer products are primarily sold to an extensive base of
established customers. Approximately 45% of Equistar's polymers products volumes
are sold to customers under term contracts, typically having a duration of one
to three years. The remainder is generally sold without contractual term
commitments. In either case, in most of the continuous supply relationships,
prices may be changed upon mutual agreement between Equistar and its customer.
Equistar sells its polymer products in the United States and Canada primarily
through its own sales organization. It generally engages sales agents to market
its polymer products in the rest of the world. Polymers are distributed
primarily by railcar.


                                       16

<PAGE>


       The bases for competition in Equistar's polymers products are price,
product performance, product quality, product deliverability and customer
service. Equistar competes with other large producers of polymers, including BP
Solvay Polyethylene, Chevron Phillips, Dow, Eastman, ExxonMobil, Formosa
Plastics, Huntsman, NOVA Chemicals, TotalFinaElf and Westlake Polymers. Industry
consolidation has concentrated North American production capacity under the
control of fewer, although larger and stronger, competitors.

Management of Equistar; Agreements between Equistar, Lyondell and the Company

       Equistar is a Delaware limited partnership. The Company owns its 29.5%
interest in Equistar through two wholly owned subsidiaries of Millennium
Petrochemicals, one of which serves as a general partner of Equistar and one of
which serves as a limited partner. The Equistar Partnership Agreement governs,
among other things, the ownership, cash distributions, capital contributions and
management of Equistar.

       The Equistar Partnership Agreement provides that Equistar is governed by
a Partnership Governance Committee consisting of six representatives, three
appointed by each general partner. Matters requiring agreement by the
representatives of Lyondell and the Company include changes in the scope of
Equistar's business, approval of the five-year Strategic Plan (and annual
updates thereof) (the "Strategic Plan"), the sale or purchase of assets or
capital expenditures of more than $30 million not contemplated by an approved
Strategic Plan, additional investments by Equistar's partners not contemplated
by an approved Strategic Plan or required to achieve or maintain compliance with
health, safety and environmental laws if the partners are required to contribute
more than a total of $100 million in a specific year or $300 million in a
five-year period, incurring or repaying debt under certain circumstances,
issuing or repurchasing partnership interests or other equity securities of
Equistar, making certain distributions, hiring and firing executive officers of
Equistar (other than Equistar's Chief Executive Officer), approving material
compensation and benefit plans for employees, commencing and settling material
lawsuits, selecting or changing accountants or accounting methods and merging or
combining with another business. All decisions of the Partnership Governance
Committee that do not require consent of the representatives of Lyondell and the
Company (including approval of Equistar's annual budget, which must be
consistent with the most recently approved Strategic Plan, and selection of
Equistar's Chief Executive Officer, who must be reasonably acceptable to the
Company) may be made by Lyondell's representatives alone. The day-to-day
operations of Equistar are managed by the executive officers of Equistar. Dan F.
Smith, the Chief Executive Officer of Lyondell, also serves as the Chief
Executive Officer of Equistar.

       Millennium Petrochemicals and Equistar entered into an agreement on
December 1, 1997 providing for the transfer of assets to Equistar. Among other
things, such agreement sets forth representations and warranties by Millennium
Petrochemicals with respect to the transferred assets and requires
indemnification by Millennium Petrochemicals with respect to such assets. Such
agreement also provides for the assumption of certain liabilities by Equistar,
subject to specified limitations. Lyondell and Occidental entered into similar
agreements with Equistar with respect to the transfer of their respective assets
and Equistar's assumption of liabilities. Millennium Petrochemicals, Lyondell
and Occidental each remains liable under these indemnification arrangements to
the same extent following Lyondell's acquisition of Occidental's interest in
Equistar as it was before.

       Equistar is party to a number of agreements with Millennium
Petrochemicals for the provision of services, utilities and materials from one
party to the other at common locations, principally La Porte, Texas. In general,
the goods and services under these agreements, other than the purchase of
ethylene by Millennium Petrochemicals from Equistar and the purchase of VAM by
Equistar from Millennium Petrochemicals, are provided at cost. Millennium
Petrochemicals purchases its ethylene requirements at market-based prices from
Equistar pursuant to a long-term contract. Equistar purchases its VAM
requirements from Millennium Petrochemicals at a formula-based price pursuant to
a long-term contract. Lyondell also entered into agreements with Equistar for
the provision of services. Pursuant to the Equistar Parent Agreement, the
Company and Lyondell have agreed to guarantee the obligations of their
respective subsidiaries under each of the agreements discussed above, including
the Equistar Partnership Agreement and the asset-transfer agreements.

       Millennium America Inc. ("Millennium America"), a wholly owned indirect
subsidiary of the Company, had an indemnity agreement with Equistar pursuant to
which Millennium America could have been required under certain circumstances to
contribute to Equistar up to $750 million. This indemnity terminated upon the
closing of the purchase by Lyondell of Occidental's interest in Equistar. The
requirement under the December 1, 1997 asset transfer agreement to indemnify
Equistar with respect to the assets transferred to Equistar and the requirement
under the Equistar Partnership Agreement to make additional investments in
Equistar, each as described above, remain in effect to the same extent after
Lyondell purchased Occidental's interest in Equistar.


                                       17


<PAGE>

       The Equistar Partnership Agreement and Equistar Parent Agreement contain
certain limitations on the ability of the partners and their affiliates to
transfer, directly or indirectly, their interests in Equistar. The following is
a summary of those limitations:

       Equistar Partnership Agreement: Without the consent of the general
partners of Equistar, no partner may transfer less than all of its interest in
Equistar, nor can any partner transfer its interest other than for cash. If one
of the limited partners and its affiliated general partner desire to transfer,
via a cash sale, all of their units, they must give written notice to Equistar
and the other partner and the non-selling partner shall have the option,
exercisable by delivering written acceptance notice of the exercise to the
selling partner within 45 days after receiving notice of the sale, to elect to
purchase all of the partnership interests of the selling partner on the terms
described in the initial notice. The notice of acceptance will set a date for
closing the purchase, which is not less than 30 nor more than 90 days after
delivery of the notice of acceptance, subject to extension. The purchase price
for the selling partners' partnership interests will be paid in cash.

       If the non-selling partner does not elect to purchase the selling
partner's partnership interests within 45 days after the receipt of initial
notice of sale, the selling partner will have a further 180 days during which it
may consummate the sale of its units to a third-party purchaser. The sale to a
third-party purchaser must be at a purchase price and on other terms that are no
more favorable to the purchaser than the terms offered to the non-selling
partner. If the sale is not completed within the 180-day period, the initial
notice will be deemed to have expired, and a new notice and offer shall be
required before the selling partner may make any transfer of its partnership
interests.

       Before the selling partner may consummate a transfer of its partnership
interests to a third party under the Equistar Partnership Agreement, the selling
partner must demonstrate that the person willing to serve as the proposed
purchaser's guarantor has outstanding indebtedness that is rated investment
grade by Moody's Investor's Services, Inc. ("Moody's") and Standard & Poor's
("S&P"). If the proposed guarantor has no rated indebtedness outstanding, it
shall provide an opinion from a nationally recognized investment banking firm
that it could be reasonably expected to obtain suitable ratings. In addition, a
partner may transfer its partnership interests only if, together with satisfying
all other requirements (1) the transferee executes an appropriate agreement to
be bound by the Equistar Partnership Agreement, (2) the transferor and/or the
transferee bears all reasonable costs incurred by Equistar in connection with
the transfer and (3) the guarantor of the transferee delivers an agreement to
the ultimate parent entity of the non-selling partner and to Equistar
substantially in the form of the Equistar Parent Agreement.

       Equistar Parent Agreement: Without the consent of Lyondell or the Company
(collectively, the "Parents") as the case may be, the other Parent may not
transfer less than all of its interests in the entities that hold its general
partnership and limited partnership interests in Equistar (the "Partner Sub
Stock") except in compliance with the following provisions.

       Each Parent may transfer all, but not less than all, of its Partner Sub
Stock, without the consent of the other Parent, if the transfer is in connection
with either (1) a merger, consolidation, conversion or share exchange of the
transferring Parent or (2) a sale or other disposition of (A) the Partner Sub
Stock, plus (B) other assets representing at least 50% of the book value of the
transferring Parent's assets excluding the Partner Sub Stock, as reflected on
its most recent audited consolidated or combined financial statements.

       In addition, any transfer of Partner Sub Stock by any Parent described
above is only permitted if the acquiring, succeeding or surviving entity, if
any, both (1) succeeds to and is substituted for the transferring Parent with
the same effect as if it had been named in the Equistar Parent Agreement and (2)
executes an instrument agreeing to be bound by the obligations of the
transferring Parent under the Equistar Parent Agreement, with the same effect as
if it had been named in the instrument.

       The transferring Parent may be released from its guarantee obligations
under the Equistar Parent Agreement after the successor parent agrees to be
bound by the transferring Parent's obligations.

       Unless a transfer is permitted under the provisions described above, a
Parent desiring to transfer all of its Partner Sub Stock to any person,
including the other Parent or any affiliate of the other Parent, may only
transfer its Partner Sub Stock for cash consideration and must give a written
right of first option to Equistar and the other Parent. The offeree Parent will
then have the option to elect to purchase all of the Partner Sub Stock of the
selling Parent, on the terms described in the right of first offer. If the
offeree Parent does not elect to purchase all of the selling Parent's Partner
Sub Stock within 45 days after the receipt of the initial notice from the
selling Parent, the selling Parent will have a further 180 days during which it
may, subject to the provisions of the following paragraph, consummate the sale
of its Partner Sub Stock to a third-party purchaser at a purchase price and on
other terms that are no more favorable to the purchaser than the initial terms
offered to the offeree Parent. If the sale is not completed


                                       18

<PAGE>


within the further 180-day period, the right of first offer will be deemed to
have expired and a new right of first offer is required.

       Before the selling Parent may consummate a transfer of its Partner Sub
Stock to a third party under the provisions described in the preceding
paragraph, the selling Parent shall demonstrate to the other Parent that the
proposed purchaser, or the person willing to serve as its guarantor as
contemplated by the terms of the Equistar Parent Agreement, has outstanding
indebtedness that is rated investment grade by either Moody's or S&P. If such
proposed purchaser or the other person has no rated indebtedness outstanding,
that person shall provide an opinion from Moody's, S&P or from a nationally
recognized investment banking firm that it could be reasonably expected to
obtain a suitable rating. Moreover, a Parent may transfer its Partner Sub Stock
under the previous paragraph only if all of the following occur: (A) the
transfer is accomplished in a nonpublic offering in compliance with, and exempt
from, the registration and qualification requirements of all federal and state
securities laws and regulations; (B) the transfer does not cause a default under
any material contract which has been approved unanimously by the Partnership
Governance Committee and to which Equistar is a party or by which Equistar or
any of its properties is bound; (C) the transferee executes an appropriate
agreement to be bound by the Equistar Parent Agreement; (D) the transferor
and/or transferee bear all reasonable costs incurred by Equistar in connection
with the transfer; (E) the transferee, or the guarantor of the obligations of
the transferee, delivers an agreement to the other Parent and Equistar
substantially in the form of the Equistar Parent Agreement; and (F) the
transferor is not in default in the timely performance of any of its material
obligations to Equistar.


                            La Porte Methanol Company

       The La Porte Methanol Company is a Delaware limited partnership that owns
a methanol plant and certain related facilities in La Porte, Texas. The
partnership is owned 85% by the Company and 15% by Linde. Linde is also required
to purchase, under certain circumstances, an additional 5% interest in the
partnership. A wholly owned subsidiary of the Company is the managing general
partner of the partnership. A wholly owned subsidiary of Linde is responsible
for operating the methanol plant. The partnership commenced operations on
January 18, 1999 when the methanol plant and certain related facilities owned by
the Company were contributed to the partnership and Linde purchased its
partnership interest from the Company.

       La Porte Methanol Company's methanol plant had an annual production
capacity of 207 million gallons as of December 31, 2002. The plant employs a
process supplied by a major engineering and construction firm to produce
methanol.

       Methanol is used primarily as a feedstock to produce acetic acid, MTBE
and formaldehyde. The Company uses approximately 80 million gallons of La Porte
Methanol Company's annual methanol production for the manufacture of acetic acid
at the Company's La Porte, Texas acetic acid plant. The methanol produced by La
Porte Methanol Company not consumed by the Company or sold by Linde to a
customer of Linde is marketed by the Company on behalf of itself and Linde.
Methanol is sold under contracts that range in term from one to six years and on
a spot basis to large domestic customers. The product is shipped by barge and
pipeline.

       The principal feedstocks for the production of methanol are carbon
monoxide and hydrogen, collectively termed synthesis gas or syngas. These raw
materials are largely supplied to La Porte Methanol Company from the Company's
syngas plant at La Porte, Texas, which is owned by the Company and leased to
Linde pursuant to a long-term lease that commenced on January 18, 1999. La Porte
Methanol Company also purchases relatively small volumes of hydrogen from time
to time from other parties.

       La Porte Methanol Company's principal competitors in the methanol
business are Methanex Company, Saudi Basic Industries Corporation, and Caribbean
Petrochemical Marketing Company Limited.


                                    Employees

       At December 31, 2002, the Company had approximately 3,800 full- and
part-time employees. Approximately 3,100 of the Company's employees were engaged
in manufacturing, 500 were engaged in sales, distribution and technology, and
200 were engaged in administrative, executive and support functions.
Approximately one-fourth of the Company's United States employees are
represented by various labor unions, and a significant percentage of the
Company's European and Brazilian employees are represented by various worker
associations. Of the Company's nine collective bargaining agreements or other
required labor negotiations, four must be renegotiated on an annual basis, four
others must be renegotiated in 2003, and one must be renegotiated in 2004. All
required annual


                                       19


<PAGE>


renegotiations relate to units outside the United States. The Company
believes that the relations of its operating subsidiaries with employees,
unions and worker associations are generally good.


                              Environmental Matters

       The Company's businesses are subject to extensive federal, state, local
and foreign laws, regulations, rules and ordinances concerning, among other
things, emissions to the air, discharges and releases to land and water, the
generation, handling, storage, transportation, treatment and disposal of wastes
and other materials and the remediation of environmental pollution caused by
releases of wastes and other materials (collectively, "Environmental Laws"). The
operation of any chemical manufacturing plant and the distribution of chemical
products entail risks under Environmental Laws, many of which provide for
substantial fines and criminal sanctions for violations. There can be no
assurance that significant costs or liabilities will not be incurred with
respect to the Company's operations and activities. In particular, the
production of TiO[u]2, TiCl[u]4, VAM, acetic acid, methanol and certain other
chemicals involves the handling, manufacture or use of substances or compounds
that may be considered to be toxic or hazardous within the meaning of certain
Environmental Laws, and certain operations have the potential to cause
environmental or other damage. Significant expenditures including
facility-related expenditures could be required in connection with any
investigation and remediation of threatened or actual pollution, triggers under
existing Environmental Laws tied to production or new requirements under
Environmental Laws.

       The Company's annual operating expenses relating to environmental matters
were approximately $46 million, $46 million and $47 million in 2002, 2001 and
2000, respectively. These amounts cover, among other things, the Company's cost
of complying with environmental regulations and permit conditions, as well as
managing and minimizing its waste. Capital expenditures for environmental
compliance and remediation were approximately $17 million, $19 million and $7
million in 2002, 2001 and 2000, respectively. In addition, capital expenditures
for projects in the normal course of operations and major expansions include
costs associated with the environmental impact of those projects that are
inseparable from the overall project cost. Capital expenditures and costs and
operating expenses relating to environmental matters for years after 2002 will
be subject to evolving regulatory requirements and will depend, to some extent,
on the amount of time required to obtain necessary permits and approvals.

       The Company cannot predict whether future developments or changes in laws
and regulations concerning environmental protection will affect its earnings or
cash flow in a materially adverse manner or whether its operating units,
Equistar or La Porte Methanol Company will be successful in meeting future
demands of regulatory agencies in a manner that will not materially adversely
affect the consolidated financial position, results of operations or cash flows
of the Company. For example, the Texas Commission on Environmental Quality (the
"TCEQ") submitted a plan to the United States Environmental Protection Agency
("EPA") requiring the eight-county Houston/Galveston, Texas area to come into
compliance with the National Ambient Air Quality Standard for ozone by 2007.
These requirements, if implemented, would mandate significant reductions of
nitrogen oxide ("NOx") emissions requiring increased capital investment by
Equistar of between $200 million and $260 million before the 2007 regulatory
deadline, as well as create higher annual operating costs. This result could
potentially affect cash distributions from Equistar to the Company. In January
2001, Equistar, individually and as part of an industry coalition, filed a
lawsuit in State District Court in Travis County, Texas seeking adoption of an
alternative plan for air quality improvement. In response to the lawsuit, the
TCEQ conducted an accelerated scientific review during 2001 and 2002. In
December 2002, the TCEQ adopted revised rules, which changed the required NOx
emission reduction levels from 90% to 80% while requiring new controls on
emissions of highly reactive volatile organic compounds ("HRVOCs"), such as
ethylene, propylene, butadiene and butanes. These new rules still require
approval by the EPA. Based on the 80% NOx reduction requirement, Equistar
estimates that its aggregate related capital expenditures could total between
$165 million and $200 million before the 2007 deadline, and could result in
higher annual operating costs. Equistar is still assessing the impact of the new
HRVOC control requirements. Additionally, the TCEQ plans to make a final review
of these rules, with final rule revisions to be adopted by May 2004. The timing
and amount of these expenditures are subject to regulatory and other
uncertainties, as well as obtaining the necessary permits and approvals. At this
time, there can be no guarantee as to the ultimate capital cost of implementing
any final plan developed to ensure ozone attainment by the 2007 deadline.

       From time to time, various agencies may serve cease and desist orders or
notices of violation on an operating unit or deny its applications for certain
licenses or permits, in each case alleging that the practices of the operating
unit are not consistent with regulations or ordinances. In some cases, the
relevant operating unit may seek to meet with the agency to determine mutually
acceptable methods of modifying or eliminating the practice in question. The


                                       20

<PAGE>

Company believes that its operating units generally operate in compliance with
applicable regulations and ordinances in a manner that should not have a
material adverse effect on the consolidated financial position, results of
operations or cash flows of the Company.

       Certain Company subsidiaries have been named as defendants, potentially
responsible parties (the "PRPs"), or both, in a number of environmental
proceedings associated with waste disposal sites or facilities currently or
previously owned, operated or used by the Company's current or former
subsidiaries or their predecessors, some of which are on the Superfund National
Priorities List of the EPA or similar state lists. These proceedings seek
cleanup costs, damages for personal injury or property damage, or both. Based
upon third-party technical reports, the projections of outside consultants or
outside counsel, or both, the Company has estimated its individual exposure at
these sites to be between $0.025 million and $26.7 million. In the most
significant of these proceedings, a subsidiary is named as one of four PRPs at
the Kalamazoo River Superfund Site in Michigan. The site involves contamination
of river sediments and floodplain soils with polychlorinated biphenyls.
Originally commenced on December 2, 1987 in the United States District Court for
the Western District of Michigan as Kelly v. Allied Paper, Inc. et al., the
matter was stayed and is being addressed under the Comprehensive Environmental
Response, Compensation and Liability Act. In October 2000, the Kalamazoo River
Study Group (the "KRSG"), of which one of the Company's subsidiaries is a
member, submitted to the State of Michigan a Draft Remedial Investigation and
Draft Feasibility Study (the "Draft Study"), which evaluated a number of
remedial options and recommended a remedy involving the stabilization of several
miles of river bank and the long-term monitoring of river sediments at a total
collective cost of approximately $73 million. During 2001, additional sampling
activities were performed in discrete parts of the river. At the end of 2001,
the EPA took responsibility for the site at the request of the State. While the
State has submitted comments to the EPA on the Draft Study, the EPA has yet to
similarly comment. The Company has estimated its liability at this site based
upon the KRSG's recommended remedy. Guidance as to how the EPA will likely
proceed with further evaluation and remediation, if required, at the Kalamazoo
site is expected by early 2004. At that time, the Company's estimate of its
liability will be reevaluated. The Company's ultimate liability for the
Kalamazoo site will depend on many factors that have not yet been determined,
including the ultimate remedy selected by the EPA, the number and financial
viability of the other members of the KRSG as well as of other PRPs outside the
KRSG, and the determination of the final allocation among the members of the
KRSG and other PRPs.

       The Company is defending a matter that involves the potential for civil
penalties or sanctions in excess of $0.1 million. In April 1997, the Illinois
Attorney General filed a complaint in Circuit Court in Grundy, Illinois alleging
releases into the environment from Millennium Petrochemical's former Morris,
Illinois facility (which was contributed to Equistar on December 1, 1997). The
Company believes it has substantial defenses to this action.

       In 2002, the Company settled on favorable terms the matter of South
Carolina Department of Health and Environmental Control v. Henkel Corp, Cognis
Corp, Millennium Petrochemicals Inc., et al., civil action no. 6:00-2570-20
(U.S. District Court for the District of South Carolina).

       The Company believes that the reasonably probable and estimable range of
potential liability for environmental and other legal contingencies,
collectively, but which primarily relates to environmental remediation
activities, is between $67 million and $95 million and has accrued $71 million
as of December 31, 2002. Expense associated with these contingencies included in
Selling, development and administrative expense totaled $15 million and $6
million in 2001 and 2000, respectively. These expenses resulted from increases
in reserves for the estimated costs to resolve legal and environmental claims
related to predecessor businesses. The Company expects that cash expenditures
related to these potential liabilities will be made over a number of years, and
will not be concentrated in any single year. This accrual also reflects the fact
that certain Company subsidiaries have contractual obligations to indemnify
other parties against certain environmental and other liabilities. For example,
the Company agreed as part of its Demerger to indemnify Hanson and certain of
its subsidiaries against certain of such contractual indemnification
obligations, and Millennium Petrochemicals agreed as part of the December 1,
1997 formation of Equistar to indemnify Equistar for certain liabilities related
to the assets contributed by Millennium Petrochemicals to Equistar in excess of
$7 million, which threshold was exceeded in 2001. The terms of these
indemnification agreements do not limit the maximum potential future payments to
the indemnified parties. The maximum amount of future indemnification payments
is dependent upon many factors and is not practicable to estimate.

       No assurance can be given that actual costs for environmental matters
will not exceed accrued amounts or that estimates made with respect to
indemnification obligations will be accurate. In addition, it is possible that
costs will be incurred with respect to contamination, indemnification
obligations or other environmental matters that currently are unknown or as to
which it is currently not possible to make an estimate.


                                       21

<PAGE>


                        Patents, Trademarks, and Licenses

       The Company's subsidiaries have numerous United States and foreign
patents, registered trademarks and trade names, together with applications. The
Company has licensed to others certain of its process technology for the
manufacture of VAM. The Company is also licensed by others in the application of
certain processes and equipment designs related to its Acetyls business segment.
The Company generally does not license its Titanium Dioxide and Related Products
business segment's proprietary processes to third parties or hold licenses from
others. While the patents and licenses of the Company's subsidiaries provide
certain competitive advantages and are considered important, particularly with
regard to processing technologies such as the Company's proprietary titanium
dioxide chloride production process, the Company's proprietary acetic acid
process and the Company's proprietary terpene chemistry process, the Company
does not consider its business, as a whole, to be materially dependent upon any
one particular patent or license.


                                       22


<PAGE>


Item 3.    Legal Proceedings

       The Company and various Company subsidiaries are defendants in a number
of pending legal proceedings relating to present and former operations. These
include several proceedings alleging injurious exposure of plaintiffs to various
chemicals and other materials on the premises of, or manufactured by, the
Company's current and former subsidiaries. Typically, such proceedings involve
claims made by many plaintiffs against many defendants in the chemical industry.
Millennium Petrochemicals is one of a number of defendants in 80 active
premises-based asbestos cases (i.e., where the alleged exposure to
asbestos-containing materials was to employees of third-party contractors or
subcontractors on the premises of certain facilities, and did not relate to any
products manufactured or sold by the Company or any of its predecessors).
Millennium Petrochemicals is also one of a number of defendants in one inactive
premises-based asbestos case where the court placed the claim on a formal
registry for dormant claims, and for which no defense costs are being incurred.
Millennium Petrochemicals is responsible for these premises-based cases as a
result of its indemnification obligations under the Company's agreements with
Equistar; however, Equistar will be required to indemnify Millennium
Petrochemicals for any such claims filed on or after December 1, 2004 related to
the assets or businesses contributed by Millennium Petrochemicals to Equistar.
Various other Company subsidiaries and alleged former subsidiaries are among a
number of defendants in 50 active premises-based asbestos cases.

       Together with other alleged past manufacturers of lead-based paint and
lead pigments for use in paint, the Company, a current subsidiary, as well as
alleged predecessor companies, have been named as defendants in various legal
proceedings alleging that they and other manufacturers are responsible for
personal injury, property damage, and remediation costs allegedly associated
with the use of these products. The plaintiffs in these legal proceedings
include municipalities, counties, school districts, individuals and one state,
and seek recovery under a variety of theories, including negligence, failure to
warn, breach of warranty, conspiracy, market share liability, fraud,
misrepresentation and public nuisance.

       Legal proceedings relating to lead pigment or paint are in various
procedural stages of pre-trial, post-trial and post-dismissal settings. These
legal proceedings are described below in groups pursuant to their particular
procedural posture. Pending legal proceedings relating to lead pigment or paint
in various pre-trial stages are as follows: The City of New York et al. v. Lead
Industries Association, Inc., et al., commenced in the Supreme Court of the
State of New York on June 8, 1989; Kayla Sabater et al., individually and on
behalf of all those similarly situated in the State of New York v. Lead
Industries Association, Inc., et al., commenced in the Supreme Court of New
York, Bronx County, on November 25, 1998; Jackson, et al. v. The Glidden Co., et
al., commenced in the Court of Common Pleas, Cuyahoga County, Ohio, on August
12, 1992; City of St. Louis v. Lead Industries Association, Inc., et al.,
commenced in the St. Louis, Missouri, Circuit Court on January 25, 2000; The
County of Santa Clara, a political subdivision of the State of California,
individually and on behalf of all those similarly situated v. Atlantic Richfield
et al., commenced in the Santa Clara County, California, Superior Court on March
23, 2000; Frederick Moore and Virginia Moore v. The Glidden Company, et al,
commenced on June 17, 2002, in the Court of Common Pleas, Hamilton County, Ohio;
Mark Ludwigsen v. NL Industries, Inc., et al, commenced on July 18, 2002, in the
Supreme Court, County of Kings, New York; and City of Chicago v. American
Cyanamid Company, et al, commenced on September 5, 2002, in the Circuit Court,
Cook County, Illinois.

       One legal proceeding relating to lead pigment or paint was tried in 2002.
On October 29, 2002, after a trial in which the jury deadlocked, the court in
the State of Rhode Island v. Lead Industry Association, Inc., et al, commenced
in the Superior Court of Providence, Rhode Island, on October 13, 1999, declared
a mistrial. The sole issue before the jury in this phase of the proceeding was
whether lead pigment in paint in and on public and private Rhode Island
buildings constitutes a "public nuisance." On March 20, 2003, the court denied
the motions for the judgment as a matter of law filed by both sides during and
after the trial. The State of Rhode Island may seek a new trial.

       Legal proceedings relating to lead pigment or paint dismissed after
summary judgment was granted by the court in favor of the defendants, but
pending appeal are as follows: Steven Thomas, et al. v. Lead Industries
Association, Inc., et al., commenced in the Milwaukee County, Wisconsin, Circuit
Court on September 10, 1999; Reginald Smith, et al. v. Lead Industries
Association, Inc., et al. commenced in the Baltimore City, Maryland, Circuit
Court on September 29, 1999; Mary Lewis, Tashswan Banks and Jacqueline Nye v.
Lead Industries Association, Inc., et al, filed on March 14, 2002, in the
Circuit Court, Cook County, Illinois; and New Jersey as In Re Lead Paint
Litigation, consolidated on February 11, 2002, in the Superior Court of New
Jersey, Law Division: Middlesex County, Case Code 702.


                                       23

<PAGE>


       One legal proceeding relating to lead pigment or paint was dismissed
after summary judgment was granted by the court in favor of the defendants. Joan
Young, et al v. Lead Industries Association, Inc., et al, commenced on February
14, 2002, in the Baltimore City, Maryland, Circuit Court is no longer pending
and the appeal period has run.

       Legal proceedings relating to lead pigment or paint, which have been
voluntarily dismissed by the plaintiffs are as follows: Jefferson County School
District v. Lead Industries Association, et al., commenced in the Circuit Court
of Jefferson County, Mississippi, on April 6, 2001; Quitman County School
District v. Lead Industries Association, et al., commenced in the Circuit Court
of Quitman County, Mississippi, on November 27, 2001; Carletta Justice v.
Sherwin-Williams Company, et al., commenced in the Superior Court in the County
of San Francisco on October 5, 2000, and amended in August 2002; and Spring
Branch Independent School District v. Lead Industries Association, et al.,
commenced in the District Court of Harris County, Texas, on June 20, 2000.

       Legal proceedings relating to lead pigment or paint that are pending but
have been abated under the laws of the State of Texas pending resolution of the
appeal of a decision granting summary judgment in favor of one lead pigment
defendant in Spring Branch Independent School District v. Lead Industries
Association, and for which no defense costs will be incurred during the
abatement period (expected to last one to two years), are as follows: Houston
Independent School District v. Lead Industries Association, et al., commenced in
the District Court of Harris County, Texas, on June 30, 2000; Harris County v.
Lead Industries Association, et al., commenced in the District Court of Harris
County, Texas, on April 23, 2001; Liberty Independent School District v. Lead
Industries Association, et al., commenced in the District Court of Liberty
County, Texas, on January 22, 2002; and Brownsville Independent School District
v. Lead Industries Association, Inc., et al, filed on May 28, 2002, in the
District Court, Cameron County, Texas.

       Legal proceedings relating to lead pigment or paint that have been filed
with a court, are pending, but have yet to be formally served on the Company,
any of its subsidiaries, or alleged predecessor companies, are as follows: Hall,
et al v. Lead Industries Association, et al., commenced in the Baltimore City,
Maryland, Circuit Court on June 19, 2000; Hart, et al v. Lead Industries
Association, et al., commenced in the Baltimore City, Maryland, Circuit Court on
June 26, 2000; Johnson, et al v. Clinton, et al., commenced in the Baltimore
City, Maryland, Circuit Court on October 10, 2000; Randle, et al v. Lead
Industries Association, et al., commenced in the Baltimore City, Maryland,
Circuit Court on August 10, 2000; Williams, et al v. Lead Industries
Association, et al., commenced in the Baltimore City, Maryland, Circuit Court on
July 7, 2000; William Russell, et al. v. NL Industries, et al., commenced in the
Circuit Court of LeFlore County, Mississippi on December 30, 2002; Myreona
Stewart, et al. v. NL Industries, et al., commenced in the Circuit Court of
LeFlore County, Mississippi on December 31, 2002; Will T. Turner v.
Sherwin-Williams Company, et al., commenced in the Circuit Court of Jefferson
County, Mississippi on December 30, 2002; and John Henry Sweeney v. The Sherwin
Williams Co., et al., commenced in the Circuit Court of Hinds County,
Mississippi on December 30, 2002.

       The Company's defense costs to date for lead-based paint and lead pigment
litigation largely have been covered by insurance. The Company has not accrued
any liabilities for any lead-based paint and lead pigment litigation. The
Company has insurance policies that potentially provide approximately $1 billion
in indemnity coverage for lead-based paint and lead pigment litigation. As a
result of insurance coverage litigation initiated by the Company, an Ohio trial
court issued a decision in 2002 effectively requiring certain insurance carriers
to resume paying defense costs in the lead-based paint and lead pigment cases.
Indemnity coverage was not at issue in the Ohio court's decision. The insurance
carriers may appeal the Ohio decision regarding defense costs, and they have in
the past and may in the future attempt to deny indemnity coverage if there is
ever a settlement or an adverse judgment in any lead-based paint or lead pigment
case.

       In 1986, a predecessor of a company that is now a subsidiary of the
Company sold its recently acquired Glidden Paints business. As part of that
sale, the seller agreed to indemnify the purchaser against certain claims made
during the first eight years after the sale; the purchaser agreed to indemnify
the seller against such claims made after the eight-year period. With the
exception of the two cases discussed below, all pending lead-based paint and
lead pigment litigation involving the Company and its subsidiaries, including
the Rhode Island case, was filed after the eight-year period. Accordingly, the
Company believes that it is entitled to full indemnification from the purchaser
against lead-based paint and lead pigment cases filed after the eight-year
period. The purchaser disputes that it has such an indemnification obligation,
and claims that the seller must indemnify it. Since the Company's defense costs
to date largely have been covered by insurance and there never has been a
settlement paid by, nor any judgment rendered against, the Company (or any other
company sued in any lead-based paint or lead pigment litigation), the parties'
indemnification claims have not been ruled on by a court.

                                       24

<PAGE>

       A current subsidiary and an alleged predecessor company are parties to
the only two remaining cases originally filed within the eight-year period
following the 1986 sale of the Glidden Paints business referred to above. In the
first of these cases, The City of New York et al. v. Lead Industries
Association, Inc., et al., commenced in the Supreme Court of the State of New
York on June 8, 1989, the New York City Housing Authority brought an action
relating to tens of thousands of public housing units. All claims in that case
have been dropped except for those relating to two housing projects. The other
remaining case, Jackson, et al. v. The Glidden Co., et al., commenced in the
Court of Common Pleas, Cuyahoga County, Ohio, on August 12, 1992, includes five
minors as plaintiffs. Dispositive motions were filed in that case in late 2002
and have yet to be ruled on by the court.

       The Company believes that it has valid defenses to all pending lead-based
paint and lead pigment proceedings and is vigorously defending them. However,
litigation is inherently subject to many uncertainties. There can be no
assurance that additional lead-based paint and lead pigment litigation will not
be filed against the Company or its subsidiaries in the future asserting similar
or different legal theories and seeking similar or different types of damages
and relief. While an outcome such as that reached in the Rhode Island proceeding
may have a positive effect on the lead-based paint and lead pigment litigation
against the Company, its subsidiaries and other defendants by reducing the
number and nature of future claims and proceedings, other adverse court rulings
or determinations of liability, among other factors, could encourage an increase
in the number of future claims and proceedings. In addition, from time to time,
legislation and administrative regulations have been enacted or proposed to
impose obligations on present and former manufacturers of lead-based paint and
lead pigment respecting asserted health concerns associated with such products
or to overturn successful court decisions. Due to the uncertainties involved,
the Company is unable to predict the outcome of lead-based paint and lead
pigment litigation, the number or nature of possible future claims and
proceedings, or the effect that any legislation and/or administrative
regulations may have on the Company or its subsidiaries. In addition, management
cannot reasonably estimate the scope or amount of the costs and potential
liabilities related to such litigation, or any such legislation and regulations.
Accordingly, the Company has not accrued any amounts for such litigation.
However, based upon, among other things, the outcome of such litigation to date,
including the dismissal of most of the over 50 lawsuits brought in recent years,
management does not currently believe that the costs or potential liabilities
ultimately determined to be attributable to the Company arising out of such
litigation will have a material adverse effect on the consolidated financial
position, results of operations or cash flows of the Company.

       On January 16, 2002, Slidell Inc. ("Slidell") filed a lawsuit against
Millennium Inorganic Chemicals Inc., a wholly owned operating subsidiary of the
Company, alleging breach of contract and other related causes of action arising
out of a contract between the two parties for the supply of packaging equipment.
In the suit, Slidell seeks unspecified monetary damages. The Company believes it
has substantial defenses to these allegations and has filed a counterclaim
against Slidell.

       The Company believes that it has valid defenses to the legal proceedings
described above and intends to defend these legal proceedings vigorously.
However, litigation is subject to many uncertainties and the Company cannot
guarantee the outcome of these proceedings. Based upon information currently
available, the Company does not believe that the outcome of these proceedings
will, either individually or in the aggregate, have a material adverse effect on
the consolidated financial position, results of operations or cash flows of the
Company. For additional information, see "Environmental and Litigation Matters"
in Item 7 and Note 16 to the Consolidated Financial Statements included in this
Annual Report.

       For information concerning the Company's environmental proceedings, see
"Environmental Matters" in Item 1 of this Annual Report, which is incorporated
in this Item 3 by reference.

                                       25



<PAGE>


                                     PART II

Item 6. Selected Financial Data

       The selected financial data presented below for each of the five years
ended December 31, 2002 have been restated to correct errors in the Company's
accounting for deferred taxes relating to its investment in Equistar, the
calculation of its pension benefit obligations, its accounting for a multi-year
precious metals agreement, and the timing of its recognition of income and
expense associated with previously established reserves for legal, environmental
and other contingencies for certain of the Company's predecessor businesses.
During the course of its review of deferred tax assets, the Company concluded
that its realization of a deferred tax asset related to its French subsidiaries
was unlikely and has also restated its financial statements to eliminate such
deferred tax asset. In addition, selling, development and administrative costs
allocated to the Company's investment in Equistar and previously reported in
Loss on Equistar investment have been reclassified to Selling, development and
administrative expense. The effect of these restatement adjustments and the
reclassification on the Company's selected financial data is presented in the
table that follows the selected financial data in this Item 6 and is more fully
described in Note 2 to the Consolidated Financial Statements included in this
Annual Report.

       The selected financial data included below were derived from the
Consolidated Financial Statements of the Company, as restated, and should be
read in conjunction with such financial statements, including the Notes thereto,
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are included in Part II, Items 8 and 7, respectively, of this
Annual Report.

       During the fourth quarter of 2002, the Company changed from the last-in
first-out ("LIFO") method to the first-in first-out ("FIFO") method of
accounting for certain of its United States inventories in the Titanium Dioxide
and Related Products business segment. The method was changed in part to achieve
a better matching of revenues and expenses due to decreasing inventory
quantities and costs. The FIFO method, or methods that approximate FIFO, are now
used to determine cost for all inventories of the Company. Information presented
below and throughout this Annual Report has been restated for all periods
presented to reflect the change from the LIFO to FIFO method.

                                       26



 <PAGE>



Selected Financial Data

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                       ----------------------------------------------------------------------
                                                       2002(1)        2001(1)       2000(1)        1999(1)        1998(1)(13)
                                                       -------        -------       -------        -------        -----------
                                                     (Restated)*    (Restated)*   (Restated)*    (Restated)*    (Restated)*
                                                                      (Millions, except per share data)
<S>                                                    <C>            <C>           <C>            <C>            <C>
Income Statement Data
   Net sales .....................................     $1,554         $1,590        $1,793         $1,589          $1,597
   Operating income ..............................         80 (3)         14 (6)       201 (9)        139 (11)        193(14)
   (Loss) earnings on Equistar investment ........        (73)           (83)(7)        45 (7)         (7) (7)         56(15)
   (Loss) income from continuing operations
     before cumulative effect of accounting change        (28)(4)        (54)(8)       111(10)       (549)(12)         13(16)
   Cumulative effect of accounting change ........       (305)(5)         --            --             --              --
   Net (loss) income from continuing operations ..       (333)(4)        (54)(8)       111(10)       (549)(12)         13(16)
   Basic (loss) earnings per share from continuing
     operations before cumulative effect of
     accounting change ...........................      (0.44)(4)      (0.85)(8)      1.73(10)      (7.93)(12)       0.17(16)
   Basic (loss) earnings per share from continuing
     operations ..................................      (5.24)(4)      (0.85)(8)      1.73(10)      (7.93)(12)       0.17(16)
   Dividends declared per share(2) ...............       0.54           0.54          0.54           0.54            0.54
Balance Sheet Data (at period end)
   Total assets ..................................     $2,396         $2,965        $3,259         $3,286          $4,145
   Total liabilities .............................      2,412          2,454         2,631          2,621           2,695
   Minority interest .............................         19             21            22             16              15
   Shareholders'(deficit) equity .................        (35)           490           606            649           1,435
Other Data (with respect to continuing operations)
   Depreciation and amortization .................     $  102         $  110        $  113         $  105          $  102
   Capital expenditures ..........................         71             97           110            109             215
</TABLE>

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

*    The Company restated its financial statements as disclosed in Note 2 to the
     Consolidated Financial Statements included in this Annual Report. The table
     that follows in this Item 6 presents a summary of the effect of the
     revisions.


(1)  The restatement of the Company's results to reflect the accounting change
     from LIFO to FIFO had the following impact on net income (loss) for each of
     the years presented above: increase of less than $1 million in 2002;
     decrease of $4 million or $0.07 per share in 2001; increase of $2 million
     or $0.04 per share in 2000; decrease of $6 million or $0.09 per share in
     1999; and increase of $7 million or $0.11 per share in 1998.

(2)  Amounts for 1998 through 2001 were previously reported at $0.60 per share,
     which included dividends declared of $0.54 per share, plus United Kingdom
     Notional Tax Credit of $0.06 per share. See Item 5 in this Annual Report
     for more information regarding dividends.

(3)  Includes a benefit of $6 million from a reduction of reserves due to
     favorable resolution of environmental claims related to predecessor
     businesses reserved for in prior years.

(4)  Includes an after-tax benefit of $4 million or $0.06 per share from a
     reduction of reserves due to favorable resolution of environmental claims
     related to predecessor businesses reserved for in prior years, a tax
     benefit of $22 million or $0.35 per share, primarily related to a federal
     tax refund claim, and a tax charge of $10 million or $0.16 per share to
     establish a valuation allowance against deferred tax assets for the
     Company's French subsidiaries.

(5)  Reflects cumulative effect of change in accounting for goodwill of the
     Company and Equistar in accordance with SFAS No. 142. See "Accounting
     Changes" in "Management's Discussion and Analysis of Financial Condition
     and Results of Operations" in this Annual Report.

(6)  Includes $36 million in reorganization and plant closure charges, $15
     million to increase reserves for the estimated costs to resolve legal and
     environmental claims related to predecessor businesses and $13 million of
     the Company's goodwill amortization.

                                       27



 <PAGE>



(7)  Includes $10 million of Equistar's goodwill amortization.

(8)  Includes $24 million after-tax or $0.38 per share in reorganization and
     plant closure charges, an additional $4 million or $0.07 per share
     representing the Company's after-tax share of costs related to the shutdown
     of Equistar's Port Arthur, Texas plant, $9 million after-tax or $0.14 per
     share to increase reserves for the estimated costs to resolve legal and
     environmental claims related to predecessor businesses, $13 million or
     $0.20 per share of the Company's goodwill amortization, $10 million or
     $0.16 per share of Equistar's goodwill amortization and a tax benefit of
     $42 million or $0.66 per share from a reduction in the Company's income tax
     accruals due to favorable developments related to matters reserved for in
     prior years.

(9)  Includes $6 million to increase reserves for the estimated costs to resolve
     legal and environmental claims related to predecessor businesses and $13
     million of the Company's goodwill amortization.

(10) Includes $4 million after-tax or $0.06 per share to increase reserves for
     the estimated costs to resolve legal and environmental claims related to
     predecessor businesses, $13 million or $0.20 per share of the Company's
     goodwill amortization and $10 million or $0.16 per share of Equistar's
     goodwill amortization.

(11) Includes $5 million to increase reserves for the estimated costs to resolve
     legal and environmental claims related to predecessor businesses and $12
     million of the Company's goodwill amortization.

(12) Includes non-recurring charge for loss in value of the Equistar interest of
     $639 million to reduce the carrying value of the Equistar interest to
     estimated fair value, $3 million after-tax or $0.04 per share to increase
     reserves for the estimated costs to resolve legal and environmental claims
     related to predecessor businesses, and $12 million or $0.17 per share of
     the Company's goodwill amortization and $10 million or $0.14 per share of
     Equistar's goodwill amortization.

(13) Includes six months of earnings of the Brazilian TiO[u]2 business acquired
     on July 1, 1998.

(14) Includes $14 million of the Company's goodwill amortization.

(15) Includes $9 million of Equistar's goodwill amortization.

(16) Includes $14 million or $0.18 per share of the Company's goodwill
     amortization and $9 million or $0.12 per share of Equistar's goodwill
     amortization.

     The table that follows presents a summary of the effect of the
restatement adjustments and the reclassification described above on the
Company's selected financial data at and for the years ended December 31, 2002,
2001, 2000, 1999 and 1998. See Note 2 to the Consolidated Financial Statements
included in this Annual Report for a complete description of the restatement
adjustments and reclassification.

                                       28



 <PAGE>



<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                              -----------------------------------------------------------------------------
                                                      2002(1)                     2001(1)                     2000(1)
                                              ----------------------      ----------------------      ---------------------
                                                 As            As            As            As            As          As
                                              Reported      Restated      Reported      Restated      Reported     Restated
                                              --------      --------      --------      --------      --------     --------
                                                                   (Millions, except per share data)
<S>                                            <C>           <C>           <C>           <C>           <C>          <C>
Income Statement Data
  Operating income .....................       $   93        $   80        $   39        $   14        $  217       $  201
  (Loss) earnings on Equistar
    investment .........................          (80)          (73)          (90)          (83)           39           45
  (Loss) income from continuing
    operations before cumulative
    effect of accounting change ........           21           (28)          (47)          (54)          124          111
  (Loss) income from
    continuing operations ..............         (284)         (333)          (47)          (54)          124          111
  Basic (loss) earnings per share
    from continuing operations
    before cumulative effect of
    accounting change ..................         0.33         (0.44)        (0.75)        (0.85)         1.94         1.73
  Basic (loss) earnings per share
    from continuing operations..........        (4.47)        (5.24)        (0.75)        (0.85)         1.94         1.73
Balance Sheet Data (at period end)
  Total assets .........................       $2,467        $2,396        $2,990        $2,965        $3,255       $3,259
  Total liabilities ....................        2,009         2,412         2,072         2,454         2,227        2,631
  Shareholders' equity (deficit) .......          439           (35)          897           490         1,006          606
</TABLE>



<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                              -------------------------------------------------
                                                      1999(1)                   1998(1)(2)
                                              ----------------------      ---------------------
                                                 As            As            As           As
                                              Reported      Restated      Reported     Restated
                                              --------      --------      --------     --------
                                                       (Millions, except per share data)
<S>                                            <C>           <C>           <C>          <C>
Income Statement Data
  Operating income .....................       $  159        $  139        $  216       $  193
  (Loss) earnings on Equistar
    investment .........................          (19)           (7)           40           56
  (Loss) income from continuing
    operations before cumulative
    effect of accounting change ........         (332)         (549)          171           13
  (Loss) income from
    continuing operations ..............         (332)         (549)          171           13
  Basic (loss) earnings per share
    from continuing operations
    before cumulative effect of
    accounting change ..................        (4.80)        (7.93)         2.29         0.17
  Basic (loss) earnings per share
    from continuing operations..........        (4.80)        (7.93)         2.29         0.17
Balance Sheet Data (at period end)
  Total assets .........................       $3,282        $3,286        $4,141       $4,145
  Total liabilities ....................        2,230         2,621         2,521        2,695
  Shareholders' equity (deficit) .......        1,036           649         1,605        1,435
</TABLE>

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

(1)  The restatement adjustments described in Note 2 to the Consolidated
     Financial Statements included in this Annual Report had the following
     effect on Income Statement Data for the years 1998 through 2002:

     o    Restatement adjustments for deferred taxes related to the Company's
          investment in Equistar increased income tax expense and increased Loss
          from continuing operations by $36 million and $212 million in 2002 and
          1999, respectively; decreased income tax expense and decreased Loss
          from continuing operations by $4 million in 2001; and increased tax
          expense and decreased Income from continuing operations by $6 million
          and $154 million in 2000 and 1998, respectively;

     o    Income tax expense and Loss from continuing operations were increased
          by $10 million in 2002 to establish a valuation allowance against
          deferred tax assets for the Company's French subsidiaries;

     o    Net periodic benefit cost increased and Operating income decreased by
          $2 million and Loss from continuing operations increased by $1 million
          in 2002 resulting from the correction of errors in the calculation of
          the Company's pension benefit obligations;

     o    The effect of the restatement adjustments to correct the accounting
          for the Company's multi-year precious metals agreement was to decrease
          Operating income by $4 million, $2 million, $1 million, and $2 million
          for the years 2002, 2001, 2000, and 1999, respectively; increase Loss
          from continuing operations by $2 million, $1 million, and $1 million
          for 2002, 2001 and 1999, respectively; and decrease Income from
          continuing operations by $1 million for 2000; and

     o    Restatement adjustments related to the timing of the Company's
          recognition of income and expense associated with previously
          established reserves for legal, environmental and other contingencies
          for certain of the Company's predecessor businesses, decreased
          Operating income by $16 million, $9 million, $6 million and $7 million
          for the years 2001, 2000, 1999 and 1998, respectively; increased Loss
          from continuing operations by $10 million in 2001; decreased Income
          from continuing operations by $6 million and $4 million for the years
          2000 and 1998, respectively; and increased Loss from continuing
          operations by $4 million in 1999.

                                       29



 <PAGE>



(2)  The restatement adjustments for deferred taxes related to the Company's
     investment in Equistar (see Note 2 to the Consolidated Financial Statements
     included in this Annual Report) increased net deferred tax liabilities and
     decreased Shareholders' equity at December 31, 1997 by $36 million, and the
     restatement adjustments for the timing of the Company's recognition of
     income and expense associated with previously established reserves for
     legal, environmental and other contingencies for certain of the Company's
     predecessor businesses decreased Total liabilities and increased
     Shareholders' equity at December 31, 1997 by $24 million.

                                       30


 <PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Restatement of Financial Statements

       The Company restated its financial statements for the years 1998 through
2002, to correct errors in its accounting for deferred taxes relating to its
Equistar investment, the calculation of its pension benefit obligations, its
accounting for a multi-year precious metals agreement, and the timing of its
recognition of income and expense associated with previously established
reserves for legal, environmental and other contingencies for certain of the
Company's predecessor businesses and thereafter accounted for by the Company.

       Deferred tax assets and liabilities and deferred tax expense for the
years 1998 through 2002 were restated to appropriately account for the Company's
book and tax basis differences associated with its investment in Equistar in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). The accounting for deferred tax
associated with Equistar was previously based on the difference between book and
tax basis of a subsidiary that holds the partnership investment. Deferred tax is
now based on the difference between book basis and tax basis of the actual
partnership interest held by the subsidiary. The effect of the adjustments to
deferred tax assets and liabilities was to increase net deferred tax liabilities
and Accumulated deficit by $402 million at December 31, 1999. The effect of the
adjustments to Benefit from income taxes for 2002 and 2001 was a decrease of $36
million and an increase of $4 million, respectively, and the effect to Provision
for income taxes for 2000 was an increase of $6 million. Other comprehensive
loss was reduced by $15 million in 2002 due to these adjustments. In addition,
during the course of its review of its deferred tax assets, the Company
concluded that its realization of a deferred tax asset of $10 million related to
its French subsidiaries was unlikely. The elimination of this deferred tax asset
as of December 31, 2002, resulted in an increase of $10 million in net deferred
tax liabilities and a decrease in Benefit from income taxes for 2002 of $10
million.

       The Company also restated its accrued pension benefit costs, included in
Other liabilities, and its net periodic pension benefit cost for 2002 to correct
errors in the calculation of its pension liability. The Company's principal
actuarial firm incorrectly utilized participant data in its 2002 actuarial
valuation and underestimated the accumulated benefit obligation at December 31,
2002 for the Company's largest domestic pension plan. The effect of these
corrections was to increase accrued pension benefit cost by $53 million and to
decrease net deferred tax liabilities by $19 million at December 31, 2002, and
to increase net periodic pension benefit cost by $2 million, to decrease
Operating income by $2 million, to increase Net loss by $1 million, and to
increase Other comprehensive loss by $33 million for the year then ended.

       The financial statements for the years 1998 through 2002 also were
restated to reflect a retroactive change in accounting treatment for a five-year
agreement entered into in 1998 that provides the Company with the right to use
gold owned by a third party, as more fully described in Note 9 to the
Consolidated Financial Statements included in this Annual Report. The Company
previously accounted for this agreement as an operating lease but is now
accounting for this agreement as a secured financing. As a result, at December
31, 1999, Other assets increased by $4 million, Accrued expenses and other
liabilities decreased by $1 million, Other long-term borrowings increased by $11
million, net deferred tax liabilities decreased by $1 million, Other liabilities
decreased by $4 million, and Accumulated deficit increased by $1 million ;
Operating income for 2002, 2001 and 2000 decreased by $4 million, $2 million and
$1 million, respectively; Net loss for 2002 and 2001 increased by $2 million and
$1 million, respectively; and Net income for 2000 decreased by $1 million.

       The restatement of the financial statements for the years 1998 through
2001 also includes changes to correct the timing of income and expense
recognition associated with previously established reserves for legal,
environmental and other contingencies for certain of the Company's predecessor
businesses. The effect of this restatement was to decrease Accrued expenses
and other liabilities and Other liabilities by $1 million and $24 million,
respectively, and to increase net deferred tax liabilities and Accumulated
deficit by $9 million and $16 million, respectively, at December 31, 1999, to
decrease Operating income by $16 million and $9 million for the years 2001 and
2000, respectively; to increase Net loss by $10 million in 2001; and to decrease
Net income by $6 million in 2000.

       In addition, $7 million, $7 million and $6 million of selling,
development and administrative ("S,D&A") costs allocated to the Company's
investment in Equistar and previously reported in (Loss) earnings on Equistar
investment for the years ended December 31, 2002, 2001 and 2000, respectively,
were reclassified to Selling, development and administrative expense in the
Company's Consolidated Statements of Operations.


                                       31



<PAGE>


                                  Introduction

       The Company's principal operations are grouped into three business
segments: Titanium Dioxide and Related Products, Acetyls, and Specialty
Chemicals. Operating income and expense not identified to the three separate
business segments, including certain of the Company's S,D&A costs not allocated
to its three business segments, employee-related costs from predecessor
businesses and certain other expenses, are reflected as Other. The Company also
holds a 29.5% interest in Equistar, which is accounted for using the equity
method. (See Notes 1 and 5 to the Consolidated Financial Statements included in
this Annual Report.) A discussion of Equistar's financial results for the
relevant period is included below, as the Company's interest in Equistar
represents a significant component of the Company's assets and Equistar's
results can have a significant effect on the Company's consolidated results of
operations.

       The following information should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto. In connection
with the forward-looking statements that appear in the following information,
please carefully review the Cautionary Statements in "Disclosure Concerning
Forward-Looking Statements" included in this Annual Report.

Historical Cyclicality of the Chemicals Industry

       The Company's income and cash flow levels reflect the cyclical nature of
the chemicals industries in which it operates. Most of these industries are
mature and sensitive to cyclical supply and demand balances. In particular, the
markets for ethylene and polyethylene, in which the Company participates through
its interest in Equistar, are highly cyclical, resulting in volatile profits and
cash flow over the business cycle. The global markets for TiO[u]2, VAM, acetic
acid, and fragrance and flavor chemicals are also cyclical, although to a lesser
degree. The balance of supply and demand in the markets in which the Company and
Equistar do business, as well as the level of inventories held by downstream
customers, has a direct effect on the sales volume and prices of the Company's
and Equistar's products. For example, if supply exceeds demand, producers are
often pressured to maintain sales volume with customers and, consequently,
pressure to reduce prices may result. This is especially true in periods of
economic decline or uncertainty, when demand may be limited and customers may
become cautious about building inventory. Producers, such as the Company and
Equistar, may respond in various ways depending upon the particular
circumstances, including by meeting competitive price reductions, short-term
curtailment of production, or longer-term temporary or permanent plant
shutdowns. In contrast, the Company believes that, over a business cycle, the
markets for specialty chemicals are generally more stable in terms of industry
demand, selling prices and operating margins.

       Demand for TiO[u]2, which is influenced by changes in the gross domestic
product of various regions of the world, has fluctuated from year to year,
averaging an increase of approximately 2.5% to 3.0% per year over the last ten
years. The industry is also sensitive to changes in its customers' marketplaces,
which are primarily the paint and coatings, plastics and paper industries. In
recent history, consolidations and negative business conditions within certain
of those industries have put pressure on TiO[u]2 prices as companies compete to
keep volume placed.

       Demand for ethylene and its derivatives and for acetyls has fluctuated
from year to year depending on various factors including but not limited to the
economy, industrial production, weather and threat of war. However, over the
last ten years, global demand for ethylene and its primary derivative,
polyethylene, has increased an average of approximately 5% per year. This
industry segment is particularly sensitive to capacity additions. Producers have
historically experienced alternating periods of inadequate capacity, resulting
in increased selling prices and operating margins, followed by periods of large
capacity additions, resulting in declining capacity utilization rates, selling
prices and operating margins. This cyclical pattern is most visible in the
markets for ethylene and polyethylene, resulting in volatile profits and cash
flow over the business cycle. Currently, there is overcapacity in these
industries, as a number of Equistar's competitors in various segments of these
industries have added capacity. There can be no assurance that future growth in
product demand will be sufficient to utilize current or any additional capacity.
Excess industry capacity has depressed and may continue to depress Equistar's
volumes and margins.

       Profitability in the Acetyls business segment and in Equistar's
businesses is further influenced by fluctuations in the price of natural gas and
feedstocks for ethylene. It is not possible to predict accurately the effect
that future changes in natural gas and feedstock costs, market conditions and
other factors will have on the Company's or Equistar's profitability.

       Different facilities may have differing operating rates from period to
period depending on supply and demand for the product produced at the facility
during that period and other factors, such as energy costs, feedstock costs and
transportation costs. As a result, individual facilities may be operated below
or above rated capacities, may be idled


                                       32



<PAGE>


or may be shut down and restarted in any period. It is possible that lower
demand in the future will cause the Company or Equistar to reduce operating
rates or idle facilities.

       The global economic and political environment continues to be uncertain,
contributing to lower operating rates, adding to the volatility of raw material
and energy costs, and forestalling recovery from trough conditions, all of which
is placing, and may continue to place, pressure on the Company's and Equistar's
results of operations.

Major Factors Affecting 2002 Results

       o   Demand for TiO[u]2 and acetyls products increased significantly over
           prior-year levels as signs of economic recovery began to emerge in
           most world markets except South America and customers rebuilt
           inventory levels depleted during 2001.

       o   Unstable economic conditions prevailed in South America, resulting in
           lower sales volume and prices in that region in 2002.

       o   After reaching their lowest level in more than five years in the
           first quarter of 2002, TiO[u]2 prices rose steadily through the end
           of the year, as price increases announced by the Company and most of
           its competitors were gradually realized, supported by increased
           demand.

       o   The value of the euro, British pound and Australian dollar
           strengthened versus the US dollar, further contributing to increasing
           sales revenue when translated into US dollars. The Brazilian real
           continued to weaken against the US dollar, contributing to declining
           sales revenue in that region.

       o   TiO[u]2 manufacturing costs decreased in 2002 as compared with 2001
           due to productivity and reliability improvements, lower cost of
           natural gas and other purchased materials, the realization of
           benefits from the Company's cost-saving initiatives, including the
           idling of its high-cost sulfate-process TiO[u]2 plant in Hawkins
           Point, Maryland at the end of the third quarter of 2001 and lower
           unit production costs due to higher fixed cost absorption from higher
           production rates as a result of increased customer demand.

       o   Acetyls prices rose steadily through the end of the year after
           reaching a low early in the second quarter, as announced price
           increases were realized.

       o   Acetyls margins in 2002 were greatly improved in comparison with
           2001. Higher demand resulted in lower per unit production costs due
           to higher fixed cost absorption resulting from increased plant
           operating rates. Unfavorable fixed-price natural gas purchase
           positions that increased Acetyls operating loss in 2001 by $19
           million expired at the end of the first quarter of 2002.

       o   Acetyls feedstock costs, including costs of natural gas and ethylene,
           remained relatively stable throughout much of the year, but increased
           during the fourth quarter primarily due to unseasonably cold weather
           in certain regions of the US and events in the Middle East.

       o   Conditions in the worldwide markets of the Specialty Chemicals
           business segment remained competitive due to excess capacity, and
           volume was negatively affected by competition from low cost
           manufacturers in Asia. In addition, the Company's production
           facilities for specialty chemicals experienced high maintenance and
           production costs due to planned and unplanned production
           interruptions.

       o   S,D&A costs were lower by $31 million or 18% from 2001.

       o   Higher interest costs were incurred primarily as a result of higher
           average debt levels and the higher cost of debt due to the issuance
           in June 2002 of $100 million additional principal amount of 9.25%
           Senior Notes.

       o   At Equistar, operating results were slightly lower compared to 2001.
           Higher polymers margins primarily due to lower raw material costs
           were more than offset by lower margins in the petrochemicals segment
           primarily as a result of lower sales prices.


                                       33



<PAGE>


Outlook for 2003

       The Company has announced additional price increases for TiO[u]2 and
acetyls products during the first quarter of 2003. However, contracts with most
of the Company's large-volume TiO[u]2 customers include periods of price
protection. Therefore, the benefits of TiO[u]2 price increases, if
implementation is successful, may not be fully realized by the Company for
several months after the effective date of the price increases. The success of
price increases in both the TiO[u]2 and Acetyls business segments is dependent
on continuing economic recovery and accompanying strong customer demand. The
TiO[u]2 business segment expects sales volume and prices in the first quarter of
2003 to be up slightly compared to the fourth quarter of 2002.

       Natural gas and ethylene pricing is critical to profitability in the
Acetyls business segment. Natural gas prices have been on the rise since early
December due to unseasonably cold weather in certain regions of the US and
events in the Middle East. Natural gas prices and, as a result, the cost of
ethylene, have increased significantly in the first quarter of 2003. The Company
has responded by announcing price increases for acetyls products in the first
quarter of 2003. The higher costs could help to support the recently announced
price increases for acetyls products, but the increase in feedstock costs has
put pressure on margins in the Acetyls business segment. Acetyls price increases
have not been sufficient to offset rising natural gas prices; accordingly, the
profitability of the Acetyls business segment is expected to be adversely
affected in the first quarter of 2003. First quarter 2003 operating income is
expected to be positive for Acetyls but below fourth quarter 2002 levels.

       First quarter 2003 operating results for the Specialty Chemicals business
segment are expected to improve slightly from the fourth quarter of 2002 based
on an increase in sales volume without the production outages and maintenance
that led to increased costs in the fourth quarter of 2002.

       The Company has achieved reductions in production costs and S,D&A
expenses as a result of process improvement, cost reduction and cost containment
programs. These programs have been critical to achieving improved operating
profit levels and will continue to be a priority in 2003.

       In the first quarter of 2003, the olefins and polyethylene industries
experienced significantly higher and more volatile energy and raw material costs
than in the fourth quarter 2002. Equistar has responded by implementing price
increases in the first quarter of 2003 for substantially all of its
petrochemicals and polymers products. However, the effect of historically high
energy-related feedstocks will make for a very difficult first quarter.
Equistar's ethylene cash costs have risen significantly faster than the
effective price increases Equistar has obtained or expects to obtain in the
first quarter. Due to price protection and market forces, typically, there is a
lag of weeks to months before a cost increase in Equistar's feedstocks
translates to full or partial price increase realization in polymers and
derivatives. Accordingly, the Company's equity loss in Equistar's results is
expected to be greater than the $35 million loss recorded in the fourth quarter
of 2002.

       Industry analysts forecast that the olefins industry will experience
improved supply/demand conditions in 2003, driven by industry announcements of
plant shutdowns and maintenance turnarounds. However, unless global economic
uncertainties and energy market issues are resolved, the impact of high raw
material and energy costs could outweigh these benefits and could depress
demand. If global economic uncertainties and energy market issues are resolved,
it should result in reduced raw material costs and increased industrial
activity, which would benefit Equistar's operations.

       As discussed in more detail in "Financing and Capital Structure" the
Company believes that it will not be in compliance with certain financial
covenants at June 30, 2003, unless economic and business conditions improve
significantly in the second quarter of 2003. Accordingly, the Company is seeking
a waiver or amendment to its credit agreement, which it expects to obtain by
June 30, 2003.

       With the Company's lowered cost base and improved prices for its major
products during the first quarter, overall prospects for the Company's business
segments are expected to be favorable for 2003 compared to 2002; however, the
current global economic uncertainties and volatile energy markets could
significantly adversely affect these prospects as well as the prospects of
Equistar.

Pension Assets and Equity

       Because of the recent declines in the financial markets, certain of the
Company's US and foreign pension plans had underfunded Accumulated Benefit
Obligations ("ABO") at the end of 2002. The Company is required to charge to
Shareholders' (deficit) equity a minimum liability for any underfunded amount
and the existing prepaid pension asset related to the affected plans. The charge
to Shareholders' (deficit) equity at December 31, 2002, net of


                                       34



<PAGE>


income taxes, was $188 million. See Note 12 to the Consolidated Financial
Statements included in this Annual Report.

       Due to the reduction in the fair value of pension plan assets and the
Company's decision to reduce its assumptions for the expected return on pension
plan assets and the discount rate related to its pension plans, pension expense
for 2003 is expected to increase by approximately $10 million. Pension income
was $7 million, $8 million and $9 million for 2002, 2001 and 2000, respectively.
Pension plan funding requirements are not expected to materially change in 2003.

Income Taxes

       The Company recorded a tax benefit of $22 million in 2002 and $42 million
in 2001 unrelated to transactions for those years. In 2002, the tax benefit
primarily relates to an $18 million refund of tax and interest originating from
refund claims filed with the Internal Revenue Service ("IRS") in 2002 which
carried back expenses incurred in 1993 and 1994 to earlier tax years. In 2001,
the tax benefit relates to the reversal of tax accruals recorded in 1996. During
2001, through ongoing discussions and negotiations with the IRS, it was
determined that the Company's original 1996 position would not be challenged and
the accruals recorded in 1996 were no longer necessary. The reversal of those
accruals was offset to an extent by certain new tax provisions the Company
determined probable of assessment based on the evolution of various domestic and
foreign tax examinations and changes in relevant tax regulations.

       As a result of the Company's assessment of its net deferred tax assets,
a valuation allowance of $10 million was required for the net deferred tax
assets of its French subsidiaries at December 31, 2002. The Company currently
expects that if its French subsidiaries continue to report net operating
losses in future periods, income tax benefits associated with those losses
would not be recognized, and the Company's results in those periods would
be adversely affected.


                       Results of Consolidated Operations

<TABLE>
<CAPTION>
                                                           2002           2001          2000
                                                       -----------    -----------    -----------
                                                       (Restated)*    (Restated)*    (Restated)*
                                                           (Millions, except per share data)
<S>                                                    <C>            <C>            <C>
Net sales..........................................    $1,554         $1,590         $1,793
Operating income...................................        80 (1)         14 (4)        201(7)
(Loss) earnings on Equistar investment.............       (73)           (83)(5)         45(8)
(Loss) income before cumulative effect of
   accounting change...............................       (28)(2)        (54)(6)        111(9)
Cumulative effect of accounting change.............      (305)(3)         --             --
Net (loss) income..................................      (333)(2)        (54)(6)        111(9)
Basic (loss) earnings per share before cumulative
   effect of accounting change.....................     (0.44)(2)      (0.85)(6)       1.73(9)
Diluted (loss) earnings per share before
   cumulative effect of accounting change..........     (0.44)(2)      (0.85)(6)       1.72(9)
Basic (loss) earnings per share....................     (5.24)         (0.85)          1.73
Diluted (loss) earnings per share..................     (5.24)         (0.85)          1.72
</TABLE>

-----------------
  *    The Company restated its financial statements as disclosed in Note 2 to
       the Consolidated Financial Statements included in this Annual Report.

(1)    Includes a benefit of $6 million from a reduction of reserves due to
       favorable resolution of environmental claims related to predecessor
       businesses reserved for in prior years.

(2)    Includes an after-tax benefit of $4 million or $0.06 per share from a
       reduction of reserves due to favorable resolution of environmental claims
       related to predecessor businesses reserved for in prior years, a tax
       benefit of $22 million or $0.35 per share, primarily related to a federal
       tax refund claim, and a tax charge of $10 million or $0.16 per share to
       establish a valuation allowance against deferred tax assets for the
       Company's French subsidiaries.


                                       35



<PAGE>


(3)    Cumulative effect of change in accounting for goodwill of the Company and
       Equistar in accordance with SFAS No. 142.

(4)    Includes $36 million in reorganization and plant closure charges, $15
       million to increase reserves for the estimated costs to resolve legal and
       environmental claims related to predecessor businesses and goodwill
       amortization of $13 million.

(5)    Includes $10 million of goodwill amortization and $6 million representing
       the Company's share of costs related to the shutdown of Equistar's Port
       Arthur, Texas plant.

(6)    Includes $24 million after-tax or $0.38 per share in reorganization and
       plant closure charges, an additional $4 million or $0.07 per share
       representing the Company's after-tax share of costs related to the
       shutdown of Equistar's Port Arthur, Texas plant, $9 million after-tax or
       $0.14 per share to increase reserves for the estimated costs to resolve
       legal and environmental claims related to predecessor businesses, $23
       million or $0.36 per share of goodwill amortization and a tax benefit of
       $42 million or $0.66 per share from a reduction in the Company's income
       tax accruals due to favorable developments related to matters reserved
       for in prior years.

(7)    Includes $6 million to increase reserves for the estimated costs to
       resolve legal and environmental claims related to predecessor businesses
       and $13 million of goodwill amortization.

(8)    Includes $10 million of goodwill amortization.

(9)    Includes $4 million after-tax or $0.06 per share to increase reserves for
       the estimated costs to resolve legal and environmental claims related to
       predecessor businesses and $23 million or $0.36 per share of goodwill
       amortization.


Accounting Changes

LIFO
       During the fourth quarter of 2002, the Company changed from the LIFO
method to the FIFO method of accounting for certain of its United States
inventories in the Titanium Dioxide and Related Products business segment. The
method was changed in part to achieve a better matching of revenues and expenses
due to decreasing inventory quantities and costs. The FIFO method, or methods
that approximate FIFO, are now used to determine cost for all product
inventories of the Company. The change increased operating income in the
Titanium Dioxide and Related Products business segment by less than $2 million
and positively impacted the net loss of the Company by less than $1 million or
$0.02 per share in 2002. The effect of the change on operating income for the
Titanium Dioxide and Related Products business segment was a decrease of $7
million and an increase of $4 million for the year 2001 and 2000, respectively.
Net (loss) income and net (loss) income per share of the Company were negatively
impacted by $4 million or $0.07 per share, respectively, for the year 2001 and
positively impacted by $2 million or $0.04 per share, respectively, for the year
2000. Information presented above and throughout this Annual Report has been
restated for all periods presented to reflect the change from the LIFO to FIFO
method.

Goodwill

       On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Intangible Assets" ("SFAS No. 142"), which applies to all goodwill and
intangible assets acquired in a business combination. Under this new standard,
all goodwill, including goodwill acquired before initial application of the
standard, is not amortized but must be tested for impairment at least annually
at the reporting unit level, as defined in the standard. Accordingly, the
Company reported a charge for the cumulative effect of a change in accounting
principle of $275 million in the first quarter of 2002 to write off goodwill
related to its Acetyls business. Also in accordance with SFAS No. 142, Equistar
reported an impairment of goodwill in the first quarter of 2002. The write-off
at Equistar required an adjustment of $30 million to reduce the carrying value
of the Company's investment in Equistar to its approximate proportional share of
Equistar's Partners' capital. The Company reported this adjustment as a charge
for the cumulative effect of a change in accounting principle.

       Goodwill amortization was suspended on January 1, 2002 in accordance with
SFAS No. 142. Results for each of the years 2001 and 2000 included $13 million
of expense in operating income for amortization of the Company's goodwill and
$10 million included in (Loss) earnings on Equistar investment for the Company's
share of Equistar's goodwill amortization.


                                       36



<PAGE>


2002 Versus 2001

       The Company reported a loss before the cumulative effect of an accounting
change for goodwill of $28 million or $0.44 per share in 2002 compared to a loss
of $54 million or $0.85 per share in 2001. The Company's pre-tax results
increased $68 million in 2002 compared to 2001, including $66 million higher
operating income and a $10 million lower loss from the Company's investment in
Equistar, partially offset by $4 million greater net interest expense and $4
million higher minority interest and other expenses. Income taxes in 2002
include a tax benefit of $22 million or $0.35 per share, primarily related to a
federal tax refund claim, while income taxes in 2001 include a tax benefit of
$42 million or $0.66 per share as a result of a reduction in the Company's
income tax accruals due to favorable developments related to matters reserved
for in prior years. These tax benefits are more fully described in "Income
Taxes" above.

       Operating income for 2002 of $80 million increased by $66 million from
2001 primarily due to charges recorded in 2001 for reorganization and plant
closure costs and to increase reserves for the estimated costs to resolve legal
and environmental claims related to predecessor businesses that did not recur in
2002 and the suspension of goodwill amortization in 2002. Operating income in
2001 includes $36 million of aggregate reorganization and plant closure costs
related to reorganization activities within each of the Company's business
segments, $15 million of charges to increase reserves for the estimated costs to
resolve legal and environmental claims related to predecessor businesses and $13
million of goodwill amortization that was suspended on January 1, 2002 in
accordance with SFAS No. 142. During the second quarter of 2001, $31 million was
recorded in connection with the Company's announced decision to reduce its
worldwide workforce and indefinitely idle its sulfate-process TiO[u]2 plant in
Hawkins Point, Maryland. The $31 million charge included severance and other
employee-related costs of $19 million for the termination of approximately 400
employees involved in manufacturing, technical, sales and marketing, finance and
administrative support, a $10 million write-down of assets and $2 million in
other costs associated with the idling of the plant. During the first quarter of
2001, the Company announced the closure of its facilities in Cincinnati, Ohio,
and recorded reorganization and other charges of $5 million in the Acetyls
segment. These charges included $3 million of severance and other termination
benefits related to the termination of about 35 employees involved in technical,
marketing and administrative activities, as well as $2 million related to the
write-down of assets, lease termination costs and other charges associated with
the Cincinnati facility. The office in Cincinnati was closed during the second
quarter of 2001. All payments for severance and related costs and for other
costs related to the reorganization and plant closure have been made as of
December 31, 2002.

       Operating income in 2002 compared to 2001 increased by $32 million in the
Acetyls business segment, including $5 million of reorganization and plant
closure costs in 2001 that did not recur in 2002 and $11 million of goodwill
amortization that was suspended on January 1, 2002 in accordance with SFAS
No. 142. Operating income in 2002 compared to 2001 increased by $21 million in
the Titanium Dioxide and Related Products business segment, including
$30 million of reorganization and plant closure costs in 2001 that did not recur
in 2002 and $2 million of goodwill amortization in 2001 that was suspended on
January 1, 2002 in accordance with SFAS No. 142. Operating income in 2002
compared to 2001 decreased by $5 million in the Specialty Chemicals business
segment, including $1 million of reorganization and plant closure costs in 2001
that did not recur in 2002. Other operating loss not identified with the three
separate business segments for 2002 was $18 million lower compared to 2001.
Other operating loss in 2002 included a benefit of $6 million from the reduction
of reserves due to favorable resolution of environmental claims related to
predecessor businesses reserved for in prior years, and in 2001 included charges
of $15 million to increase reserves for the estimated costs to resolve legal and
environmental claims related to predecessor businesses.

       Net sales for 2002 of $1.554 billion decreased by $36 million or 2% from
2001 as higher sales volume in the Titanium Dioxide and Related Products and
Acetyls business segments was more than offset by lower selling prices. Although
average prices for many of the Company's products remained at lower levels
compared to the prior year, TiO[u]2 and acetyls prices, after reaching a low in
the first quarter of 2002, rose steadily through the end of the year as certain
of the Company's worldwide price increases for TiO[u]2 and for Acetyls'
principal products announced during 2002 were gradually realized. Specialty
Chemicals sales revenue for 2002 was lower than 2001 due to lower sales volume
as the business remained under significant competitive pressure.

       Manufacturing costs decreased in 2002 as compared with 2001 due to
productivity and reliability improvements, lower cost of natural gas and other
purchased materials, and the realization of benefits from the Company's
cost-saving initiatives, including the idling of its high-cost sulfate-process
TiO[u]2 plant in Hawkins Point, Maryland at the end of the third quarter of
2001. Both the Titanium Dioxide and Related Products and Acetyls business
segments benefited from lower unit production costs due to higher fixed cost
absorption from higher production rates as a result of increased customer
demand. Results for the Acetyls business segment also improved

                                       37




 <PAGE>


in comparison to 2001 as unfavorable fixed-price natural gas purchase positions
entered into during the first quarter of 2001 expired at the end of the first
quarter of 2002. These unfavorable contracts negatively impacted Acetyls
operating loss by $19 million in the last three quarters of 2001, while 2002
operating profit was reduced by only $7 million. Specialty Chemicals
manufacturing costs for 2002 were higher than 2001 due in part to planned and
unplanned production outages that increased unit production costs.

       After a reduction of $55 million or 26% in 2001, S,D&A costs were reduced
in 2002 by an additional $10 million or 6%. The $55 million reduction in S,D&A
costs in 2001 excludes $15 million and $6 million of charges in 2001 and 2000,
respectively, to increase reserves for the estimated costs to resolve legal and
environmental claims related to predecessor businesses. The $10 million
reduction in S,D&A costs in 2002 excludes $15 million of charges in 2001 to
increase reserves for the estimated costs to resolve legal and environmental
claims related to predecessor businesses and a benefit of $6 million in 2002
from the reduction of reserves due to favorable resolution of environmental
claims related to predecessor businesses reserved for in prior years. The
Company continued to focus on its cost reduction initiatives and received a full
year of benefit from its June 2001 reorganization and reduction in workforce.
The savings from these initiatives were partially offset by higher incentive
compensation costs in 2002.

       The Company's loss from its Equistar investment was $73 million in 2002
and $83 million in 2001. The loss in 2001 includes $10 million representing the
Company's share of Equistar's goodwill amortization that was suspended on
January 1, 2002 in accordance with SFAS No. 142, and $6 million of costs related
to the shutdown of Equistar's Port Arthur, Texas plant. Excluding the effect of
these items, the Company's loss on its Equistar investment was $6 million higher
in 2002 compared to 2001. Higher polymer margins primarily due to lower raw
material costs were more than offset by lower margins in the petrochemical
segment primarily as a result of lower sales prices.

2001 Versus 2000

       Net sales for 2001 decreased $203 million or 11% from 2000 primarily due
to weak demand in the Titanium Dioxide and Related Products business segment and
declining prices across all business segments. Operating income of $14 million
decreased $187 million or 93% from 2000. This decrease in operating income
includes $36 million of reorganization and plant closure costs related to
reorganization activities within each of the Company's business segments, as
more fully described in "2002 Versus 2001" above. All three business segments
were affected by the slowdown in the global economy. Operating income in the
Titanium Dioxide and Related Products segment decreased $106 million or 72% from
2000, including $30 million of reorganization and plant closure costs in 2001.
The Titanium Dioxide and Related Products business segment experienced
competitive pressure on pricing globally, reduced sales volume and higher
manufacturing costs, primarily caused by lower fixed cost absorption due to
reduced plant operating rates. In the Acetyls business segment, 2001 operating
results declined by $68 million or 145% from 2000, including $5 million of
reorganization and plant closure costs in 2001, as the segment was severely
impacted by declining prices during the third and fourth quarters, the high cost
of natural gas during the first quarter and the impact of unfavorable
fixed-price natural gas purchase positions entered during the first quarter,
which negatively impacted operating results by $19 million in the last three
quarters of the year. Specialty Chemicals operating profit of $11 million was
down $9 million or 45% from 2000, including $1 million of reorganization and
plant closure costs in 2001. The Specialty Chemicals business segment remained
under significant competitive pressure. Other operating loss not identified with
the three business segments for 2001 increased $4 million from 2000, primarily
due to higher charges to increase reserves for the estimated costs to resolve
legal and environmental claims related to predecessor businesses, partially
offset by higher income from employee benefit plans related to predecessor
businesses. The Company reduced S,D&A costs by $55 million or 26% from 2000,
excluding $15 million and $6 million of charges in 2001 and 2000, respectively,
to increase reserves for the estimated costs to resolve legal and environmental
claims related to predecessor businesses. This significant reduction in S,D&A
costs was achieved through the Company's cost-saving initiatives, which included
benefits from the Company's reorganization and reduction in workforce, reduced
external consultant fees, reduced employee bonuses and travel, and various other
cost reductions.

       The Company reported a net loss of $54 million or $0.85 per share for
2001 compared to net income of $111 million or $1.73 per share for 2000. The
decrease was primarily due to decreased operating results in all three business
segments, reorganization and plant closure costs included in 2001 and a loss
from the Company's investment in Equistar of $83 million compared to earnings
from its investment in Equistar of $45 million in 2000. Additionally, the 2001
results include a tax benefit of $42 million due to favorable developments
related to matters reserved for in prior years, as more fully described in
"Income Taxes" above.


                                       38



<PAGE>


                                Segment Analysis

       A description of the products and markets for each of the business
segments is included in Item 1 of this Annual Report. Additional segment
information is included in Note 17 to the Consolidated Financial Statements in
this Annual Report.

Titanium Dioxide and Related Products

<TABLE>
<CAPTION>
                                                2002         2001         2000
                                               ------       ------       ------
                                                          (Millions)
<S>                                            <C>          <C>          <C>
Net sales....................................  $1,129       $1,145       $1,355
Operating income.............................      63           42          148

</TABLE>

2002 Versus 2001

       Operating income for 2002 of $63 million increased $21 million or 50%
from the prior year. Operating income in 2001 includes $30 million of
reorganization and plant closure costs that did not recur in 2002, as more fully
described in "Results of Consolidated Operations" above, and $2 million of
goodwill amortization that was suspended on January 1, 2002 in accordance with
SFAS No. 142. Excluding the reorganization and plant closure costs and goodwill
amortization from the 2001 results, operating income in 2002 decreased $11
million from the prior year primarily due to lower selling prices ($83 million),
partially offset by the favorable effects of lower manufacturing and other costs
of sales ($41 million), lower S,D&A expenses ($19 million) and higher sales
volume ($12 million).

       Net sales for 2002 decreased $16 million or 1% to $1.129 billion. Average
selling prices for 2002 were 7% lower than for 2001, decreasing sales revenue by
$83 million. After reaching their lowest level in more than five years in the
first quarter of 2002, TiO[u]2 prices rose steadily through the end of the year
as announced price increases were gradually realized. However, this increase in
prices was not sufficient to raise the average price for 2002 to the prior year
level. Average prices for 2002 were lower than 2001 in all three major TiO[u]2
markets and in all major geographic regions globally. This was partially offset
by a 6% increase in sales volume, which increased revenue by $67 million.
TiO[u]2 sales volume was higher than the prior year in all major geographic
regions globally except Central and South America. Sales volume was 8% higher in
the paint and coatings market and 15% higher in the plastics market. Sales
volume declined by 13% in the paper market, which continued to be depressed in
all major geographic regions except Europe, due to poor economic conditions and
the Company's election to reduce its participation in the fine paper markets in
light of unacceptably low margins.

       The overall operating rate for the Company's TiO[u]2 plants in 2002 was
89% compared to 85% for the prior year. Production was increased due to
increased market demand in 2002. The lower operating rate in 2001 was primarily
due to curtailment of production at certain facilities in response to weak
market demand in 2001.

       Operating income was increased by $41 million as a result of lower
manufacturing and other cost of sales per metric ton in 2002 compared with the
prior year. Overall TiO[u]2 cost of sales per metric ton decreased 5% in 2002
primarily due to lower production costs resulting from higher fixed cost
absorption due to increased production, idling of the Hawkins Point plant,
reduced controllable and fixed costs due to productivity and reliability
improvements and cost-saving initiatives, lower utility costs and lower
distribution costs. This was slightly offset by the unfavorable effect of
translating local currency manufacturing costs into a weaker US dollar.

        S,D&A costs in 2002 decreased by $19 million or 15% compared to 2001.
The Company continued to focus on its cost reduction initiatives and received a
full year of benefit from its June 2001 reorganization and reduction in
workforce. The savings from these initiatives were partially offset by higher
incentive compensation costs in 2002.

2001 Versus 2000

       Operating income for 2001 of $42 million decreased $106 million or 72%
from the prior year. Operating income in 2001 includes $30 million of
reorganization and plant closure costs, as more fully described in "Results of
Consolidated Operations" above. Excluding the reorganization and plant closure
costs from the 2001 results, operating income in 2001 decreased $76 million from
the prior year primarily due to lower sales volume ($43 million), lower selling
prices ($42 million) and higher manufacturing costs ($30 million), partially
offset by lower S,D&A expenses ($39 million).


                                       39



<PAGE>


       Net sales decreased 15% to $1.145 billion. Overall, sales volume was down
11% and average selling prices were down 5% from the prior year. Sales volume in
2001 was down compared to 2000 in all three major TiO[u]2 markets: paint and
coatings, 10%; plastics, 6%; and paper, 20%. TiO[u]2 sales volume was also down
in all major geographic regions globally. In addition, TiO[u]2 sales prices were
down in all three major markets and in all major geographic regions globally.

       For all of 2001, global economic conditions restricted demand and fueled
competitive pricing situations in all markets, most notably in paint and
coatings and paper. The United States and European paper markets suffered
declining business conditions, adversely affecting TiO[u]2 volume and price into
these markets. These economic and business conditions continued in the fourth
quarter. TiO[u]2 sales volume and price in the fourth quarter of 2001 declined
16% and 9%, respectively, from the fourth quarter of 2000. Operating income for
the segment, excluding goodwill amortization, was $7 million for the fourth
quarter of 2001 compared to $18 million in the third quarter of 2001 and $38
million in the fourth quarter of 2000.

       The overall operating rate for the Company's TiO[u]2 plants in 2001 was
85% compared to 94% for the prior year. Production was curtailed in line with
reduced market demand. The Company idled its 44,000 tpa Hawkins Point, Maryland
sulfate-process plant and re-rated its Kemerton, Australia, and Ashtabula, Ohio
plants at the end of the third quarter of 2001, reducing annual nameplate
capacity from 712,000 to 690,000 metric tons.

       The overall TiO[u]2 cost per metric ton increased 1% in 2001.
Productivity and reliability improvements, cost-cutting initiatives, and the
benefit of translating local currency manufacturing costs into a stronger US
dollar were more than offset by lower fixed cost absorption due to decreased
production and by increases in raw material costs compared to the prior year.

       In 2001, S,D&A costs were $39 million or 24% lower than 2000. This
significant reduction in S,D&A costs was achieved through the Company's
cost-saving initiatives, which included benefits from the Company's
reorganization, reduction in workforce, reduced external consultant fees,
reduced employee bonuses and travel, and various other cost reductions.

Acetyls

<TABLE>
<CAPTION>
                                             2002          2001         2000
                                         -----------   -----------   -----------
                                         (Restated)*   (Restated)*   (Restated)*
                                                       (Millions)
<S>                                          <C>           <C>           <C>
Net sales.................................   $334          $355          $337
Operating income (loss)...................     11           (21)           47

</TABLE>
----------------
*  The Company's financial statements have been restated as disclosed in Note 2
   to the Consolidated Financial Statements included in this Annual Report.

2002 Versus 2001

       Operating income in the Acetyls business segment for 2002 of $11 million
increased by $32 million from an operating loss of $21 million in 2001.
Operating income in 2001 includes $5 million of reorganization and plant closure
costs that did not recur in 2002, as more fully described in "Results of
Consolidated Operations" above, and $11 million of goodwill amortization that
was suspended on January 1, 2002 in accordance with SFAS No. 142. Excluding the
reorganization and plant closure costs and goodwill amortization from the 2001
results, operating income in 2002 increased $16 million from the prior year,
primarily due to lower production costs ($65 million) and higher sales volume
($10 million), partially offset by lower selling prices ($55 million) and higher
S,D&A expenses ($4 million).

       Sales revenue for 2002 of $334 million decreased $21 million or 6%
compared to 2001, primarily due to lower selling prices ($55 million) across all
product lines, partially offset by higher sales volume ($34 million). Overall,
sales volume for 2002 increased 14% from 2001, driven primarily by strong acetic
acid demand due to competitor outages and growth in the purified terephthalic
acid business, for which acetic acid is a reaction medium. Average selling
prices declined by 14% in 2002 compared to 2001 due to high selling prices in
the first half of 2001, which were supported by high feedstock costs during that
period. During the second half of 2001, prices began to decline and continued to
decline until reaching a low early in the second quarter of 2002. Price
increases realized during the second, third and fourth quarters of 2002 were not
sufficient to return revenue to 2001 levels; however, profitability on sales in
2002 was much improved due to lower costs.


                                       40



<PAGE>


       The Acetyls business segment benefited from lower feedstock costs and
lower unit production costs as increased demand resulted in higher fixed cost
absorption from higher production volume in 2002. Additionally, unfavorable
fixed-price natural gas purchase positions entered into during the first quarter
of 2001, which negatively impacted Acetyls 2001 operating loss by $19 million in
the last three quarters of 2001, expired at the end of the first quarter of
2002, negatively impacting 2002 operating profit by $7 million, a net benefit in
the effect of these contracts on cost of $12 million.

       S,D&A costs for 2002 were $4 million or 29% higher than 2001, primarily
due to a loss in 2002 for the change in the value of gold and the Company's
obligation under its agreement with a third party, which provides the Company
with the right to use gold at its La Porte, Texas facility. See Note 9 to the
Consolidated Financial Statements included in this Annual Report.

2001 Versus 2000

       The Acetyls business segment's operating loss for 2001 was $21 million, a
decrease of $68 million or 145% from operating profit of $47 million in 2000.
Operating income in 2001 includes $5 million of reorganization and plant closure
costs, as more fully described in "Results of Consolidated Operations" above.
Excluding the reorganization and plant closure costs from the 2001 results,
operating income in 2001 decreased $63 million from the prior year, primarily
due to higher production costs ($69 million), lower sales volume ($2 million)
and lower selling prices ($1 million), partially offset by lower S,D&A expenses
($9 million). Net sales increased $18 million to $355 million, primarily due to
higher prices and higher VAM sales volume in the first half of the year compared
to 2000. The operating loss in the fourth quarter of 2001 was $13 million
compared to $4 in the third quarter of 2001 and income of $18 million in the
fourth quarter of 2000, as deteriorating business conditions over the course of
2001 impacted the Acetyls business segment.

       The high cost of natural gas compared to the prior year and lower fixed
cost absorption due to decreased operating rates were the primary causes for
decreased profits in 2001. The Company did not enjoy the full benefit of lower
natural gas prices in the last half of the year because of unfavorable
fixed-price purchase positions entered into during the first quarter of 2001
that negatively impacted operating loss by approximately $19 million for the
year.

       Average VAM prices for 2001 decreased 1% from the prior year, while
acetic acid and methanol prices increased 3% and 6%, respectively. With the
declining cost of natural gas, the global economic slowdown and continued
oversupply in the marketplace, price increases that were achieved during the
first half of 2001 were eroded by rapidly falling prices in the second half. VAM
volume increased 9% in 2001 versus the prior year primarily due to the tolling
arrangement with DuPont offset by a generally weaker market. Acetic acid volume
was down 30% for the year 2001, due mainly to reduced merchant sales as a result
of acetic acid shipped to the DuPont facility under the tolling arrangement and
weak demand in the United States and Europe. Methanol volume increased 3% in
2001.

       In 2001, S,D&A costs were $9 million or 39% lower than 2000. This
significant reduction was achieved through the Company's cost-saving
initiatives, which included benefits from the Company's reorganization and
reduction in workforce, reduced employee bonuses, and various other cost
reductions.

Specialty Chemicals

<TABLE>
<CAPTION>
                                                     2002       2001       2000
                                                    ------     ------     ------
                                                             (Millions)
<S>                                                   <C>        <C>       <C>
Net sales........................................     $91        $90       $101
Operating income.................................       6         11         20
</TABLE>

2002 Versus 2001

       Operating income for 2002 of $6 million was $5 million or 45% lower than
2001. Operating income in 2001 includes $1 million of reorganization and plant
closure costs that did not recur in 2002, as more fully described in "Results of
Consolidated Operations" above. Excluding the reorganization and plant closure
costs from the 2001 results, operating income in 2002 decreased $6 million from
the prior year, primarily due to higher manufacturing and other cost of sales
($17 million) and lower sales volume ($4 million), partially offset by higher
average selling prices ($15 million).


                                       41



<PAGE>


        Net sales for 2002 increased $1 million or 1% to $91 million. The
weighted-average selling price for all Specialty Chemicals products increased by
19% over the 2001 weighted average, resulting primarily from a greater
proportion of higher-priced products sold and the favorable effect of
strengthening currencies against the US dollar. Sales volume was down 15% from
2001 as the marketplace remains fiercely competitive mainly due to price
pressure from low cost manufacturers in Asia.

       The average cost of CST, the principal raw material for the business,
remained relatively level with the prior year. Production costs and other cost
of sales increased in 2002 compared to 2001 due to expenses incurred as a result
of planned and unplanned production outages and maintenance during the fourth
quarter of 2002 and lower fixed cost absorption resulting from decreased
production volume.

       S,D&A costs were approximately equal to the prior year.

2001 Versus 2000

       Operating income for 2001 was $11 million, a decrease of $9 million or
45% from the prior year. Operating income in 2001 includes $1 million of
reorganization and plant closure costs, as more fully described in "Results of
Consolidated Operations" above. Excluding the reorganization and plant closure
costs from the 2001 results, operating income in 2001 decreased $8 million from
the prior year, primarily due to lower selling prices ($9 million) and lower
sales volume ($1 million), partially offset by lower S,D&A expenses ($2
million).

       Net sales decreased 11% to $90 million. Fourth quarter 2001 operating
income was $1 million compared to $3 million in both the third quarter of 2001
and the fourth quarter of 2000.

       Average selling prices were down 3% from 2000. Competitive conditions in
the fragrance chemical market adversely impacted prices, as did the continued
strength of the US dollar. Sales volume was down 9% from 2000 as a result of
competitive conditions and the global economic slowdown. The fourth quarter of
the year was particularly soft, resulting from global economic uncertainty.

       The average cost of CST, the principal raw material for the business,
remained relatively level with the prior year.

       In 2001, S,D&A costs were $2 million or 13% lower than 2000. This
significant reduction was achieved through the Company's cost-saving
initiatives, which included benefits from the Company's reorganization and
various other cost reductions.

Other

<TABLE>
<CAPTION>
                                             2002          2001         2000
                                         -----------   -----------   -----------
                                         (Restated)*   (Restated)*   (Restated)*
                                                       (Millions)
<S>                                          <C>          <C>           <C>
Operating loss..........................     $ --         $(18)         $(14)
</TABLE>

----------------
*  The Company's financial statements have been restated as disclosed in Note 2
   to the Consolidated Financial Statements included in this Annual Report.

2002 Versus 2001

       Operating loss not identified with the three separate business segments
for 2002 was $18 million less than 2001, primarily due to a $15 million charge
in 2001 to increase reserves for the estimated costs to resolve legal and
environmental claims related to predecessor businesses and a benefit of $6
million from the reduction of reserves in 2002 due to favorable resolution of
environmental claims related to predecessor businesses reserved for in prior
years.

2001 Versus 2000

       Operating loss not identified with the three separate business segments
for 2001 was $4 million greater than 2000, primarily due to higher charges to
increase reserves for the estimated costs to resolve legal and environmental
claims related to predecessor businesses, partially offset by higher income from
employee benefit plans related to predecessor businesses.


                                       42

<PAGE>


Equistar

<TABLE>
<CAPTION>
                                                                  Company's Share                      Reported by Equistar
                                                            ------------------------------------  -----------------------------
                                                              2002         2001         2000       2002(1)     2001      2000
                                                            --------   -----------   -----------  ---------  --------  --------
                                                           (Restated)* (Restated)*   (Restated)*
                                                                                            (Millions)
<S>                                                        <C>          <C>           <C>          <C>        <C>       <C>
(Loss) earnings on Equistar investment....................  $ (73)       $ (83)         $ 45       $ (246)    $ (283)    $ 153
</TABLE>
----------------
* The Company's financial statements have been restated as disclosed in Note 2
  to the Consolidated Financial Statements included in this Annual Report.

(1) Before cumulative effect of accounting change


2002 Versus 2001

       The Company recorded a loss from its investment in Equistar of $73
million in 2002 compared to a loss of $83 million in 2001. Equistar reported a
loss for 2002 of $246 million, before the cumulative effect of an accounting
change, compared to a loss of $283 million for 2001. Equistar's operating losses
in 2002 of $44 million were $55 million lower than the $99 million of operating
losses in the prior year. Equistar's operating losses in the prior year include
$33 million of goodwill amortization that was suspended on January 1, 2002 in
accordance with SFAS No. 142, and $22 million of plant closure costs related to
the shutdown of Equistar's Port Arthur, Texas plant. Operating income in the
petrochemical segment decreased by $129 million compared to the prior year,
while the polymer segment reported operating losses of $112 million lower than
those incurred in 2001. Equistar's expenses not allocated to its separate
business segments decreased by $72 million primarily due to the goodwill
amortization and plant closure costs incurred in 2001. Equistar's interest costs
increased by $13 million in 2002 compared to 2001.

       Operating income in the petrochemical segment of $146 million for 2002
decreased $129 million or 47% from the prior year as sales prices decreased more
than raw material costs, resulting in lower product margins in 2002 compared to
2001. The effect of the lower 2002 product margins was only partly offset by the
benefit of a 4% increase in sales volume, which was in line with industry demand
growth. Equistar's sales prices in 2002 averaged 11% lower than in 2001,
reflecting lower raw material costs and low demand growth coupled with excess
industry capacity. These lower sales prices were slightly offset by higher 2002
co-product propylene sales prices. Cost of sales decreased 6% compared to the
prior year, 2% less than the percent decrease in revenues. While the costs of
natural gas and natural gas liquid raw materials decreased from historically
high levels experienced in 2001, other raw material costs, such as heavy
liquids, did not decrease similarly.

       The operating loss in the polymer segment of $74 million for 2002
decreased $112 million compared to the operating loss of $186 million in 2001.
The $112 million improvement was due to higher polymer product margins and, to a
lesser extent, higher sales volume. Margins improved in 2002 compared to 2001,
as decreases in sales prices were less than the decreases in polymer raw
material costs. Sales prices decreased by 9% from 2001, partially offset by a 4%
increase in sales volume. Lower sales prices in 2002 reflected generally lower
raw material costs compared to 2001. Sales volume increased due to stronger
demand in 2002 compared to 2001. Cost of sales decreased 10% compared to the
prior year, or 4% more than the percent decrease in revenues. The decrease
during 2002 reflected lower raw material costs, primarily ethylene, and lower
energy costs, partly offset by the 4% increase in sales volume. Benchmark
ethylene prices were 16% lower and were only partly offset by a 3% increase in
benchmark propylene prices in 2002 compared to 2001.

2001 Versus 2000

       The Company recorded a loss from its investment in Equistar of $83
million in 2001 compared to income of $45 million in 2000. Equistar reported a
net loss for 2001 of $283 million compared to net income of $153 million for
2000. Operating profits were lower than the prior year in the petrochemical
segment. Equistar's polymer segment experienced operating losses similar to
those incurred in 2000. Equistar's expenses not allocated to its separate
business segments in 2001 increased $13 million from 2000 primarily due to $22
million of plant closure costs related to the shutdown of Equistar's Port
Arthur, Texas plant in 2001. Overall, lower demand and selling prices were only
partially offset by lower costs. Additionally, Equistar's interest costs
increased by $7 million in 2001 compared to 2000.

                                       43


<PAGE>


       Petrochemical segment operating profit for 2001 was 60% below the prior
year. Sales volume for this segment decreased by 12% from the prior year, while
the average selling price dropped 15% year over year. Cost of sales for this
segment decreased 19% compared to the prior year. The effect of the decrease in
sales volume and lower average raw material costs was partly offset by decreases
in co-product prices. Benchmark crude oil prices, which affect the cost of raw
materials, averaged 14% lower in 2001 compared to 2000, while benchmark prices
for co-product propylene averaged 23% lower in 2001 compared to 2000.


                                Interest Expense

<TABLE>
<CAPTION>
                                                               2002       2001      2000
                                                             --------   --------  --------
                                                                       (Millions)
       <S>                                                   <C>        <C>       <C>
       Interest expense, net...............................   $ 86       $ 82      $ 77
</TABLE>

       During 2002, interest expense, net of interest income, increased $4
million to $86 million from $82 million in the prior year. The $4 million
increase in interest expense was due to higher average debt levels throughout
the year compared to the prior year and the higher cost of debt due to the
Company's issuance of additional 9.25% Senior Notes described below in
"Liquidity and Capital Resources". Interest expense, net in 2001 was $82 million
versus $77 million in 2000, primarily due to higher debt levels throughout the
year and the Company's refinancing of debt in 2001, which included the issuance
of 9.25% Senior Notes.


                         Liquidity and Capital Resources

       The Company has historically financed its operations primarily through
cash generated from its operations and cash distributions from Equistar. Cash
generated from operations is to a large extent dependent on economic, financial,
competitive and other factors affecting the Company's businesses. The amount of
cash distributions received from Equistar is affected by Equistar's results of
operations and current and expected future cash flow requirements. The Company
has not received any cash distributions from Equistar since 2000 and it is
unlikely the Company will receive any cash distributions from Equistar in 2003.

       Cash provided by operating activities for the year ended December 31,
2002 was $84 million compared to $112 million provided in the year ended
December 31, 2001. The $28 million decrease was primarily due to movements in
trade receivables and trade accounts payable that were favorable to a lesser
extent during 2002 compared to the prior year ($128 million) and unfavorable
movements in other current assets compared to favorable movements in the prior
year ($53 million), partially offset by higher operating income before
depreciation and amortization ($58 million), movements in other long-term
liabilities that were unfavorable to a lesser extent during 2002 compared to the
prior year ($36 million, including $12 million proceeds from termination of
interest rate swaps), and favorable movements in inventories, accrued expenses
and other liabilities and taxes payable compared to unfavorable movements in the
prior year ($57 million). Various other changes resulted in a net favorable
movement compared to the prior year ($2 million).

       Cash used in investing activities in the year ended December 31, 2002 was
$70 million compared to $78 million used in 2001. The Company spent
approximately $71 million in 2002 for capital expenditures, down from $97
million in 2001. Also during 2002, the Company received $1 million in proceeds
from sales of Property, plant and equipment, a decrease of $18 million from the
$19 million in proceeds received in 2001, which included proceeds of $17 million
from the Research Center Sale Leaseback transaction more fully described in Note
4 to the Consolidated Financial Statements included in this Annual Report. There
were no cash distributions from Equistar in 2002 or 2001.

       Cash used in financing activities was $2 million in the year ended 2002
compared to $22 million used in 2001. Financing activities in 2002 included $33
million of net debt proceeds, while 2001 included $13 million of net debt
proceeds. Dividends paid to shareholders totaled $35 million in both years.

       In 2001, the Company's cash flows from operations increased to $112
million from $20 million in 2000. Aggressive efforts in 2001 to collect accounts
receivable, reduce raw materials inventory levels and extend vendor terms
resulted in cash generation of $144 million. Capital expenditures for 2001 were
$97 million, down from $110 million in 2000. There were no distributions from
Equistar in 2001, while $83 million was received during 2000. In 2000, the
Company paid $151 million in taxes and interest to settle certain issues
relating to the tax years 1986 through 1988. In addition, the Company utilized
$65 million in 2000 to repurchase a total of 3,500,000 shares of Common Stock,
representing 5% of the total shares outstanding at the beginning of 2000.

                                       44

<PAGE>

       Net debt (short-term and long-term debt less cash) at December 31, 2002
totaled $1.117 billion versus $1.084 billion at the end of 2001. At December 31,
2002, the Company had approximately $198 million of unused availability under
short-term uncommitted lines of credit and its five-year credit agreement (the
"Credit Agreement"). The Company's focus in 2003 is to sustain the benefits of
cost reduction efforts achieved to date, and manage working capital and capital
spending to levels deemed reasonable given the current state of business
performance. The Company believes these efforts, along with the borrowing
availability under the Credit Agreement, will be sufficient to fund the
Company's cash requirements.

       At March 19, 2003, the Company had $71 million outstanding ($60 million
of outstanding borrowings, and outstanding letters of credit of $11 million)
under the revolving loan portion of the Credit Agreement (the "Revolving Loans")
and, accordingly, had $104 million of unused availability under such facility at
March 19, 2003. In addition, the Company had $49 million outstanding under the
term loan portion of the Credit Agreement (the "Term Loans") at March 19, 2003.
Additionally, at March 19, 2003, the Company had unused availability under
short-term uncommitted lines of credit, other than the Credit Agreement, of $41
million. For a discussion of the covenants under the Credit Agreement, see
"Financing and Capital Structure."

Capital Expenditures

<TABLE>
<CAPTION>
                                                                     2002     2001     2000
                                                                    -------  -------  -------
                                                                            (Millions)
       <S>                                                          <C>      <C>      <C>
       Additions to property, plant and equipment..................  $ 71     $ 97    $ 110
</TABLE>

       Capital spending for 2002 was $71 million compared to depreciation and
amortization of $102 million. The 27% decrease in capital spending from 2001
reflects the Company's continued focus on optimization of its capital base.
Major expenditures included installation of a dredge and certain related
processing equipment at the mine in Mataraca, Paraiba, Brazil, and environmental
improvement projects at the Company's TiO[u]2 manufacturing locations in France
and the United States. In addition, expenditures included cost-reduction and
yield-improvement projects at various sites.

       Planned capital spending in 2003 is projected to be at a similar level to
2002.

       Capital spending for 2001 was $97 million compared to depreciation and
amortization of $110 million. The 12% decrease in capital spending from 2000
reflected the Company's focus on optimization of its capital base. Major
expenditures included continuation of projects begun in 2000, including design
and installation of a dredge and certain related processing equipment in
Mataraca, Paraiba, Brazil, and the design and construction of new TiO[u]2
packaging equipment, as well as environmental improvement projects at the
Company's TiO[u]2 manufacturing locations in France. In addition, expenditures
included cost reduction and yield improvement projects at various sites.

       Capital expenditures in 2000 totaled $110 million, which was similar to
1999 levels. Significant capital expenditures during 2000 included multi-year
projects, such as the design and construction of new packaging equipment at
several of the Company's TiO2 manufacturing facilities and the dredge project at
the Company's raw material mine in Mataraca, Paraiba, Brazil. Expenditures also
included various cost reduction and yield improvement projects in all of the
businesses.

Financing and Capital Structure

       In June 2002, the Company received approximately $100 million in net
proceeds ($102.5 million in gross proceeds) from the completion of an offering
by Millennium America of $100 million additional principal amount at maturity of
9.25% Senior Notes. The gross proceeds of the offering were used to repay all
outstanding borrowings at that time under the Company's Revolving Loans and to
repay $65 million outstanding under the Term Loans. During 2001, the Company
refinanced $425 million of borrowings and paid refinancing expenses of $11
million with the combined proceeds of the Credit Agreement, which provided a
$175 million revolving credit facility and $125 million in term loans, and the
issuance of $275 million aggregate principal amount of 9.25% Senior Notes by
Millennium America. The Company and Millennium America guarantee the obligations
under the Credit Agreement.

       The Credit Agreement contains various restrictive covenants and requires
that the Company meet certain financial performance criteria. The financial
covenants in the Credit Agreement include a Leverage Ratio and an Interest
Coverage Ratio. The Leverage Ratio is the ratio of total indebtedness to
cumulative EBITDA for the prior


                                       45

<PAGE>


four fiscal quarters, each as defined. The Interest Coverage Ratio is the ratio
of cumulative EBITDA for the prior four fiscal quarters to Net Interest Expense,
for the same period, each as defined. To permit the Company to be in compliance,
these covenants were amended in the fourth quarter of 2001 and again in the
second quarter of 2002. This second amendment was conditioned upon consummation
of the offering of $100 million additional principal amount of the 9.25% Senior
Notes and retirement of the Credit Agreement debt described above. Under the
covenants now in effect, the Company is required to maintain a Leverage Ratio of
no more than 7.25 to 1.00 for the fourth quarter of 2002, 5.75 to 1.00 for the
first quarter of 2003, 4.75 to 1.00 for the second quarter of 2003, 4.50 to 1.00
for the third and fourth quarters of 2003, and 4.00 to 1.00 for January 1, 2004
and thereafter, and an Interest Coverage Ratio of no less than 1.90 to 1.00 for
the fourth quarter of 2002, 2.25 to 1.00 for the first quarter of 2003, 2.50 to
1.00 for the second, third and fourth quarters of 2003, and 3.00 to 1.00 for
January 1, 2004 and thereafter. The covenants in the Credit Agreement also
limit, among other things, the ability of the Company and/or certain
subsidiaries of the Company to: (i) incur debt and issue preferred stock; (ii)
create liens; (iii) engage in sale/leaseback transactions; (iv) declare or pay
dividends on, or purchase, the Company's stock; (v) make restricted payments;
(vi) engage in transactions with affiliates; (vii) sell assets; (viii) engage in
mergers or acquisitions; (ix) engage in domestic accounts receivable
securitization transactions; and (x) enter into restrictive agreements. In the
event the Company sells certain assets as specified in the Credit Agreement, the
Term Loans must be prepaid with a portion of the net cash proceeds of such sale.
The obligations under the Credit Agreement are collateralized by: (1) a pledge
of 100% of the stock of the Company's existing and future domestic subsidiaries
and 65% of the stock of certain of the Company's existing and future foreign
subsidiaries, in both cases other than subsidiaries that hold immaterial assets
(as defined in the Credit Agreement); (2) all the equity interests held by the
Company's subsidiaries in Equistar and the La Porte Methanol Company (which
pledges are limited to the right to receive distributions made by Equistar and
the La Porte Methanol Company, respectively); and (3) all present and future
accounts receivable, intercompany indebtedness and inventory of the Company's
domestic subsidiaries, other than subsidiaries that hold immaterial assets.

       The Company was in compliance with all covenants under the Credit
Agreement at December 31, 2002. Compliance with these covenants is monitored
frequently in order to assess the likelihood of continued compliance. The
Company currently expects that it will be in compliance with these covenants at
March 31, 2003. However, the Company believes that it will not be in compliance
with certain of these financial covenants at June 30, 2003, unless economic and
business conditions improve significantly in the second quarter of 2003.
Accordingly, the Company is seeking a waiver or amendment to the Credit
Agreement, which it expects to obtain by June 30, 2003.

       The indenture governing the Company's $500 million aggregate principal
amount of 7.00% Senior Notes due November 15, 2006 and $250 million aggregate
principal amount of 7.625% Senior Debentures due November 15, 2026 allows the
Company to grant security on loans of up to 15% of Consolidated Net Tangible
Assets ("CNTA"), as defined, of Millennium America. Accordingly, based upon CNTA
and secured borrowing levels at December 31, 2002, any reduction in CNTA below
approximately $1.6 billion would decrease the Company's availability under the
Revolving Loans by 15% of any such reduction. CNTA was approximately $2.0
billion at December 31, 2002.

       The 9.25% Senior Notes were issued by Millennium America and are
guaranteed by the Company. The indenture under which the 9.25% Senior Notes were
issued contains certain covenants that limit, among other things, the ability of
the Company and/or certain subsidiaries of the Company to: (i) incur additional
debt; (ii) issue redeemable stock and preferred stock; (iii) create liens; (iv)
redeem debt that is junior in right of payment to the 9.25% Senior Notes; (v)
sell or otherwise dispose of assets, including capital stock of subsidiaries;
(vi) enter into arrangements that restrict dividends from subsidiaries; (vii)
enter into mergers or consolidations; (viii) enter into transactions with
affiliates; and (ix) enter into sale/leaseback transactions. In addition, this
indenture contains a covenant that would prohibit the Company from (i) paying
dividends or making distributions on its common stock; (ii) repurchasing its
common stock; and (iii) making other types of restricted payments, including
certain types of investments, if such restricted payments would exceed a
"restricted payments basket." The basket is reduced by the amount of each such
restricted payment and is increased by: (i) 50% of the Company's Cumulative Net
Income (as defined in such indenture) since July 1, 2001 (or is reduced by 100%
of its Cumulative Net Income if such amount is negative); (ii) the net cash
proceeds from the sale by the Company of its common stock to third parties; and,
(iii) 50% of any cash distributions received from Equistar. As of March 25,
2003, the date of filing of the original Annual Report on Form 10-K, and after
taking into consideration the $9 million dividend declared in the first quarter
of 2003 and the restatements and reclassification reflected in this Form 10-K/A,
the amount of the restricted payments basket was $11 million. The indenture also
requires the calculation of a Consolidated Coverage Ratio, defined as the ratio
of the aggregate amount of EBITDA, as defined, for the four most recent fiscal
quarters to Consolidated Interest Expense, as defined, for the four most recent
fiscal quarters. If this ratio were to cease to be greater than 2.00 to 1.00
(2.25 to 1.00 after June 15, 2003), there would be certain restrictions on the
Company's


                                       46

<PAGE>

ability to incur additional indebtedness and the Company's ability to pay
dividends, repurchase capital stock or make certain other restricted payments
would be limited. However, if the 9.25% Senior Notes were to receive
investment grade credit ratings from both S&P and Moody's and meet certain
other requirements as specified in the indenture, certain of these covenants
would no longer apply.

       At December 31, 2002, the Company was in compliance with all covenants in
the indentures governing the 9.25% Senior Notes, 7.00% Senior Notes and 7.625%
Senior Debentures.

       The Company is currently rated BB+ by S&P and Ba1 by Moody's. On March 7,
2003, S&P lowered the Company's credit rating from investment grade rating BBB-
to non-investment grade rating BB+ with a negative outlook, reflecting S&P's
concern regarding the Company's ability to generate the cash flow necessary to
substantially improve its financial profile during a period of economic
uncertainties and higher raw material costs. Moody's affirmed the Company's
non-investment grade rating on June 19, 2002, but revised its ratings outlook to
negative from stable, reflecting Moody's concern over the Company's cash flow
performance in the fourth quarter of 2001 and the first quarter of 2002.

       Millennium America had an indemnity agreement with Equistar pursuant to
which Millennium America could have been required under certain circumstances to
contribute to Equistar up to $750 million. This indemnity terminated upon the
closing of the purchase by Lyondell of Occidental's interest in Equistar. The
requirement under the December 1, 1997 asset transfer agreement to indemnify
Equistar with respect to the assets transferred to Equistar and the requirement
under the Equistar Partnership Agreement to make additional investments in
Equistar remain in effect to the same extent after Lyondell purchased
Occidental's interest in Equistar.

       The Company uses gold as a component in a catalyst in the Company's La
Porte, Texas facility. In April 1998, the Company entered into an agreement that
provides the Company with the right to use gold owned by a third party for a
five-year term. The agreement requires the Company to either deliver the gold to
the third party at the end of the term or pay for it at its then-current value.
As a result of a change in accounting for this agreement, the Company's
financial statements were restated as more fully described in Note 2 to the
Consolidated Financial Statements included in this Annual Report. The value of
the gold and the Company's obligation under this agreement at December 31, 2002
and at December 31, 2001 was $14 million and $11 million, respectively. Such
obligation at December 31, 2002 and 2001 is included in Other short-term
borrowings and Other long-term borrowings, respectively. The change in value of
the gold and the Company's obligation under this agreement, which is included in
Selling, development and administrative expense, for the year ended December 31,
2002 was a loss of $3 million and for the years ended December 31, 2001 and 2000
was not significant.

European Receivables Securitization Program

       Since March 2002, the Company has been transferring its interest in
certain European trade receivables to an unaffiliated third party as its basis
for issuing commercial paper under a revolving securitization arrangement
(annually renewable up to five years) with maximum availability of 70 million
euro, which is treated, in part, as a sale under GAAP. Accordingly, transferred
trade receivables that qualify as a sale, $61 million outstanding at December
31, 2002, are removed from the Company's Consolidated Balance Sheet. The Company
continues to carry its retained interest in a portion of the transferred assets
that do not qualify as a sale, $9 million at December 31, 2002, in Trade
receivables, net in its Consolidated Balance Sheet at amounts that approximate
net realizable value based upon the Company's historical collection rate for
these trade receivables. Unused availability under this arrangement at December
31, 2002 was 3 million euro. For the year ended December 31, 2002, cumulative
gross proceeds from this securitization arrangement were $213 million. Cash
flows from this securitization arrangement are reflected as operating activities
in the Consolidated Statements of Cash Flows. For the year ended December 31,
2002, the aggregate loss on sale associated with this arrangement was $2
million. Administration and servicing of the trade receivables under the
arrangement remains with the Company. Servicing liabilities associated with the
transaction are not significant.

Contractual Obligations

       In addition to the Company's long-term indebtedness, in the ordinary
course of business, the Company enters into contractual obligations to purchase
raw materials, utilities and services for fixed or minimum amounts and lease
arrangements for certain property, plant and equipment. Following is a schedule
that shows long-term debt, unconditional purchase obligations, lease commitments
and certain other contractual obligations as of December 31, 2002:


                                       47

<PAGE>


<TABLE>
<CAPTION>
                                           2003    2004    2005    2006    2007   Thereafter    Total
                                         -------  ------- ------- ------- ------ -----------   ------
                                        (Restated)*                                           (Restated)*
                                                                      (Millions)
       <S>                               <C>     <C>     <C>     <C>      <C>       <C>         <C>
       Long-term debt................... $   12   $    6  $   26  $  534  $    4     $   629    $ 1,211
       Other short-term borrowings......     14       --      --      --      --          --         14
       Operating leases.................     21       17      14      11      10          88        161
       VAM toll.........................     57       60      66      64      --          --        247
       Unconditional purchase
          obligations...................    327      238     248     122      78         654      1,667
                                         ------   ------  ------  ------  ------     -------    -------
          Total contractual obligations. $  431   $  321  $  354  $  731  $   92     $ 1,371    $ 3,300
                                         ======   ======  ======  ======  ======     =======    =======
</TABLE>

       ----------------
       * The Company's financial statements have been restated as disclosed in
       Note 2 to the Consolidated Financial Statements included in this Annual
       Report.

       The Company is currently rated BB+ by S&P and Ba1 by Moody's. On March 7,
2003, S&P lowered the Company's credit rating from investment grade rating BBB-
to non-investment grade rating BB+ with a negative outlook, reflecting S&P's
concern regarding the Company's ability to generate the cash flow necessary to
substantially improve its financial profile during a period of economic
uncertainties and higher raw material costs. Moody's affirmed the Company's
non-investment grade rating on June 19, 2002, but revised its ratings outlook to
negative from stable, reflecting Moody's concern over the Company's cash flow
performance in the fourth quarter of 2001 and the first quarter of 2002. The
Company could be required to cash collateralize the mark-to-market positions of
certain derivative instruments dependent upon the market value of these
instruments. Based on the current market value of these instruments, the Company
would not be required to place any funds on deposit with the counterparty to
these transactions. Furthermore, the Company will also provide a $2.5 million
letter of credit in accordance with a real estate lease. Obtaining this letter
of credit will result in an equal reduction of availability under the revolving
credit portion of the Credit Agreement.


                      Environmental and Litigation Matters

       Certain Company subsidiaries have been named as defendants, PRPs, or
both, in a number of environmental proceedings associated with waste disposal
sites or facilities currently or previously owned, operated or used by the
Company's current or former subsidiaries or their predecessors, some of which
are on the Superfund National Priorities List of the EPA or similar state lists.
These proceedings seek cleanup costs, damages for personal injury or property
damage, or both. Based upon third-party technical reports, the projections of
outside consultants or outside counsel, or both, the Company has estimated its
individual exposure at these sites to be between $0.025 million and $26.7
million. In the most significant of these proceedings, a subsidiary is named as
one of four PRPs at the Kalamazoo River Superfund Site in Michigan. The site
involves contamination of river sediments and floodplain soils with
polychlorinated biphenyls. Originally commenced on December 2, 1987 in the
United States District Court for the Western District of Michigan as Kelly v.
Allied Paper, Inc. et al., the matter was stayed and is being addressed under
the Comprehensive Environmental Response, Compensation and Liability Act. In
October 2000, the KRSG, of which one of the Company's subsidiaries is a member,
submitted to the State of Michigan a Draft Study, which evaluated a number of
remedial options and recommended a remedy involving the stabilization of several
miles of river bank and the long-term monitoring of river sediments at a total
collective cost of approximately $73 million. During 2001, additional sampling
activities were performed in discrete parts of the river. At the end of 2001,
the EPA took responsibility for the site at the request of the State. While the
State has submitted comments to the EPA on the Draft Study, the EPA has yet to
similarly comment. The Company has estimated its liability at this site based
upon the KRSG's recommended remedy. Guidance as to how the EPA will likely
proceed with further evaluation and remediation, if required, at the Kalamazoo
site is expected by early 2004. At that time, the Company's estimate of its
liability will be reevaluated. The Company's ultimate liability for the
Kalamazoo site will depend on many factors that have not yet been determined,
including the ultimate remedy selected by the EPA, the number and financial
viability of the other members of the KRSG as well as of other PRPs outside the
KRSG, and the determination of the final allocation among the members of the
KRSG and other PRPs.

       In addition, the Company and various of its subsidiaries are defendants
in a number of pending legal proceedings relating to present and former
operations. These include proceedings alleging injurious exposure of the
plaintiffs to various chemicals and other materials on the premises of, or
manufactured by, the Company's current and former subsidiaries; cases alleging
historic premises-based exposure to asbestos-containing materials at various
worksites; and cases alleging personal injury, property damage and remediation
costs associated with use of the lead

                                       48

<PAGE>


pigment in paint. Typically, such proceedings involve claims made by many
plaintiffs against many defendants in the chemical industry.

       With respect to the non-environmental legal proceedings referred to
above, the Company believes that it has valid defenses and intends to defend
them vigorously. However, litigation is subject to uncertainties and the Company
is unable to guarantee the outcome of these proceedings. As discussed in more
detail under "Critical Accounting Policies -- Environmental Liabilities and
Legal Matters" below, the Company believes that the reasonably probable and
estimable range of potential liability for such environmental and litigation
contingencies collectively, which primarily relates to environmental remediation
activities, is between $67 million and $95 million and has accrued $71 million
as of December 31, 2002. Expense associated with these contingencies included in
Selling, development and administrative expense totaled $15 million and $6
million in 2001 and 2000, respectively. These expenses resulted from increases
in reserves for the estimated costs to resolve legal and environmental claims
related to predecessor businesses. Included in 2002 is a benefit of $6 million
from a reduction of reserves due to favorable resolution of certain
environmental claims related to predecessor businesses reserved for in prior
years. The Company has not accrued any liabilities for any lead-based paint and
lead pigment litigation. The Company expects that cash expenditures related to
these potential liabilities will not be concentrated in any single year and,
based on information currently available, the Company does not expect the
outcome of these proceedings, either individually or in the aggregate, will have
a material adverse effect on the consolidated financial position, results of
operations or cash flows of the Company. See "Environmental Matters" in Item I,
"Legal Proceedings" in Item 3 and Note 16 to the Consolidated Financial
Statements included in this Annual Report.


                                    Inflation

       The financial statements are presented on a historical cost basis. While
the United States inflation rate has been modest for several years, the Company
operates in many international areas with both inflation and currency
instability. The ability to pass on inflation costs is an uncertainty due to
general economic conditions and competitive situations.

                            Foreign Currency Matters

       The functional currency of each of the Company's non-United States
operations (principally, the Company's TiO[u]2 operations in the United Kingdom,
France, Brazil and Australia) is the local currency. Consolidated Shareholders'
equity increased approximately $27 million in 2002 and decreased approximately
$19 million and $46 million in 2001 and 2000, respectively, as a result of
translating subsidiary financial statements into US dollars. Future events,
which may significantly increase or decrease the risk of future movements in
foreign currencies in which the Company conducts business, cannot be predicted.

       The Company generates revenue from export sales and revenue from
operations conducted outside the United States that may be denominated in
currencies other than the relevant functional currency. Revenues earned outside
the United States accounted for 59%, 54% and 51% of total revenues in 2002, 2001
and 2000, respectively. These revenues were denominated in US dollars as well as
other currencies.

       Net foreign currency transactions aggregated gains of $3 million in 2002
and losses of $7 million and $4 million in 2001 and 2000, respectively.


                  Derivative Instruments and Hedging Activities

       As more fully described in Note 10 to the Consolidated Financial
Statements included in this Annual Report, the Company is exposed to market
risk, such as changes in currency exchange rates, interest rates and commodity
pricing, and manages these exposures by selectively entering into derivative
transactions pursuant to the Company's policies for hedging practices. The
counterparties to the derivative financial instruments entered by the Company
are high-credit-quality institutions. The Company does not hold or issue
derivative financial instruments for speculative or trading purposes.

       Derivative contracts outstanding at December 31, 2002 were as follows:


                                       49


<PAGE>


                   Foreign Currency Forward Contracts
<TABLE>
<CAPTION>
                                         Notional Amount        Unrealized         Weighted Average
                                       (US$ Equivalent)(1)    Gain/(Loss)(2)       Settlement Price
                                       ---------------------  ----------------  ------------------------
                                               (Dollars, in millions)
   <S>                                <C>                     <C>                    <C>
   Less than 1 year
   Receive AUS$/Pay US$.............           $ 49                $  2              0.5397 US$/AUS$
   Receive US$/Pay euro.............             57                  (2)             1.0096 US$/euro
   Receive GBP/Pay euro.............            132                  (2)             0.6437 GBP/euro
   Receive GBP/Pay JPY..............              1                  --             193.1000 JPY/GBP
   Receive US$/Pay GBP..............             13                  (1)              0.6450 GBP/US$
   Receive GBP/Pay US$..............              4                  --               1.5847 US$/GBP
   Receive euro/Pay US$.............              5                  --              1.0300 US$/euro
   Receive AUS$/Pay NZD.............              2                  --              1.1233 NZD/AUS$
   Receive AUS$/Pay JPY.............              1                  --             67.5000 JPY/AUS$
                                                                   -----
                                                                   $ (3)
                                                                   =====
</TABLE>
--------------
  (1) US$ equivalent was determined based upon currency exchange rates at
December 31, 2002.
  (2) As of December 31, 2002.


                        Commodity Derivative Instruments

<TABLE>
<CAPTION>
                                                                        Unrealized           Weighted Average
                                                 Notional Amount      Gain/(Loss)(1)         Settlement Price
                                               --------------------  ------------------ -------------------------
                                                       (Dollars, in millions)
<S>                                           <C>                       <C>                 <C>
Less than 1 year
                                                                                             Pay $4.70/mmbtu, receive
Natural Gas Swap Contracts.................       $ 1                     $ --               Henry Hub-Gas Daily

1-2 Years
                                                                                             Pay $5.01/mmbtu, receive
Natural Gas Swap Contracts.................        14                      (1)               NYMEX settlement
                                                                          -----
   Total                                                                  $(1)
                                                                          =====
</TABLE>

--------------
  (1) As of December 31, 2002.



                               Interest Rate Swaps

<TABLE>
<CAPTION>
                                                                        Unrealized           Weighted Average
                                                 Notional Amount      Gain/(Loss)(1)          Pay/Receive
                                               --------------------  ------------------ -------------------------
                                                       (Dollars, in millions)
<S>                                           <C>                       <C>                 <C>
Less than 1 year
                                                                                             Pay 1.71%, receive six
Interest Rate Swap Contract................       $  50                   $ --               month LIBOR

3-4 Years
                                                                                             Pay six month LIBOR plus
Interest Rate Swap Contracts...............         200                     4                3.18%, receive 7%
                                                                          -----
   Total                                                                  $ 4
                                                                          =====
</TABLE>
--------------
  (1) As of December 31, 2002.


                                       50

<PAGE>


       Non-Derivative Financial Instruments and Other Market-Related Risks

       See Note 10 to the Consolidated Financial Statements included in this
Annual Report.


                          Critical Accounting Policies

       The preparation of the Company's financial statements requires management
to apply generally accepted accounting principles to the Company's specific
circumstances and make estimates and assumptions that affect the reported amount
of assets and liabilities at the date of the financial statements, the
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

       The Company considers the following accounting policies to be critical to
the preparation of the Company's financial statements:

       Environmental Liabilities and Legal Matters -- The Company periodically
reviews matters associated with potential environmental obligations and legal
matters brought against the Company, its subsidiaries and predecessor companies
and evaluates, accounts for, reports and discloses these matters in accordance
with SFAS No. 5, "Accounting for Contingencies" ("SFAS No. 5"). In order to make
estimates of liabilities, the Company's evaluation of and judgments about
environmental obligations and legal matters are based upon the individual facts
and circumstances relevant to the particular matters and include advice from
legal counsel, if applicable. The Company establishes reserves by recording
charges to its results of operations for loss contingencies that are considered
probable (the future event or events are likely to occur) and for which the
amount of loss can be reasonably estimated. When a loss contingency is
considered probable but the amount of loss can only be reasonably estimated
within a range, the Company records a reserve for the loss contingency at the
low end of the range, at minimum, but also applies judgment as to whether any
particular amount within the range is a better estimate than any other amount.
If an amount within the range is considered to be a better estimate of the loss,
the Company records this amount as its reserve for the loss contingency.
Reserves are exclusive of claims against third parties, except where the amount
of liability or contribution by such other parties, including insurance
companies, has been agreed, and are not discounted. Loss contingencies that are
not considered probable or that cannot be reasonably estimated are disclosed in
the Notes to the Consolidated Financial Statements, either individually or in
the aggregate, if there is a reasonable possibility that a loss may be incurred
and if the amount of possible loss could have a significant impact on the
Company's consolidated financial position, results of operations or cash flows.
Loss contingencies that are considered remote (the chance of the future event or
events occurring is slight) are not typically disclosed unless the Company
believes the potential loss to be extremely significant to its consolidated
financial position and results of operations.

       Certain Company subsidiaries have been named as defendants, PRPs, or
both, in a number of environmental proceedings associated with waste disposal
sites or facilities currently or previously owned, operated or used by the
Company's current or former subsidiaries or their predecessors, some of which
are on the Superfund National Priorities List of the EPA or similar state lists.
These proceedings seek cleanup costs, damages for personal injury or property
damage, or both. Based upon third-party technical reports, the projections of
outside consultants or outside counsel, or both, the Company has estimated its
individual exposure at these sites to be between $0.025 million and $26.7
million. In the most significant of these proceedings, a subsidiary is named as
one of four PRPs at the Kalamazoo River Superfund Site in Michigan. The site
involves contamination of river sediments and floodplain soils with
polychlorinated biphenyls. Originally commenced on December 2, 1987 in the
United States District Court for the Western District of Michigan as Kelly v.
Allied Paper, Inc. et al., the matter was stayed and is being addressed under
the Comprehensive Environmental Response, Compensation and Liability Act. In
October 2000, the KRSG, of which one of the Company's subsidiaries is a member,
submitted to the State of Michigan a Draft Study, which evaluated a number of
remedial options and recommended a remedy involving the stabilization of several
miles of river bank and the long-term monitoring of river sediments at a total
collective cost of approximately $73 million. During 2001, additional sampling
activities were performed in discrete parts of the river. At the end of 2001,
the EPA took responsibility for the site at the request of the State. While the
State has submitted comments to the EPA on the Draft Study, the EPA has yet to
similarly comment. The Company has estimated its liability at this site based
upon the KRSG's recommended remedy. Guidance as to how the EPA will likely
proceed with further evaluation and remediation, if required, at the Kalamazoo
site is expected by early 2004. At that time, the Company's estimate of its
liability will be reevaluated. The Company's ultimate liability for the
Kalamazoo site will depend on many factors that have not yet been determined,
including the ultimate remedy selected by the EPA, the number and financial
viability of the other members of the KRSG as well as of other PRPs outside the
KRSG, and the determination of the final allocation among the members of the
KRSG and other PRPs.

                                       51
<PAGE>


       The Company believes that the reasonably probable and estimable range of
potential liability for environmental and other legal contingencies,
collectively, but which primarily relates to environmental remediation
activities, is between $67 million and $95 million and has accrued $71 million
as of December 31, 2002. Expense associated with these contingencies included in
Selling, development and administrative expense totaled $15 million and $6
million in 2001 and 2000, respectively. These expenses resulted from increases
in reserves for the estimated costs to resolve legal and environmental claims
related to predecessor businesses. Included in 2002 is a benefit of $6 million
from a reduction of reserves due to favorable resolution of certain
environmental claims related to predecessor businesses reserved for in prior
years. The Company expects that cash expenditures related to these potential
liabilities will be made over a number of years, and will not be concentrated in
any single year. This accrual also reflects the fact that certain Company
subsidiaries have contractual obligations to indemnify other parties against
certain environmental and other liabilities. For example, the Company agreed as
part of its Demerger from Hanson to indemnify Hanson and certain of its
subsidiaries against certain of such contractual indemnification obligations,
and Millennium Petrochemicals agreed as part of the December 1, 1997 formation
of Equistar to indemnify Equistar for certain liabilities related to the assets
contributed by Millennium Petrochemicals to Equistar in excess of $7 million,
which threshold was exceeded in 2001. The terms of these indemnification
agreements do not limit the maximum potential future payments to the indemnified
parties. The maximum amount of future indemnification payments is dependent upon
many factors and is not practicable to estimate.

       Due to the uncertainties involved, the Company is unable to predict the
outcome of lead-based paint and lead pigment litigation, the number or nature of
possible future claims and proceedings, or the effect that any legislation
and/or administrative regulations may have on the Company or its subsidiaries.
In addition, management cannot reasonably estimate the scope or amount of the
costs and potential liabilities related to such litigation, or any such
legislation and regulations. The Company has not accrued any liabilities for
such litigation. However, based upon, among other things, the outcome of such
litigation to date, including the dismissal of most of the over 50 lawsuits
brought in recent years, management does not currently believe that the costs or
potential liabilities ultimately determined to be attributable to the Company
arising out of such litigation will have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company. See Note 16 to the Consolidated Financial Statements included in this
Annual Report for additional information on the Company's loss contingencies.

       Goodwill -- Goodwill represents the excess of the purchase price over the
fair value of the net assets of acquired companies. Through December 31, 2001,
goodwill was amortized using the straight-line method over 40 years in
accordance with generally accepted accounting principles, and management
evaluated goodwill for impairment based on the anticipated future cash flows
attributable to its operations in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of"
("SFAS No. 121"). Such expected cash flows, on an undiscounted basis, were
compared to the carrying value of the tangible and intangible assets, and if
impairment was indicated, the carrying value of goodwill was adjusted. In the
opinion of management, no impairment of goodwill existed at December 31, 2001
under SFAS No. 121. On January 1, 2002, the Company adopted SFAS No. 142,
"Goodwill and Intangible Assets" ("SFAS No. 142") which applies to all goodwill
and intangible assets acquired in a business combination. Under this new
standard, all goodwill, including goodwill acquired before initial application
of the standard, is not amortized but must be tested for impairment at least
annually at the reporting unit level, as defined in the standard. Accordingly,
the Company reported a charge for the cumulative effect of a change in
accounting principle of $275 million in the first quarter of 2002 to write off
goodwill related to its Acetyls business. Also in accordance with SFAS No. 142,
Equistar reported an impairment of goodwill in the first quarter of 2002. The
write-off at Equistar required an adjustment of $30 million to reduce the
carrying value of the Company's investment in Equistar to its approximate
proportional share of Equistar's Partners' capital. The Company reported this
adjustment as a charge for the cumulative effect of a change in accounting
principle. In the opinion of management, no further adjustment to the carrying
value of goodwill of $106 million is required at December 31, 2002 under SFAS
No. 142. Amortization expense for the Company's goodwill was $13 million for
each of the years 2001 and 2000. Additionally, the Company's share of
amortization expense reported by Equistar for its goodwill, included in Equity
in (loss) earnings of Equistar, was $10 million for each of the years 2001 and
2000.

       Equity Interest in Equistar -- The Company has evaluated the carrying
value of its investment in Equistar at December 31, 2002 using assumptions that
anticipate a long-term holding value for the Equistar investment based upon
anticipated future cash flows. Valuation of the Equistar investment under a
current sale scenario could result in a different value. As described in Equity
Interest in Equistar in Item 1 in this Annual Report, Occidental sold its 29.5%
interest in Equistar to Lyondell on August 22, 2002. The value of this
transaction was based on facts and circumstances significantly different from
those surrounding the Company's interest in Equistar and therefore such

                                       52

<PAGE>


value cannot be viewed to represent similar value for the Company's investment
in Equistar. The carrying value of the Company's investment in Equistar at
December 31, 2002 and 2001 was $563 million and $677 million, respectively.

       Income Taxes -- The Company accounts for income taxes using the liability
method under SFAS No. 109, "Accounting for Income Taxes". This method generally
provides that deferred tax assets and liabilities, computed using enacted
marginal tax rates of the respective tax jurisdictions, be recognized for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities and expected benefits of utilizing net
operating loss carryforwards. The Company periodically assesses the likelihood
of realization of deferred tax assets and with respect to net operating loss
carryforwards, prior to expiration, by considering the availability of taxable
income in prior carryback periods, the scheduled reversal of deferred tax
liabilities, certain distinct tax planning strategies, and projected future
taxable income. If it is considered to be more likely than not that the deferred
tax assets will not be realized, a valuation allowance is established against
some or all of the deferred tax assets. The Company's net deferred tax
liabilities (net of deferred tax assets and valuation allowances) were $337
million and $373 million at December 31, 2002 and 2001, respectively. See
"Income Taxes" for additional information on the Company's deferred taxes.

       The Company periodically assesses tax exposures and establishes or
adjusts estimated reserves for probable assessments by the Internal Revenue
Service ("IRS") or other taxing authorities. Such reserves represent an
estimated provision for taxes ultimately expected to be paid.

       Certain of the income tax returns of the Company's domestic and foreign
subsidiaries are currently under examination by the IRS, Inland Revenue and
various foreign and state tax authorities. In many cases, these audits result in
the examining tax authority issuing proposed assessments. In the United States,
IRS audits for tax years prior to 1989 have been settled. The Company made
payment of $151 million of tax and interest to the IRS in 2000 to settle certain
issues relating to the tax years 1986 through 1988. Additionally, the IRS has
concluded its examinations of the Company's Federal income tax returns for 1989
through 1996 and during 2002, the Company negotiated a settlement with the IRS
with respect to the audit issues relating to the Company's Federal income tax
returns for the years 1989 through 1992. The Company has estimated the payment
of tax and interest to be made to the IRS in 2003 under this settlement and has
included such estimate in Income taxes payable. In connection with the 1993
through 1996 examination, the IRS has issued proposed assessments that challenge
certain of the Company's tax positions. The Company believes that its tax
positions comply with applicable tax law and it intends to defend its positions
through the IRS appeals process. The Company believes it has adequately provided
for any probable outcome related to these matters, and does not anticipate any
material earnings impact from their ultimate settlement or resolution. However,
if the IRS positions on certain issues are upheld after all the Company's
administrative and legal options are exhausted, a material impact on the
Company's earnings and cash flows could result. The IRS examination for the
years subsequent to 1996 will commence in early 2003. See Notes 8 and 16 to the
Consolidated Financial Statements included in this Annual Report for additional
information on the Company's income taxes and related loss contingencies.

       Retirement-Related Benefits -- The Company determines its benefit
obligations and net periodic benefit costs for its defined benefit pension plans
and its other postretirement benefit plans using actuarial models required by
SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS No. 87") and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
respectively. These models use an approach that generally recognizes individual
events like plan amendments and changes in actuarial assumptions such as
discount rates, rate of compensation increases, inflation, medical costs and
mortality over the service lives of the employees in the plan. The
market-related value of plan assets, a calculated value that recognizes changes
in the fair value of plan assets over a five-year period, is utilized to
determine the Company's benefit obligations and net periodic benefit cost.

       The Company evaluates the appropriateness of retirement-related benefit
plan assumptions annually. Some of the more significant assumptions used to
determine the Company's benefit obligations and net periodic benefit costs are
the expected rate of return on plan assets, the discount rate, the rate of
compensation increases, and healthcare cost trend rates.

       To develop its expected return on plan assets, the Company uses long-term
historical actual return information, the mix of investments that comprise plan
assets, and future estimates of long-term investment returns by reference to
external sources. The discount rate assumptions reflect the rates available on
high-quality fixed-income debt instruments on December 31 of each year. The rate
of compensation increase is determined by the

                                       53

<PAGE>

Company based upon its long-term plans for such increases. The Company reviews
external data and its own historical trends for health care costs to determine
the health care cost trend rates.

       At December 31 of each year, if any of the Company's retirement-related
plans is underfunded and requires adjustment to establish an additional minimum
liability in accordance with SFAS No. 87, an adjustment is first made to
establish an intangible asset to the extent of any unrecognized amount of prior
service cost for the given plan and then an equity adjustment is included in
Other comprehensive loss for the remaining amount of the required minimum
liability. This additional minimum liability is calculated and adjusted, if
necessary, annually through the Company's Consolidated Balance Sheet and has no
immediate impact on the Company's Consolidated Statement of Operations.

       Due to the reduction of rates on high-quality fixed income debt
instruments, lowered expectations regarding long-term investment returns, and
the Company's long-term plans for compensation increases, the Company reduced
the discount rate, the expected return on plan assets and the rate of
compensation increases at December 31, 2002. The weighted average discount rate,
the expected return on plan assets, and the rate of compensation increase
assumptions at December 31, 2002 and 2001 were 6.35% and 7.27%; 8.34% and 8.87%;
and 3.52% and 4.23%, respectively.

       Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The assumed healthcare cost trend
rate used in measuring the healthcare portion of the postretirement benefit
obligation at December 31, 2002 was 9.0% for 2003, declining gradually to 5.5%
for 2010 and thereafter. A 1% increase or decrease in assumed health care cost
trend rates would affect service and interest components of postretirement
health care benefit costs by less than $1 million in each of the years ended
December 31, 2002 and 2001. The effect on the accumulated postretirement benefit
obligation would be $4 million at each of December 31, 2002 and 2001.

       See "Pension Assets and Equity" and Note 12 to the Consolidated Financial
Statements included in this Annual Report for other information related to the
Company's retirement-related benefits.


                         Recent Accounting Developments

       See the discussion under the caption "Recent Accounting Developments" in
Note 1 to the Consolidated Financial Statements included in this Annual Report.

Item 7A.      Quantitative and Qualitative Disclosures about Market Risk

       See Note 10 to the Consolidated Financial Statements included in this
Annual Report for discussion of the Company's management of foreign currency
exposure, commodity price risk and interest rate risk through its use of
derivative instruments and hedging activities and "Derivative Instruments and
Hedging Activities" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in this Annual Report.


                                       54


 <PAGE>

Item 8.  Financial Statements and Supplementary Data


                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
MILLENNIUM CHEMICALS INC.:


       In our opinion, the consolidated balance sheets and the related
consolidated statements of operations, cash flows, and changes in shareholders'
equity present fairly, in all material respects, the financial position of
Millennium Chemicals Inc. and its subsidiaries (the "Company") at December 31,
2002 and 2001, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) on page 102 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, 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 our opinion.

       As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for certain domestic inventories in
2002.

       As discussed in Note 1 to the consolidated financial statements,
effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Accounting for Goodwill and Other Intangible Assets".

       As discussed in Note 2 to the consolidated financial statements, the
Company has restated its financial statements for the years ending December 31,
2002, 2001 and 2000.


PricewaterhouseCoopers LLP
Florham Park, NJ
January 30, 2003, except for the impact of restatement in Notes 1, 2, 8, 9, 12,
14, 17, 18 and 19, as to which date is November 12, 2003


                                      55



 <PAGE>

                            MILLENNIUM CHEMICALS INC.
                           CONSOLIDATED BALANCE SHEETS
                          (Millions, except share data)


<TABLE>
<CAPTION>
                                                                                         As of December 31,
                                                                                   ------------------------------
                                                                                       2002            2001
                                                                                   --------------  --------------
                                                                                    (Restated -     (Restated -
                                      ASSETS                                        See Note 2)     See Note 2)
<S>                                                                                <C>             <C>
Current assets
   Cash and cash equivalents....................................................   $         125   $         114
   Trade receivables, net.......................................................             210             215
   Inventories..................................................................             406             399
   Other current assets.........................................................              78              61
                                                                                   -------------   -------------
     Total current assets.......................................................             819             789
Property, plant and equipment, net..............................................             862             880
Investment in Equistar..........................................................             563             677
Other assets....................................................................              46             238
Goodwill........................................................................             106             381
                                                                                   -------------   -------------
     Total assets...............................................................   $       2,396   $       2,965
                                                                                   =============   =============

                  LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities
   Notes payable................................................................   $           4   $           4
   Other short-term borrowings..................................................              14              --
   Current maturities of long-term debt.........................................              12              11
   Trade accounts payable.......................................................             274             256
   Income taxes payable.........................................................              44               7
   Accrued expenses and other liabilities.......................................             127             104
                                                                                   -------------   -------------
     Total current liabilities..................................................             475             382
Long-term debt..................................................................           1,212           1,172
Other long-term borrowings......................................................              --              11
Deferred income taxes...........................................................             337             373
Other liabilities...............................................................             388             516
                                                                                   -------------   -------------
     Total liabilities..........................................................           2,412           2,454
                                                                                   -------------   -------------
Commitments and contingencies (Note 16)
Minority interest...............................................................              19              21
Shareholders' (deficit) equity
   Preferred stock (par value $.01 per share, authorized 25,000,000 shares,
     none issued and outstanding)...............................................              --              --
   Common stock (par value $.01 per share, authorized 225,000,000 shares;
     issued 77,896,586 shares in 2002 and 2001, respectively)...................               1               1
   Paid in capital..............................................................           1,297           1,299
   Accumulated deficit..........................................................            (776)           (408)
   Cumulative other comprehensive loss..........................................            (299)           (136)
   Treasury stock, at cost (14,766,279 and 14,594,614 shares in 2002 and 2001,
     respectively)..............................................................            (275)           (283)
   Deferred compensation........................................................              17              17
                                                                                   -------------   -------------
     Total shareholders' (deficit) equity.......................................             (35)            490
                                                                                   -------------   -------------
       Total liabilities and shareholders' (deficit) equity.....................   $       2,396   $       2,965
                                                                                   =============   =============
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                       56



 <PAGE>


                            MILLENNIUM CHEMICALS INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                        (Millions, except per share data)


<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                             ------------------------------------
                                                                                2002        2001         2000
                                                                             ----------- ------------ -----------
                                                                             (Restated - (Restated -  (Restated -
                                                                              See Note 2) See Note 2)  See Note 2)

<S>                                                                          <C>         <C>          <C>
Net sales..................................................................  $    1,554  $     1,590   $    1,793
Operating costs and expenses
   Cost of products sold...................................................       1,234        1,261       1,264
   Depreciation and amortization...........................................         102          110         113
   Selling, development and administrative expense.........................         138          169         215
   Reorganization and plant closure costs..................................          --           36          --
                                                                             ----------  -----------  ----------
     Operating income......................................................          80           14         201
Interest expense...........................................................         (90)         (85)        (80)
Interest income............................................................           4            3           3
(Loss) earnings on Equistar investment.....................................         (73)         (83)         45
Other (expense) income, net................................................          (1)           1          14
                                                                             ----------  -----------  ----------
(Loss) income before income taxes and minority interest....................         (80)        (150)        183
Benefit from (provision for) income taxes..................................          58          100         (65)
                                                                             ----------  -----------  ----------
(Loss) income before minority interest and cumulative effect of
   accounting change.......................................................         (22)         (50)        118
Minority interest..........................................................          (6)          (4)         (7)
                                                                             ----------  -----------  ----------
(Loss) income before cumulative effect of accounting change................         (28)         (54)        111
Cumulative effect of accounting change.....................................        (305)          --          --
                                                                             ----------  -----------  ----------
Net (loss) income..........................................................  $     (333) $       (54) $      111
                                                                             ==========  ===========  ==========
Basic (loss) earnings per share:
   Before cumulative effect of accounting change...........................  $    (0.44) $     (0.85) $     1.73
   From cumulative effect of accounting change.............................       (4.80)         --           --
                                                                             ----------  -----------  ----------
   After cumulative effect of accounting change............................  $    (5.24) $     (0.85) $     1.73
                                                                             ==========  ===========  ==========
Diluted (loss) earnings per share:
   Before cumulative effect of accounting change...........................  $    (0.44) $     (0.85) $     1.72
   From cumulative effect of accounting change.............................       (4.80)         --           --
                                                                             ----------  -----------  ----------
   After cumulative effect of accounting change............................  $    (5.24) $     (0.85) $     1.72
                                                                             ==========  ===========  ==========
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                    57


 <PAGE>


                            MILLENNIUM CHEMICALS INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Millions)

<TABLE>
<CAPTION>

                                                                                    Year Ended December 31,
                                                                               ----------------------------------
                                                                                 2002        2001        2000
                                                                               ----------  ---------  -----------
                                                                               (Restated-  (Restated-   (Restated-
                                                                               See Note 2) See Note 2)  See Note 2)
<S>                                                                                <C>        <C>         <C>
Cash flows from operating activities:
   Net (loss) income.........................................................      $(333)     $ (54)      $ 111
   Adjustments to reconcile net (loss) income to net cash provided by
     operating activities:
       Cumulative effect of accounting change................................        305         --          --
       Write-off of assets related to plant closure..........................         --         10          --
       Depreciation and amortization.........................................        102        110         113
       Deferred income tax (benefit) provision...............................        (35)       (68)         41
       Non-cash income tax benefit...........................................        (22)       (42)         --
       Restricted stock amortization and adjustments, net....................         --          1          (6)
       Loss (earnings) on Equistar investment...............................          73         83         (45)
       Minority interest.....................................................          6          4           7
       Other, net............................................................          5         --          --
       Changes in assets and liabilities:
         Decrease (increase) in trade receivables............................          7         83         (52)
         Decrease (increase) in inventories..................................          4         (3)        (34)
         (Increase) decrease in other current assets.........................        (23)        30          24
         Increase in other assets............................................        (16)       (19)        (18)
         Increase in trade accounts payable..................................         12         64          19
         Increase (decrease) in accrued expenses and other liabilities and
           income taxes payable..............................................         15        (35)        (93)
         Decrease in other liabilities.......................................        (16)       (52)        (47)
                                                                                   -----      -----       -----
     Cash provided by operating activities...................................         84        112          20
                                                                                   -----      -----       -----
Cash flows from investing activities:
   Capital expenditures......................................................        (71)       (97)       (110)
   Distributions from Equistar...............................................         --         --          83
   Proceeds from sales of property, plant & equipment........................          1         19           4
                                                                                   -----      -----       -----
     Cash used in investing activities.......................................        (70)       (78)        (23)
                                                                                   -----      -----       -----
Cash flows from financing activities:
   Dividends to shareholders.................................................        (35)       (35)        (35)
   Repurchases of common stock...............................................         --         --         (65)
   Proceeds from long-term debt..............................................        302        783         311
   Repayment of long-term debt...............................................       (272)      (736)       (187)
   Increase (decrease) in notes payable......................................          3        (34)        (17)
                                                                                   -----      -----       -----
     Cash (used in) provided by financing activities.........................         (2)       (22)          7
                                                                                   -----      -----       -----
Effect of exchange rate changes on cash......................................         (1)        (5)         (7)
                                                                                   -----      -----       -----
Increase (decrease) in cash and cash equivalents.............................         11          7          (3)
Cash and cash equivalents at beginning of year...............................        114        107         110
                                                                                   -----      -----       -----
Cash and cash equivalents at end of year.....................................      $ 125      $ 114       $ 107
                                                                                   =====      =====       =====
</TABLE>


                 See Notes to Consolidated Financial Statements.





                                       58





<PAGE>



                            MILLENNIUM CHEMICALS INC.
     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                 Common Stock
                              ---------------------
                                                                                 Paid
                                Outstanding          Treasury     Deferred        In       Accumulated
                                   Shares    Amount    Stock    Compensation    Capital      Deficit
                                   ------    ------    -----    ------------    -------      -------
                                                        (Millions)
<S>                              <C>          <C>     <C>        <C>           <C>          <C>
Balance at December 31, 1999
   (Restated - See Note 2)...         68      $ 1       $(210)        $10        $1,335        $(398)
Comprehensive income (loss)
   Net income................         --       --          --          --            --          111
   Other comprehensive loss
     Currency translation
       adjustment............         --       --          --          --            --           --
                                    ----    -----       -----         ---        ------        -----
Total comprehensive income            --       --          --          --            --          111
   (loss)....................
Amortization and adjustment
   of unearned restricted
   shares....................         --       --          --          --            (9)          --
Shares repurchased...........         (3)      --         (65)         --            --           --
Shares purchased by employee
   benefit plan trusts.......         (1)      --          (7)          5            --           --
Dividend to shareholders.....         --       --          --          --            --          (35)
                                    ----    -----       -----         ---        ------        -----
Balance at December 31, 2000          64        1        (282)         15         1,326         (322)
   (Restated - See Note 2)...
Comprehensive loss
   Net loss..................         --       --          --          --            --          (54)
   Other comprehensive loss
     Net losses on
       derivative financial
       instruments:
       Losses arising during
         the year, net of
         tax of $5...........         --       --          --          --            --           --
       Less:
         reclassification
         adjustment, net of
         tax of $3...........         --       --          --          --            --           --
                                    ----    -----       -----         ---        ------        -----
         Net losses..........         --       --          --          --            --           --
     Minimum pension
       liability adjustment,
       net of tax of $3......         --       --          --          --            --           --
     Currency translation
       adjustment............         --       --          --          --            --           --
                                    ----    -----       -----         ---        ------        -----
Total comprehensive loss.....         --       --          --          --            --          (54)
Amortization and adjustment
   of unearned restricted
   shares....................         --       --          --          --           (27)          --
Dividends related to
   forfeiture of
   restricted shares.........         --       --          --          --            --            3
Shares purchased by employee
   benefit plan trusts.......         (1)      --          (1)          2            --           --
Dividend to shareholders.....         --       --          --          --            --          (35)
                                    ----    -----       -----         ---        ------        -----
Balance at December 31, 2001          63        1        (283)         17         1,299         (408)
   (Restated - See Note 2)...
Comprehensive loss
   Net loss..................         --       --          --          --            --         (333)
   Other comprehensive loss
     Net gains on derivative
       financial instruments:
       Gains arising during
         the year, net of
         tax of $2...........         --       --          --          --            --           --
       Less:
         reclassification
         adjustment..........         --       --          --          --            --           --
                                    ----    -----       -----        ----        ------        -----
         Net gains...........         --       --          --          --            --           --
     Minimum pension
       liability adjustment,
       net of tax of $98.....         --       --          --          --            --           --
     Equity in other
       comprehensive loss of
       Equistar:
         Minimum pension
           liability,
           net of tax of
           $4................         --       --          --          --            --           --
     Currency translation
       adjustment............         --       --          --          --            --           --
                                    ----    -----       -----         ---        ------        -----
Total comprehensive loss.....         --       --          --          --            --         (333)
Shares issued to fund 401(k)
   plan......................         --       --           6          --            (2)          --
Shares purchased by employee
   benefit plan trusts.......         --       --           2          (2)           --           --
Current year compensation             --       --          --           2            --           --
   deferred..................
Dividend to shareholders.....         --       --          --          --           --           (35)
                                    ----     ----       -----         ---        ------        -----
Balance at December 31, 2002
   (Restated - See Note 2)...         63      $ 1       $(275)        $17        $1,297        $(776)
                                    ====     ====       =====         ===        ======        =====



<CAPTION>

                                               Cumulative
                                  Unearned        Other
                                 Restricted   Comprehensive
                                   Shares         Loss        Total
                                   ------         ----        -----
                                               (Millions)
<S>                                 <C>          <C>          <C>
Balance at December 31, 1999
   (Restated - See Note 2)...       $(28)        $ (61)       $ 649
Comprehensive income (loss)
   Net income................         --            --          111
   Other comprehensive loss
     Currency translation
       adjustment............         --           (46)         (46)
                                    ----         -----        -----
Total comprehensive income            --           (46)          65
   (loss)....................
Amortization and adjustment
   of unearned restricted
   shares....................          3            --           (6)
Shares repurchased...........         --            --          (65)
Shares purchased by employee
   benefit plan trusts.......         --            --           (2)
Dividend to shareholders.....         --            --          (35)
                                    ----         -----        -----
Balance at December 31, 2000         (25)         (107)         606
   (Restated - See Note 2)...
Comprehensive loss
   Net loss..................         --            --          (54)
   Other comprehensive loss
     Net losses on
       derivative financial
       instruments:
       Losses arising during
         the year, net of
         tax of $5...........         --           (12)         (12)
       Less:
         reclassification
         adjustment, net of
         tax of $3...........         --             6            6
                                    ----         -----        -----
         Net losses..........         --            (6)          (6)
     Minimum pension
       liability adjustment,
       net of tax of $3......         --            (4)          (4)
     Currency translation
       adjustment............         --           (19)         (19)
                                    ----         -----        -----
Total comprehensive loss.....         --           (29)         (83)
Amortization and adjustment
   of unearned restricted
   shares....................         25            --           (2)
Dividends related to
   forfeiture of
   restricted shares.........         --            --            3
Shares purchased by employee
   benefit plan trusts.......         --            --            1
Dividend to shareholders.....         --            --          (35)
                                    ----         -----        -----
Balance at December 31, 2001          --          (136)         490
   (Restated - See Note 2)...
Comprehensive loss
   Net loss..................         --            --         (333)
   Other comprehensive loss
     Net gains on derivative
       financial instruments:
       Gains arising during
         the year, net of
         tax of $2...........         --             6            6
       Less:
         reclassification
         adjustment..........         --            (1)          (1)
                                    ----         -----        -----
         Net gains...........         --             5            5
     Minimum pension
       liability adjustment,
       net of tax of $98.....         --          (188)        (188)
     Equity in other
       comprehensive loss of
       Equistar:
         Minimum pension
           liability,
           net of tax of
           $4................         --            (7)          (7)
     Currency translation
       adjustment............         --            27           27
                                    ----         -----        -----
Total comprehensive loss.....         --          (163)        (496)
Shares issued to fund 401(k)
   plan......................         --            --            4
Shares purchased by employee
   benefit plan trusts.......         --            --           --
Current year compensation             --            --            2
   deferred..................
Dividend to shareholders.....         --            --          (35)
                                    ----         -----        -----
Balance at December 31, 2002
   (Restated - See Note 2)...       $ --         $(299)       $ (35)
                                    ====         =====        =====

</TABLE>

                 See Notes to Consolidated Financial Statements.


                                       59


 <PAGE>


                            MILLENNIUM CHEMICALS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    (Dollars in millions, except share data)



Note 1 -- Significant Accounting Policies

       Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Minority interest represents the minority ownership of the Company's Brazilian
subsidiary and the La Porte Methanol Company. The Company's investment in
Equistar Chemicals, LP ("Equistar") is accounted for by the equity method;
accordingly, the Company's share of Equistar's pre-tax net income or loss is
included in net income.

       Estimates and Assumptions: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Such estimates include the evaluation of and
judgments about environmental obligations, legal matters and tax claims brought
against the Company, pension and other postretirement benefits, the ability to
recover the full carrying value of accounts receivable and inventories owned by
the Company, and the carrying value of goodwill and other long-term assets such
as the Company's investment in Equistar and the Company's deferred tax assets.
Actual results could differ from those estimates.

       Reclassification: Certain prior year balances have been reclassified to
conform with the current year presentation, principally $7, $7 and $6 of
selling, development and administrative ("S,D&A") costs allocated to the
Company's investment in Equistar and previously reported in (Loss) earnings on
Equistar investment for 2002, 2001, and 2000, respectively, have been
reclassified to Selling, development and administrative expense in the Company's
Consolidated Statements of Operations.

       Revenue Recognition: Revenue is recognized upon transfer of title and
risk of loss to the customer, which is generally upon shipment of product to the
customer or upon usage of the product by the customer in the case of consignment
inventories.

       Costs incurred related to shipping and handling are included in cost of
products sold. Amounts billed to the customer for shipping and handling are
included in sales revenue.

       Cash Equivalents: Cash equivalents represent investments in short-term
deposits and commercial paper with banks that have original maturities of 90
days or less. In addition, Other assets include approximately $3 and $4 in
restricted cash at December 31, 2002 and 2001, respectively, which is on deposit
to satisfy insurance claims.

       Inventories: Product inventories are stated at the lower of cost or
market value. Raw materials and maintenance parts and supplies are carried at
average cost. During the fourth quarter of 2002, the Company changed from the
last-in first-out ("LIFO") method to the first-in first-out ("FIFO") method to
account for certain of its United States ("US") product inventories. These
financial statements have been restated for all periods presented to reflect the
change to the FIFO method. The method was changed in part to achieve a better
matching of revenues and expenses due to decreasing inventory quantities and
costs. The FIFO method, or methods that approximate FIFO, are now used to
determine cost for all product inventories of the Company. The change positively
impacted net loss in 2002 by $1 or $0.02 per share and increased retained
earnings for periods prior to 2000 by $21. The effect of the change on reported
net (loss) income for 2002, 2001 and 2000 is as follows:


                                       60



 <PAGE>


                            MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)


Note 1 -- Significant Accounting Policies - Continued

<TABLE>
<CAPTION>
                                                            Year Ended December 31, 2002 (Restated - See Note 2)
                                                     -------------------------------------------------------------------
                                                      1st Qtr.     2nd Qtr.       3rd Qtr.     4th Qtr.      Full Year
                                                     ------------ ------------  ------------- ------------  ------------
                                                                (Quarterly amounts unaudited)
<S>                                                  <C>          <C>           <C>           <C>           <C>
Net (loss) income  before change to FIFO..........   $      (337) $         1   $          5  $        (2)  $      (333)
  Change in inventory costing method..............            (1)           1             --           --            --
  Income tax effect of change.....................            --           --             --           --            --
                                                     -----------  -----------   ------------  -----------   -----------
Net (loss) income after change to FIFO............   $      (338) $         2   $          5  $        (2)  $      (333)
                                                     ===========  ===========   ============  ===========   ===========

Basic (loss) income per share:
  Before change to FIFO...........................   $     (5.31) $      0.01   $       0.08  $     (0.03)  $     (5.24)
    Change in inventory costing method, net of tax         (0.01)        0.01             --           --            --
                                                     -----------  ----------    ------------  -----------   -----------
  After change to FIFO............................   $     (5.32) $      0.02   $       0.08  $     (0.03)  $     (5.24)
                                                     ===========  ===========   ============  ===========   ===========

Diluted (loss) income per share:
  Before change to FIFO...........................   $     (5.31) $      0.01   $       0.08  $     (0.03)  $     (5.24)
    Change in inventory costing method............         (0.01)        0.01             --           --            --
                                                     -----------  -----------   ------------  -----------   -----------
  After change to FIFO............................   $     (5.32) $      0.02   $       0.08  $     (0.03)  $     (5.24)
                                                     ===========  ===========   ============  ===========   ===========
</TABLE>


<TABLE>
<CAPTION>
                                                            Year Ended December 31, 2001 (Restated - See Note 2)
                                                     -------------------------------------------------------------------
                                                      1st Qtr.     2nd Qtr.       3rd Qtr.     4th Qtr.      Full Year
                                                     ------------ ------------  ------------- ------------  ------------
                                                                (Quarterly amounts unaudited)
<S>                                                  <C>          <C>           <C>           <C>           <C>
Net (loss) income before change to FIFO...........   $       (17) $       (26)  $        (14) $         7   $       (50)
   Change in inventory costing method.............            --           --             (4)          (3)           (7)
   Income tax effect of change....................            --           --              2            1             3
                                                     -----------  -----------   ------------  -----------   -----------
Net (loss) income after change to FIFO............   $       (17) $       (26)  $        (16) $         5   $       (54)
                                                     ===========  ===========   ============  ===========   ===========

Basic (loss) income per share:
   Before change to FIFO..........................   $     (0.27) $     (0.41)  $      (0.21) $      0.11   $     (0.78)
    Change in inventory costing method, net of tax            --           --          (0.04)       (0.03)        (0.07)
                                                     -----------  -----------   ------------  -----------   -----------
   After change to FIFO...........................   $     (0.27) $     (0.41)  $      (0.25) $      0.08   $     (0.85)
                                                     ===========  ===========   ============  ===========   ===========

Diluted (loss) income per share:
   Before change to FIFO..........................   $     (0.27) $     (0.41)  $      (0.21) $      0.11   $     (0.78)
    Change in inventory costing method, net of tax            --           --          (0.04)       (0.03)        (0.07)
                                                     -----------  -----------   ------------  -----------   -----------
   After change to FIFO...........................   $     (0.27) $     (0.41)  $      (0.25) $      0.08   $     (0.85)
                                                     ===========  ===========   ============  ===========   ===========
</TABLE>


                                       61


 <PAGE>



                            MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)


Note 1 -- Significant Accounting Policies - Continued

<TABLE>
<CAPTION>
                                                                         2000
                                                                      -----------
                                                                      (Restated -
                                                                      See Note 2)
<S>                                                                   <C>
Net income before change to FIFO..................................    $      109
   Change in inventory costing method.............................             4
   Income tax effect of change....................................            (2)
                                                                      ----------
Net income after change to FIFO...................................    $      111
                                                                      ==========

Basic income per share:
   Before change to FIFO..........................................    $     1.69
    Change in inventory costing method, net of tax................          0.04
                                                                      ----------
   After change to FIFO...........................................    $     1.73
                                                                      ==========

Diluted income per share:
   Before change to FIFO..........................................    $     1.68
    Change in inventory costing method, net of tax................          0.04
                                                                      ----------
   After change to FIFO...........................................    $     1.72
                                                                      ==========
</TABLE>

       Property, Plant and Equipment: Property, plant and equipment is stated on
the basis of cost. Depreciation is provided by the straight-line method over the
estimated useful lives of the assets, generally 20 to 40 years for buildings and
5 to 25 years for machinery and equipment. Environmental costs are capitalized
if the costs increase the value of the property and/or mitigate or prevent
contamination from future operations. Major repairs and improvements incurred in
connection with substantial overhauls or maintenance turnarounds are capitalized
and amortized on a straight-line basis until the next planned turnaround
(generally 18 months to 3 years). Other less substantial maintenance and repair
costs are expensed as incurred. Unamortized capitalized turnaround costs were
$19 and $21 at December 31, 2002 and 2001, respectively.

       Capitalized Software Costs: The Company capitalizes costs incurred in the
acquisition and modification of computer software used internally, including
consulting fees and costs of employees dedicated solely to a specific project.
Such costs are amortized over periods not exceeding 7 years and are subject to
impairment evaluation under Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
No. 144"). Unamortized capitalized software costs of $43 and $53 at December 31,
2002 and 2001, respectively, are included in Property, plant and equipment.

       Goodwill: Goodwill represents the excess of the purchase price over the
fair value of the net assets of acquired companies. Through December 31, 2001,
goodwill was amortized using the straight-line method over 40 years in
accordance with generally accepted accounting principles, and management
evaluated goodwill for impairment based on the anticipated future cash flows
attributable to its operations in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121"). Such expected cash flows, on an undiscounted basis, were
compared to the carrying value of the tangible and intangible assets, and if
impairment was indicated, the carrying value of goodwill was adjusted. In the
opinion of management, no impairment of goodwill existed at December 31, 2001
under SFAS No. 121.

       On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). Under this new standard, all goodwill,
including goodwill acquired before initial application of the standard, is not
amortized but must be tested for impairment at least annually at the reporting
unit level, as defined in the standard. Accordingly, the Company reported a
charge for the cumulative effect of this accounting change of $275 in the first
quarter of 2002 to write off certain of its goodwill related to its Acetyls
business based upon the Company's estimate of fair value for this business
considering expected future


                                       62


 <PAGE>



                            MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)


Note 1 -- Significant Accounting Policies - Continued

profitability and cash flows. Also in accordance with SFAS No. 142, Equistar
reported an impairment of its goodwill in the first quarter of 2002. The
write-off at Equistar required an adjustment of $30 to reduce the carrying value
of the Company's investment in Equistar to its approximate proportional share of
Equistar's Partners' capital. The Company reported this adjustment as a charge
for the cumulative effect of this accounting change. In the opinion of
management, no further adjustment to the carrying value of goodwill of $106 is
required at December 31, 2002 under SFAS No. 142. Amortization expense was $13
for each of the years ended December 31, 2001 and 2000 for the Company's
goodwill. Additionally, the Company's share of amortization expense reported by
Equistar for each of the years ended December 31, 2001 and 2000 for its
goodwill, included in (Loss) earnings on Equistar investment, was $10. Following
is a reconciliation of the reported net (loss) income to net income (loss)
adjusted for goodwill amortization and the cumulative effect of the accounting
change, and related per share amounts:


<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                             -----------------------------------------
                                                                2002           2001            2000
                                                             ----------    -------------   -------------
                                                              (Restated -    (Restated -    (Restated -
                                                             See Note 2)    See Note 2)    See Note 2)
<S>                                                          <C>            <C>            <C>
Reported net (loss) income.................................  $     (333)    $      (54)    $      111
Goodwill amortization......................................          --             13             13
Equistar goodwill amortization included
    in (Loss) earnings on Equistar investment..............          --             10             10
                                                             ----------     ----------     ----------
Adjusted net (loss) income.................................        (333)           (31)           134
Cumulative effect of accounting change.....................         305             --             --
                                                             -----------    ----------     ----------
Adjusted net (loss) income before cumulative effect of
   accounting change.......................................  $      (28)    $      (31)    $      134
                                                             ==========     ==========     ==========
</TABLE>


<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                            ---------------------------------------------------
Per share amounts:                                             2002         2001               2000
                                                            ------------ ----------- --------------------------
                                                              Basic &    Basic &
                                                              Diluted     Diluted         Basic        Diluted
                                                              -------     -------         -----        -------
                                                             Restated -   Restated -    Restated -    Restated -
                                                            See Note 2)  See Note 2)   See Note 2)   See Note 2)
<S>                                                         <C>          <C>           <C>           <C>
Reported net (loss) income...............................   $    (5.24)  $    (0.85)   $     1.73    $     1.72
Goodwill amortization....................................           --         0.20          0.20          0.20
Equistar goodwill amortization included
    in (Loss) earnings on Equistar investment............           --         0.16          0.16          0.15
                                                            ----------   ----------    ----------    ----------
Adjusted net (loss) income...............................        (5.24)       (0.49)         2.09          2.07
Cumulative effect of accounting change...................         4.80           --            --            --
                                                            ----------   ----------    ----------    ----------
Adjusted net (loss) income before cumulative effect of
    accounting change....................................   $    (0.44)  $    (0.49)   $     2.09    $     2.07
                                                            ==========   ==========    ==========    ==========
</TABLE>

       Environmental Liabilities and Legal Matters -- The Company periodically
reviews matters associated with potential environmental obligations and legal
matters brought against the Company and evaluates, accounts, reports and
discloses these matters in accordance with SFAS No. 5 "Accounting for
Contingencies" ("SFAS No. 5"). In order to make estimates of liabilities, the
Company's evaluation of and judgments about environmental obligations and legal
matters are based upon the individual facts and circumstances relevant to the
individual matters and include advice from legal counsel, if applicable. The
Company establishes reserves by recording charges to its results of operations
for loss contingencies that are considered probable (the future event or events
are likely to occur) and for which the amount of loss can be reasonably
estimated. When a loss contingency is considered


                                       63



 <PAGE>



                            MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)


Note 1 -- Significant Accounting Policies - Continued

probable but the amount of loss can only be reasonably estimated within a range,
the Company records a reserve for the loss contingency at the low end of the
range but also applies judgment to specific matters as to whether any particular
amount within the range is a better estimate than any other amount. If an amount
within the range is considered to be a better estimate of the loss, the Company
records this amount as its reserve for the loss contingency. Reserves are
exclusive of claims against third parties, except where the amount of liability
or contribution by such other parties, including insurance companies, has been
agreed, and are not discounted. Loss contingencies that are not considered
probable or that cannot be reasonably estimated are disclosed in the Notes to
the Consolidated Financial Statements, either individually or in the aggregate,
if there is a reasonable possibility that a loss may be incurred and if the
amount of possible loss could have a significant impact on the Company's
consolidated financial position or results of operations. Loss contingencies
that are considered remote (the chance of the future event or events occurring
is slight) are not typically disclosed unless the Company believes the potential
loss to be extremely significant to its consolidated financial position and
results of operations.

       Foreign Currency: Assets and liabilities of the Company's foreign
subsidiaries are translated at the exchange rates in effect at the balance sheet
dates, while revenue, expenses and cash flows are translated at average exchange
rates for the reporting period or, where practicable, at the exchange rates in
effect at the dates on which transactions are recognized. Resulting translation
adjustments are recorded as a component of Cumulative other comprehensive loss
in Shareholders' (deficit) equity. Gains and losses resulting from changes in
foreign currency on transactions denominated in currencies other than the
functional currency of the respective subsidiary are recognized in income as
they occur.

       Derivative Instruments and Hedging Activities: Effective January 1, 2001,
all derivatives are recognized on the balance sheet at their fair value. If a
derivative is designated as a hedging instrument for accounting purposes, the
Company designates the derivative, on the date the derivative contract is
entered into, as (1) a hedge of the fair value of a recognized asset or
liability or of an unrecognized firm commitment ("fair value" hedge), (2) a
hedge of a forecasted transaction ("cash flow" hedge), (3) a foreign-currency
fair value or cash flow hedge ("foreign currency" hedge) or (4) a hedge of a net
investment in a foreign operation. For derivative instruments not designated as
hedging instruments for accounting purposes, changes in fair values are
recognized in earnings in the period in which they occur. Prior to January 2001,
gains or losses on instruments that hedged foreign currency denominated
receivables and payables were recognized in income as they occurred. Gains or
losses on instruments that hedged firm commitments were deferred and reported as
part of the underlying transaction when settled.

       Changes in the fair value of derivatives that are highly effective as,
and that are designated and qualify as, fair value hedges, along with the losses
or gains on the hedged assets or liabilities that are attributable to the hedged
risks (including losses or gains on firm commitments), are recorded in
current-period earnings. Changes in the fair value of derivatives that are
highly effective as, and that are designated and qualify as, cash flow hedges
are recorded in Other comprehensive income (loss) ("OCI"), until earnings are
affected by the variability of cash flows. Changes in the fair value of
derivatives that are highly effective as, and that are designated and qualify
as, foreign-currency hedges are recorded in either current-period earnings or
OCI, depending on whether the hedge transactions are fair value hedges or cash
flow hedges. If, however, a derivative is used as a hedge of a net investment in
a foreign operation, its changes in fair value, to the extent effective as a
hedge, are recorded as translation adjustments in OCI.

       The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair value, cash flow, or
foreign-currency hedges to specific assets and liabilities on the balance sheet
or to specific firm commitments or forecasted transactions. The Company also
formally assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items.
When it is determined that a derivative is not highly effective as a hedge, or
that it has ceased to be a highly effective hedge, the Company discontinues
hedge accounting prospectively.


                                       64


 <PAGE>
                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 1 -- Significant Accounting Policies - Continued

       Income Taxes: The Company accounts for income taxes using the liability
method under SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). This
method generally provides that deferred tax assets and liabilities, computed
using enacted marginal tax rates of the respective tax jurisdictions, be
recognized for temporary differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities and expected benefits of
utilizing net operating loss carryforwards. The Company periodically assesses
the likelihood of realization of deferred tax assets and with respect to net
operating loss carryforwards, prior to expiration, by considering the
availability of taxable income in prior carryback periods, the scheduled
reversal of deferred tax liabilities, certain distinct tax planning strategies,
and projected future taxable income. If it is considered to be more likely than
not that the deferred tax assets will not be realized, a valuation allowance is
established against some or all of the deferred tax assets.

       The Company periodically assesses tax exposures and establishes or
adjusts estimated reserves for probable assessments by the Internal Revenue
Service ("IRS") or other taxing authorities. Such reserves represent an
estimated provision for taxes ultimately expected to be paid.

       Research and Development: The cost of research and development efforts is
expensed as incurred. Such costs aggregated $20, $20 and $26 for the years ended
December 31, 2002, 2001 and 2000, respectively.

       Retirement-Related Benefits -- The Company determines its benefit
obligations and net periodic benefit costs for its defined benefit pension plans
and its other postretirement benefit plans using actuarial models required by
SFAS No. 87, "Employers' Accounting for Pensions" ("SFAS No. 87") and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
respectively. These models use an approach that generally recognizes individual
events like plan amendments and changes in actuarial assumptions such as
discount rates, rate of compensation increases, inflation, medical costs and
mortality over the service lives of the employees in the plan. The
market-related value of plan assets, a calculated value that recognizes changes
in the fair value of plan assets over a five-year period, is utilized to
determine the Company's benefit obligations and net periodic benefit cost.

       The Company evaluates the appropriateness of retirement-related benefit
plan assumptions annually. Some of the more significant assumptions used to
determine the Company's benefit obligations and net periodic benefit costs are
the expected rate of return on plan assets, the discount rate, the rate of
compensation increases, and healthcare cost trend rates.

       To develop its expected return on plan assets, the Company uses long-term
historical actual return information, the mix of investments that comprise plan
assets, and future estimates of long-term investment returns by reference to
external sources. The discount rate assumptions reflect the rates available on
high-quality fixed-income debt instruments on December 31 of each year. The rate
of compensation increase is determined by the Company based upon its long-term
plans for such increases. The Company reviews external data and its own
historical trends for health care costs to determine the health care cost trend
rates.

       At December 31 of each year, if any of the Company's retirement-related
plans is underfunded and requires adjustment to establish an additional minimum
liability in accordance with SFAS No. 87, an adjustment is first made to
establish an intangible asset to the extent of any unrecognized amount of prior
service cost for the given plan and then an equity adjustment is included in
Other comprehensive loss for the remaining amount of the required minimum
liability. This additional minimum liability is calculated and adjusted annually
through the Company's Consolidated Balance Sheet and has no immediate impact on
the Company's Consolidated Statement of Operations.

       Stock-Based Compensation: SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123") encourages a fair value based method of
accounting for employee stock options and similar equity instruments, which
generally would result in the recording of additional compensation expense in
the Company's financial statements. SFAS No. 123 also allows the Company to
continue to account for stock-based employee compensation


                                       65


 <PAGE>

                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 1 -- Significant Accounting Policies - Continued

using the intrinsic value for equity instruments under Accounting Principles
Board Opinion No. 25 ("APB Opinion No. 25"). The Company has elected to account
for such instruments using APB Opinion No. 25 and related interpretations, and
thus has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no
compensation cost has been recognized for the stock option plans in the
accompanying financial statements as all options granted had an exercise price
equal to the market value of the underlying Common Stock on the date of grant.

       The following table illustrates the effect on net income (loss) and
earnings per share before cumulative effect of accounting change if the Company
had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee recognition:


<TABLE>
<CAPTION>
                                                                                         Year Ended
                                                                                         December 31,
                                                                             ------------------------------------
                                                                                 2002        2001         2000
                                                                             -----------  -----------  ----------
                                                                             (Restated-   (Restated-   (Restated-
                                                                             See Note 2)  See Note 2)  See Note 2)

<S>                                                                          <C>          <C>          <C>
       Net (loss) income before cumulative effect of accounting change....   $      (28)  $     (54)   $     111
       Deduct: Total stock-based employee compensation expense determined
          under fair value based method for all awards, net of related
          tax effects.....................................................           (2)         (1)          (1)
                                                                             ----------   ---------    ---------
       Pro forma net (loss) income before cumulative effect of accounting
          change..........................................................   $      (30)  $     (55)   $     110
                                                                             ==========   =========    =========
       (Loss) earnings per share:
       Basic - as reported................................................   $    (0.44)  $   (0.85)   $    1.73
                                                                             ==========   =========    =========
       Basic - pro forma..................................................   $    (0.48)  $   (0.87)   $    1.72
                                                                             ==========   =========    =========

       Diluted - as reported..............................................   $    (0.44)  $   (0.85)   $    1.72
                                                                             ==========   =========    =========
       Diluted - pro forma................................................   $    (0.48)  $   (0.87)   $    1.71
                                                                             ==========   =========    =========
</TABLE>

       Earnings Per Share: The weighted average number of equivalent shares of
Common Stock outstanding used in computing (loss) earnings per share for 2002,
2001 and 2000 was as follows:

<TABLE>
<CAPTION>
                                                                 2002            2001            2000
                                                              ----------      ---------       ----------
<S>                                                           <C>             <C>             <C>
       Basic............................................      63,587,561      63,564,497      64,304,594
       Options..........................................              --              --           3,314
       Restricted and other shares......................              --              --         281,729
                                                              ----------      ----------      ----------
       Diluted..........................................      63,587,561      63,564,497      64,589,637
                                                              ==========      ==========      ==========
</TABLE>

       The computation of diluted (loss) earnings per share for 2002 does not
include 290,160 restricted and other shares and 4,727 options, and for 2001 does
not include 318,606 restricted and other shares issued under the Company's
stock-based compensation plans as their effect would be antidilutive.

       Concentration of Credit Risk: Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of temporary cash investments, foreign currency, interest rate and
natural gas derivative contracts and accounts receivable. The Company maintains
its investments and enters contracts with high-credit-quality institutions,
generally financial institutions that provide the Company with debt financing.

                                       66


 <PAGE>

                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 1 -- Significant Accounting Policies - Continued

       The Company sells a broad range of commodity, industrial, performance and
specialty chemicals to a diverse group of customers operating throughout the
world. During 2002, revenue generated outside the United States accounted for
59%, 54% and 51% of total revenues in 2002, 2001 and 2000, respectively, from
sales to customers in over 90 countries. Accordingly, there is no significant
concentration of risk in any one particular country. In addition, 58%, 60% and
57% of the revenues of the Titanium Dioxide and Related Products business
segment in 2002, 2001 and 2000, respectively (which accounts for approximately
73%, 72% and 76% of consolidated revenues in 2002, 2001 and 2000, respectively)
are from customers in the global paint and coatings industry. The leading United
States economic indicator for this industry is new and existing home sales,
which has remained relatively strong through 2002 despite the slow United States
economic conditions. In addition, some seasonality in sales exists because sales
of paint and coatings are greatest in the spring and summer months. Credit
limits, ongoing credit evaluation, and account-monitoring procedures are
utilized to minimize credit risk. Collateral is generally not required, but may
be used under certain circumstances or in certain markets, particularly in
lesser-developed countries of the world. Credit losses to customers operating in
this industry have not been material.

       Recent Accounting Developments: In July 2001, the FASB issued SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No.
143 applies to legal obligations associated with the retirement of long-lived
assets. This standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and
the associated asset retirement costs be capitalized as part of the carrying
amount of the long-lived asset. Accretion expense and depreciation expense
related to the liability and capitalized asset retirement costs, respectively,
would be recorded in subsequent periods. Although earlier application is
permitted, the Company must adopt this standard on January 1, 2003. Upon
adoption, the Company will recognize transition amounts for existing asset
retirement obligations, associated capitalizable costs, and accumulated
depreciation. The after-tax transition charge of $2 will be recorded as a
cumulative effect of an accounting change. The ongoing annual expense resulting
from the initial adoption of SFAS No. 143 is not expected to be significant.

       In January 2003, the FASB issued Financial Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities" ("FIN No. 46"). FIN No. 46
provides guidance on the identification of and financial reporting for entities
over which control is achieved through means other than voting rights. The
Company must adopt FIN No. 46 for previously existing arrangements on June 15,
2003 and is currently evaluating the potential impact on its consolidated
financial position and results of operations. Immediate adoption is required for
arrangements newly created after January 31, 2003 to which FIN No. 46 applies.

Note 2 -- Restatement of Financial Statements

       The Company restated its financial statements for the years 1998 through
2002, to correct errors in its accounting for deferred taxes relating to its
Equistar investment, the calculation of its pension benefit obligations, its
accounting for a multi-year precious metals agreement, and the timing of its
recognition of income and expense associated with previously established
reserves for legal, environmental and other contingencies for certain of the
Company's predecessor businesses.

       Deferred tax assets and liabilities and deferred tax expense for the
years 1998 through 2002 were restated to appropriately account for the Company's
book and tax basis differences associated with its investment in Equistar in
accordance with SFAS No. 109. The accounting for deferred taxes associated with
Equistar was previously based on the difference between book and tax basis of a
subsidiary that holds the partnership investment. Deferred tax is now based on
the difference between book and tax basis of the actual partnership interest
held by the subsidiary. The effect of the adjustments to deferred tax assets and
liabilities was to increase net deferred tax liabilities and Accumulated deficit
by $402 at December 31, 1999. The effect of the adjustments to Benefit from
income taxes for 2002 and 2001 was a decrease of $36 and an increase of $4,
respectively, and the effect to Provision for income taxes for 2000 was an
increase of $6. Other comprehensive loss was reduced by $15 in 2002 due to these
adjustments. In addition, during the course of its review of its deferred tax
assets, the Company concluded that its realization of a deferred tax asset of
$10 related to its French subsidiaries was unlikely. The elimination of this
deferred tax asset as of December 31, 2002, resulted in an increase of $10 in
net deferred tax liabilities and a decrease in Benefit from income taxes for
2002 of $10.

                                       67


 <PAGE>

                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 2 -- Restatement of Financial Statements - Continued

       The Company also restated its accrued pension benefit costs, included in
Other liabilities, and its net periodic pension benefit cost for 2002 to correct
errors in the calculation of its pension liability. The Company's principal
actuarial firm incorrectly utilized participant data in its 2002 actuarial
valuation and underestimated the accumulated pension benefit obligation at
December 31, 2002 for the Company's largest domestic pension plan. The effect of
these corrections was to increase accrued pension benefit cost by $53 and to
decrease net deferred tax liabilities by $19 at December 31, 2002, and to
increase net periodic pension benefit cost by $2, to decrease Operating income
by $2, to increase Net loss by $1, and to increase Other comprehensive loss by
$33 for the year ended December 31, 2002.

       The financial statements for the years 1998 through 2002 also were
restated to reflect a retroactive change in accounting treatment for a five-year
agreement entered into in 1998 that provides the Company with the right to use
gold owned by a third party, as more fully described in Note 9. The Company
previously accounted for this agreement as an operating lease but is now
accounting for this agreement as a secured financing. As a result, at December
31, 1999, Other assets increased by $4, Accrued expenses and other liabilities
decreased by $1, Other long-term borrowings increased by $11, net deferred tax
liabilities decreased by $1, Other liabilities decreased by $4, and Accumulated
deficit increased by $1; Operating income for 2002, 2001 and 2000 decreased by
$4, $2 and $1, respectively; Net loss for 2002 and 2001 increased by $2 and $1,
respectively; and Net income for 2000 decreased by $1.

       The restatement of the financial statements for the years 1998 through
2001 also includes changes to correct the timing of income and expense
recognition associated with previously established reserves for legal,
environmental and other contingencies for certain of the Company's predecessor
businesses. The effect of this restatement was to decrease Accrued expenses and
other liabilities and Other liabilities by $1 and $24, respectively, and to
increase net deferred tax liabilities and Accumulated deficit by $9 and $16,
respectively, at December 31, 1999; to decrease Operating income by $16 and $9
for the years 2001 and 2000, respectively; to increase Net loss by $10 in 2001;
and to decrease Net income by $6 in 2000.

       A summary of the aggregate effect of these restatements and the
reclassification, described in Note 1, on the Company's Consolidated Balance
Sheets and Consolidated Statements of Operations for the periods presented
herein is shown below.

<TABLE>
<CAPTION>
                                                 As of December 31, 2002    As of December 31, 2001
                                                 ------------------------   ------------------------
                                                 As Reported  As Restated   As Reported  As Restated
                                                 -----------  -----------   -----------  -----------
<S>                                              <C>          <C>           <C>          <C>
Changes to Consolidated Balance Sheets:
   Deferred income taxes - asset................ $        75  $        --   $        29  $        --
   Other assets.................................          42           46           234          238
   Total assets.................................       2,467        2,396         2,990        2,965
   Other short-term borrowings..................          --           14            --           --
   Accrued expenses and other liabilities.......         128          127           105          104
   Total current liabilities....................         462          475           383          382
   Other long-term borrowings...................          --           --            --           11
   Deferred income taxes - liability............          --          337            --          373
   Other liabilities............................         335          388           517          516
   Total liabilities............................       2,009        2,412         2,072        2,454
   Accumulated deficit..........................        (320)        (776)           (1)        (408)
   Cumulative other comprehensive loss..........        (281)        (299)         (136)        (136)
   Total shareholders' equity (deficit).........         439          (35)          897          490
   Total liabilities and shareholders' equity
     (deficit)..................................       2,467        2,396         2,990        2,965
</TABLE>

                                       68


 <PAGE>


                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 2 -- Restatement of Financial Statements - Continued

<TABLE>
<CAPTION>
                                                        Year Ended                Year Ended               Year Ended
                                                     December 31, 2002         December 31, 2001        December 31, 2000
                                                 ------------------------  ------------------------  -----------------------
                                                 As Reported  As Restated  As Reported  As Restated  As Reported  As Restated
                                                 -----------  -----------  -----------  -----------  -----------  -----------
<S>                                              <C>          <C>          <C>          <C>          <C>          <C>
Changes to Consolidated Statements
   of Operations:
   Cost of products sold........................  $   1,233    $   1,234    $   1,259    $   1,261    $   1,263    $   1,264
   Selling, development and administrative
     expense....................................        126          138          146          169          200          215
   Operating income.............................         93           80           39           14          217          201
   (Loss) earnings on Equistar investment.......        (80)         (73)         (90)         (83)          39           45
   (Loss) income before income taxes, minority
     interest  and cumulative effect of
     accounting change..........................        (74)         (80)        (132)        (150)         193          183
   Benefit from (provision for) income taxes....        101           58           89          100          (62)         (65)
   Income (loss) before minority interest and
     cumulative effect of accounting change.....         27          (22)         (43)         (50)         131          118
   Income (loss) before cumulative effect of
     accounting change..........................         21          (28)         (47)         (54)         124          111
   Net (loss) income............................       (284)        (333)         (47)         (54)         124          111
   Basic earnings (loss) per share:
     Before cumulative effect of accounting
       change...................................       0.33        (0.44)       (0.75)       (0.85)        1.94         1.73
     After cumulative effect of accounting
       change...................................      (4.47)       (5.24)       (0.75)       (0.85)        1.94         1.73
   Diluted earnings (loss) per share:
     Before cumulative effect of accounting
       change...................................       0.33        (0.44)       (0.75)       (0.85)        1.93         1.72
     After cumulative effect of accounting
       change...................................      (4.44)       (5.24)       (0.75)       (0.85)        1.93         1.72
</TABLE>

A summary of the aggregate effect of these restatements and the
reclassification, described in Note 1, is shown below for the Company's
Quarterly Financial Data for the periods presented in Note 18.


                                       69


 <PAGE>

                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 2 -- Restatement of Financial Statements - Continued

<TABLE>
<CAPTION>
                                                    Quarterly Financial Data (Unaudited)
                              -----------------------------------------------------------------------------
                                    1st Qtr            2nd Qtr             3rd Qtr             4th Qtr
                              ------------------  ------------------  ------------------  ------------------
                                 As        As        As        As        As        As        As        As
                              Reported  Restated  Reported  Restated  Reported  Restated  Reported  Restated
                              --------  --------  --------  --------  --------  --------  --------  --------
<S>                           <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
2002
   Operating income.........  $    10   $     7   $    24   $    20   $    33   $    30   $    26   $    23
   (Loss) earnings on
     Equistar investment....      (39)      (37)      (10)       (8)        4         6       (35)      (34)
   Net (loss) income before
     cumulative effect of
     accounting change......      (32)      (33)        2         2         6         5        45        (2)
   Net (loss) income after
     cumulative effect of
     accounting change......     (337)     (338)        2         2         6         5        45        (2)
   Basic (loss) earnings
     per share before
     cumulative effect of
     accounting change......    (0.50)    (0.52)     0.02      0.02      0.10      0.08      0.71     (0.03)
   Basic (loss) earnings
     per share after
     cumulative effect of
     accounting change......    (5.30)    (5.32)     0.02      0.02      0.10      0.08      0.71     (0.03)
   Diluted (loss) earnings
     per share before
     cumulative effect of
     accounting change......    (0.50)    (0.52)     0.02      0.02      0.10      0.08      0.70     (0.03)
   Diluted (loss) earnings
     per share after
     cumulative effect of
     accounting change......    (5.27)    (5.32)     0.02      0.02      0.10      0.08      0.70     (0.03)

2001
   Operating income (loss)..       25        20        (2)       (9)       19        11        (3)       (8)
   Net (loss) income........      (16)      (17)      (23)      (26)      (14)      (16)        6         5
   Basic (loss) earnings
     per share..............    (0.24)    (0.27)    (0.37)    (0.41)    (0.24)    (0.25)     0.10      0.08
   Diluted (loss) earnings
     per share..............    (0.24)    (0.27)    (0.37)    (0.41)    (0.24)    (0.25)     0.10      0.08
</TABLE>

Note 3 -- Reorganization and Plant Closure Charges

       A provision for reorganization and plant closure costs of $36 before tax
($24 after-tax or $0.38 per share) was recorded in 2001 related to
reorganization activities within each of the Company's business segments.

       During the second quarter of 2001, $31 was recorded in connection with
the Company's announced decision to reduce its worldwide workforce and
indefinitely idle its sulfate-process TiO[u]2 plant in Hawkins Point, Maryland.
The $31 charge included severance and other employee-related costs of $19 for
the termination of approximately 400 employees involved in manufacturing,
technical, sales and marketing, finance and administrative support, a $10
write-down of assets and $2 in other costs associated with the idling of the
plant.

       During the first quarter of 2001, the Company announced the closure of
its facilities in Cincinnati, Ohio and recorded reorganization and other charges
of $5 in the Acetyls segment. These charges included $3 of severance and other
termination benefits related to the termination of about 35 employees involved
in technical, marketing and administrative activities, as well as $2 related to
the write-down of assets, lease termination costs and other charges associated
with the Cincinnati facility. The office in Cincinnati was closed during the
second quarter of 2001.

       All payments for severance and related costs and for other costs related
to the reorganization and plant closure have been made as of December 31, 2002.



                                       70


 <PAGE>

                          MILLENNIUM CHEMICALS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
                    (Dollars in millions, except share data)


Note 4 -- Sale/Leaseback Transaction

       On December 27, 2001, the Company sold its research facility in
Baltimore, Maryland to an unrelated party in a sale/leaseback transaction. Cash
proceeds from the sale were $17. The pre-tax gain on the sale of $3 will be
amortized to income over the term of the related leaseback. In conjunction with
the sale, the Company entered into an operating lease with the buyer to lease
the research facility for a 20-year term at an annual fee of approximately $2,
which escalates at a rate of 2.5% per annum. Certain renewal options exist to
extend the term in five-year intervals.

Note 5 -- Investment in Equistar

       On December 1, 1997, the Company and Lyondell Chemical Company
("Lyondell") completed the formation of Equistar, a joint venture partnership
created to own and operate the petrochemical and polymer businesses of the
Company and Lyondell. The Company contributed to Equistar substantially all of
the net assets of its former ethylene, polyethylene, ethanol and related
products business. The Company retained $250 from the proceeds of accounts
receivable collections and substantially all the accounts payable and accrued
expenses of its contributed businesses existing on December 1, 1997, and
received proceeds of $750 from borrowings under a new credit facility entered
into by Equistar. The Company used the $750 received from Equistar to repay
debt. Equistar was owned 57% by Lyondell and 43% by the Company until May 15,
1998, when the Company and Lyondell expanded Equistar with the addition of the
ethylene, propylene, ethylene oxide and derivatives businesses of the chemical
subsidiary of Occidental Petroleum Corporation ("Occidental"). Occidental
contributed the net assets of those businesses (including approximately $205 of
related debt) to Equistar. In exchange, Equistar borrowed an additional $500,
$420 of which was distributed to Occidental and $75 to the Company. Equistar was
then owned 41% by Lyondell, 29.5% by Occidental and 29.5% by the Company. No
gain or loss resulted from these transactions. On August 22, 2002, Occidental
sold its 29.5% equity interest in Equistar to Lyondell. Equistar is now owned
70.5% by Lyondell and 29.5% by the Company.

       The Company has evaluated the carrying value of its investment in
Equistar at December 31, 2002 using assumptions that anticipate a long-term
holding value for the Equistar investment based upon anticipated future cash
flows. Valuation of the Equistar investment under a current sale scenario could
result in a different value. As described in "Equity Interest in Equistar" in
Item 1 in this Annual Report, Occidental sold its 29.5% interest in Equistar to
Lyondell. The value of this transaction was based on facts and circumstances
significantly different from those surrounding the Company's interest in
Equistar and therefore such value cannot be viewed to represent similar value
for the Company's investment in Equistar. The carrying value of the Company's
investment in Equistar at December 31, 2002 and 2001 was $563 and $677,
respectively.

       Equistar is managed by a Partnership Governance Committee consisting of
representatives of both partners. Approval of Equistar's strategic plans and
other major decisions requires the consent of the representatives of both
partners. All decisions of Equistar's Governance Committee that do not require
unanimity among the partners may be made by Lyondell's representatives alone.

       Because of the significance of the Company's interest in Equistar to the
Company's total results of operations, the separate financial statements of
Equistar are included in this Annual Report.

Note 6 -- European Receivables Securitization Program

       Since March 2002, the Company has been transferring its interest in
certain European trade receivables to an unaffiliated third party as its basis
for issuing commercial paper under a revolving securitization arrangement
(annually renewable up to five years) with maximum availability of 70 million
euro, which is treated, in part, as a sale under accounting principles generally
accepted in the United States of America. Accordingly, transferred trade
receivables that qualify as a sale, $61 outstanding at December 31, 2002, are
removed from the Company's Consolidated Balance Sheet. The Company continues to
carry its retained interest in a portion of the transferred assets that do not
qualify as a sale, $9 at December 31, 2002, in Trade receivables, net in its
Consolidated Balance Sheet at amounts that approximate net realizable value
based upon the Company's historical collection rate for these trade receivables.
Unused availability under this arrangement at December 31, 2002 was 3 million
euro. For the year ended December 31, 2002, cumulative gross proceeds from this
securitization arrangement were $213. Cash


                                       71



 <PAGE>


                          MILLENNIUM CHEMICALS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
                    (Dollars in millions, except share data)

Note 6 -- European Receivables Securitization Program - Continued

flows from this securitization arrangement are reflected as operating activities
in the Consolidated Statements of Cash Flows. For the year ended December 31,
2002, the aggregate loss on sale associated with this arrangement was $2.
Administration and servicing of the trade receivables under the arrangement
remains with the Company. Servicing liabilities associated with the transaction
are not significant.

Note 7 -- Supplemental Financial Information

<TABLE>
<CAPTION>
                                                                              2002         2001
                                                                         ------------   ----------
<S>                                                                      <C>            <C>
Trade receivables
   Trade receivables..................................................   $      217     $    222
   Allowance for doubtful accounts....................................           (7)          (7)
                                                                         ----------     --------
                                                                         $      210     $    215
                                                                         ==========     ========
Inventories
   Finished products..................................................   $      210     $    219
   In-process products................................................           30           23
   Raw materials......................................................          106          100
   Maintenance parts and supplies.....................................           60           57
                                                                         ----------     --------
                                                                         $      406     $    399
                                                                         ==========     ========
Property, plant and equipment
   Land and buildings................................................    $      222     $    218
   Machinery and equipment...........................................         1,401        1,291
   Construction-in-progress..........................................           111          121
                                                                         ----------     --------
                                                                              1,734        1,630
   Accumulated depreciation and amortization.........................          (872)        (750)
                                                                         ----------     --------
                                                                         $      862     $    880
                                                                         ==========     ========

Goodwill.............................................................    $      487     $    487
   Accumulated amortization..........................................          (106)        (106)
   Cumulative effect of accounting change............................          (275)          --
                                                                         ----------     --------
                                                                         $      106     $    381
                                                                         ==========     ========
</TABLE>


<TABLE>
<CAPTION>
                                                                            2002           2001            2000
                                                                         ------------   ------------   -------------
<S>                                                                      <C>            <C>            <C>
Amortization expense..................................................   $        --    $        13    $         13
                                                                         ============   ============   =============

Rental expense on operating leases is as follows:
                                                                            2002           2001            2000
                                                                         ------------   ------------   -------------
   Rental expense....................................................    $        22    $        19    $         14
                                                                         ============   ============   =============


Cash paid for interest and taxes:

                                                                            2002            2001            2000
                                                                        ------------    ------------   -------------
   Interest (net of interest received)...............................   $        86     $        81    $         77
   Taxes (net of refunds)............................................            (1)              1             169
</TABLE>


                                       72



 <PAGE>


                          MILLENNIUM CHEMICALS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
                    (Dollars in millions, except share data)

Note 8 -- Income Taxes

<TABLE>
<CAPTION>
                                                                     2002            2001            2000
                                                                  ------------   -------------   -------------
                                                                  (Restated -     (Restated -      (Restated -
                                                                  See Note 2)     See Note 2)      See Note 2)
<S>                                                               <C>            <C>             <C>
       Pretax (loss) income is generated from:
          United States........................................   $      (161)   $       (221)   $        90
          Foreign..............................................            81              71             93
                                                                  -----------    ------------    -----------
                                                                          (80)           (150)           183
                                                                  ===========    ============    ===========
       Income tax (benefit) provision is comprised of:
       Federal
          Current..............................................   $       (19)   $        (12)   $        --
          Deferred.............................................           (35)            (68)            41
          Tax benefit from previous years......................           (22)            (42)            --
       Foreign.................................................            16              21             21
       State and local.........................................             2               1              3
                                                                  -----------    ------------    -----------
                                                                          (58)           (100)            65
                                                                  ===========    ============    ===========

</TABLE>

       The Company's effective income tax rate differs from the amount computed
by applying the statutory federal income tax rate as follows:

<TABLE>
<CAPTION>
                                                                     2002          2001             2000
                                                                  ----------    ----------     -------------
                                                                  (Restated -   (Restated -     (Restated -
                                                                  See Note 2)   See Note 2)     See Note 2)
<S>                                                               <C>           <C>             <C>
          Statutory federal income tax rate....................       (35.0)%       (35.0)%            35.0%
          State and local income taxes, net of federal benefit.         1.9          (0.3)              1.1
          Provision for nondeductible expenses, primarily
            goodwill amortization..............................          --           7.5               4.6
          Foreign rate differential............................       (20.1)        (12.0)             (6.9)
          Tax benefit from previous years......................       (27.5)        (31.3)               --
          Establish valuation allowance for French subsidiaries        12.5            --                --
          Other................................................        (4.3)          4.4               1.7
                                                                  ---------     ---------       -----------
          Effective income tax rate............................       (72.5)%       (66.7)%            35.5%
                                                                  =========     =========       ===========
</TABLE>

       The Company recorded a tax benefit of $22 in 2002 and $42 in 2001
unrelated to transactions for those years. In 2002, the tax benefit primarily
relates to an $18 refund of tax and interest originating from refund claims
filed with the Internal Revenue Service ("IRS") in 2002 which carried back
expenses incurred in 1993 and 1994 to earlier tax years. In 2001, the tax
benefit relates to the reversal of tax accruals recorded in 1996. During 2001,
through ongoing discussions and negotiations with the IRS, it was determined
that the Company's original 1996 position would not be challenged and the
accruals recorded in 1996 were no longer necessary. The reversal of those
accruals was offset to an extent by certain new tax provisions the Company
determined probable of assessment based on the evolution of various domestic and
foreign tax examinations and changes in relevant tax regulations.


                                       73



 <PAGE>


                          MILLENNIUM CHEMICALS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
                    (Dollars in millions, except share data)

Note 8 -- Income Taxes - Continued

       Significant components of deferred taxes are as follows:

<TABLE>
<CAPTION>
                                                                                       2002          2001
                                                                                    -----------   ----------
                                                                                    (Restated     (Restated
                                                                                   See Note 2)    See Note 2)
<S>                                                                                <C>            <C>
       Deferred tax assets
          Environmental and legal obligations....................................   $       27     $     35
          Other postretirement benefits and pension..............................           82           --

          Net operating loss carryforwards.......................................          174          143
          Capital loss carryforwards.............................................            9            9
          AMT credits............................................................           97          105
          Other accruals.........................................................           14           14
                                                                                    ----------     --------
                                                                                           403          306
          Valuation allowance....................................................          (19)          (9)
                                                                                    ----------     --------
            Total deferred tax assets............................................          384          297
                                                                                    ----------     --------
       Deferred tax liabilities
          Excess of book over tax basis in property, plant and equipment.........          106          126
          Other postretirement benefits and pension..............................           --           10
          Excess of book over tax basis in investment in Equistar................          456          478
          Reserve for income taxes...............................................          116           33
          Other..................................................................           43           23
                                                                                    ----------     --------
            Total deferred tax liabilities.......................................          721          670
                                                                                    ----------     --------
              Net deferred tax liabilities.......................................   $      337     $    373
                                                                                    ==========     ========
</TABLE>


       As a result of the Company's assessment of its net deferred tax assets at
December 31, 2002, a valuation allowance of $10 was required for the net
deferred tax assets of its French subsidiaries at December 31, 2002. The Company
currently expects that if its French subsidiaries continue to report net
operating losses in future periods, income tax benefits associated with those
losses would not be recognized, and the Company's results in those periods would
be adversely affected.

       At December 31, 2002 and 2001, certain subsidiaries of the Company had
available US net operating loss carryforwards aggregating $288 and $223,
respectively, and foreign net operating loss carryforwards aggregating $244 and
$215, respectively, including $203 and $174, respectively, that were generated
in the United Kingdom ("UK") and $41 and $41, respectively, that were generated
in France. The net operating loss carryforwards generated in the UK do not
expire but are subject to certain limitations on their use. The net operating
loss carryforwards generated in France begin to expire at December 31, 2003
through December 31, 2007. The US net operating loss carryforwards begin to
expire at December 31, 2021 through December 31, 2022. The majority of the
capital loss carryforwards expired at December 31, 2001, with the remaining
capital loss carryforward expiring at December 31, 2002 and 2006. The AMT
credits have no expiration and can be carried forward indefinitely.

       The undistributed earnings of Millennium Chemicals Inc.'s foreign
subsidiaries are considered to be indefinitely reinvested. Accordingly, no
provision for US federal and state income taxes or foreign withholding taxes has
been provided on approximately $155 of such undistributed earnings.
Determination of the potential amount of unrecognized deferred US income tax
liability and foreign withholding taxes is not practicable because of the
complexities associated with its hypothetical calculation.


                                       74



 <PAGE>


                          MILLENNIUM CHEMICALS INC.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
                    (Dollars in millions, except share data)

Note 8 -- Income Taxes - Continued

       The Company and certain of its subsidiaries have entered into tax-sharing
and indemnification agreements with Hanson or its subsidiaries in which the
Company and/or its subsidiaries generally agreed to indemnify Hanson or its
subsidiaries for income tax liabilities attributable to periods when certain
operations of Hanson were included in the consolidated United States tax returns
of the Company's subsidiaries. The terms of these indemnification agreements do
not limit the maximum potential future payments to the indemnified parties. The
maximum amount of future indemnification payments is dependent upon the results
of future audits by various tax authorities and is not practicable to estimate.

       Certain of the income tax returns of the Company's domestic and foreign
subsidiaries are currently under examination by the IRS, Inland Revenue and
various foreign and state tax authorities. In many cases, these audits result in
the examining tax authority issuing proposed assessments. In the United States,
IRS audits for tax years prior to 1989 have been settled. The Company made
payment of $151 of tax and interest to the IRS in 2000 to settle certain issues
relating to the tax years 1986 through 1988. Additionally, the IRS has concluded
its examinations of the Company's Federal income tax returns for 1989 through
1996 and during 2002, the Company negotiated a settlement with the IRS with
respect to the audit issues relating to the Company's Federal income tax returns
for the years 1989 through 1992. The Company has estimated the payment of tax
and interest to be made to the IRS in 2003 under this settlement and has
included such estimate in Income taxes payable. In connection with the 1993
through 1996 examination, the IRS has issued proposed assessments that challenge
certain of the Company's tax positions. The Company believes that its tax
positions comply with applicable tax law and it intends to defend its positions
through the IRS appeals process. The Company believes it has adequately provided
for any probable outcome related to these matters, and does not anticipate any
material earnings impact from their ultimate settlement or resolution. However,
if the IRS positions on certain issues are upheld after all the Company's
administrative and legal options are exhausted, a material impact on the
Company's earnings and cash flows could result. The IRS examination for the
years subsequent to 1996 will commence in early 2003.

       Reserves for the resolution of probable tax assessments that are expected
to result in the reduction of tax attributes recognized in deferred tax assets,
rather than a cash payment to the taxing authorities, are included as a
component of deferred tax liabilities. Other reserves for the resolution of
probable tax assessments where cash payment is expected, but not within the next
year, are included in Other liabilities.

Note 9 -- Long-Term Debt and Credit Arrangements

<TABLE>
<CAPTION>
                                                                                               2002        2001
                                                                                            ----------  ----------
<S>                                                                                         <C>         <C>
Revolving Loans due 2006 bearing interest at the option of the Company at the higher of
   the federal funds rate plus .50% and the bank's prime lending rate plus 1.0%; or at
   LIBOR or NIBOR plus 2.0%, plus, in each case, a facility fee of .50%, to be paid
   quarterly..............................................................................  $      10   $     10
Term Loans due 2006 bearing interest at the option of the Company at the higher of the
   federal funds rate plus .50% and the bank's prime lending rate plus 2.0%; or at LIBOR
   or NIBOR plus 3.0%, to be paid quarterly...............................................         49        125
7% Senior Notes due 2006..................................................................        500        500
7.625% Senior Debentures due 2026.........................................................        249        249
9.25% Senior Notes due 2008...............................................................        377        275
Debt payable through 2011 at interest rates ranging from 0% to 9.5%.......................         26         24
Other.....................................................................................         13         --
Less current maturities of long-term debt.................................................        (12)       (11)
                                                                                            ---------   --------
                                                                                            $   1,212   $  1,172
                                                                                            =========   ========
</TABLE>


                                       75


 <PAGE>

                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 9 -- Long-Term Debt and Credit Arrangements - Continued

       In June 2002, the Company received approximately $100 in net proceeds
($102.5 in gross proceeds) from the completion of an offering by Millennium
America Inc. ("Millennium America"), a wholly owned indirect subsidiary of the
Company, of $100 additional principal amount at maturity of 9.25% Senior Notes
due June 15, 2008 (the "9.25% Senior Notes"). The gross proceeds of the offering
were used to repay all outstanding borrowings at that time under the Company's
revolving loan portion, which has a maximum availability of $175 (the "Revolving
Loans"), of its five-year credit agreement (the "Credit Agreement") and to repay
$65 outstanding under the term loan portion (the "Term Loans") of the Credit
Agreement. During 2001, the Company refinanced $425 of borrowings and paid
refinancing expenses of $11 with the combined proceeds of the Credit Agreement,
which provided the Revolving Loans and $125 in Term Loans, and the issuance of
$275 aggregate principal amount of 9.25% Senior Notes by Millennium America. The
Company and Millennium America guarantee the obligations under the Credit
Agreement.

       The Revolving Loans are available in US dollars, British pounds and
euros. The Revolving Loans may be borrowed, repaid and reborrowed from time to
time. The Revolving Loans include a $50 letter of credit subfacility and a
swingline facility in the amount of $25. As of December 31, 2002, $11 was
outstanding under the letter of credit subfacility, and no amount under the
swingline facility. The Term Loans may be prepaid in part or in total at the
option of the Company at any time, but any such amounts prepaid may not be
reborrowed. The interest rates on the Revolving Loans and the Term Loans are
floating rates based upon margins over LIBOR, NIBOR, or the Administrative
Agent's prime lending rate, as the case may be. Such margins, as well as the
facility fee, are based on the Company's Leverage Ratio, as defined. The margins
set forth in the table above are the margins at the end of the fourth quarter
and through the date hereof. The weighted-average interest rate for borrowings
under the Company's Revolving Loans, excluding facility fees, was 3.9%, 5.4% and
6.7% for 2002, 2001 and 2000, respectively. The weighted average interest rate
for borrowings under the Term Loans was 4.9% for 2002 and 6.4% for 2001.

       The Credit Agreement contains various restrictive covenants and requires
that the Company meet certain financial performance criteria. The financial
covenants in the Credit Agreement include a Leverage Ratio and an Interest
Coverage Ratio. The Leverage Ratio is the ratio of Total Indebtedness to
cumulative EBITDA for the prior four fiscal quarters, each as defined. The
Interest Coverage Ratio is the ratio of cumulative EBITDA for the prior four
fiscal quarters to Net Interest Expense, for the same period, each as defined.
To permit the Company to be in compliance, these covenants were amended in the
fourth quarter of 2001 and again in the second quarter of 2002. This second
amendment was conditioned upon consummation of the offering of $100 additional
principal amount of the 9.25% Senior Notes and retirement of the Credit
Agreement debt described above. Under the covenants now in effect, the Company
is required to maintain a Leverage Ratio of no more than 7.25 to 1.00 for the
fourth quarter of 2002; 5.75 to 1.00 for the first quarter of 2003; 4.75 to 1.00
for the second quarter of 2003; 4.50 to 1.00 for the third and fourth quarters
of 2003; and 4.00 to 1.00 for January 1, 2004 and thereafter; and an Interest
Coverage Ratio of no less than 1.90 to 1.00 for the fourth quarter of 2002; 2.25
to 1.00 for the first quarter of 2003; 2.50 to 1.00 for the second, third and
fourth quarters of 2003; and 3.00 to 1.00 for January 1, 2004 and thereafter.
The covenants in the Credit Agreement also limit, among other things, the
ability of the Company and/or certain subsidiaries of the Company to: (i) incur
debt and issue preferred stock; (ii) create liens; (iii) engage in
sale/leaseback transactions; (iv) declare or pay dividends on, or purchase, the
Company's stock; (v) make restricted payments; (vi) engage in transactions with
affiliates; (vii) sell assets; (viii) engage in mergers or acquisitions; (ix)
engage in domestic accounts receivable securitization transactions; and (x)
enter into restrictive agreements. In the event the Company sells certain assets
as specified in the Credit Agreement, the Term Loans must be prepaid with a
portion of the net cash proceeds of such sale. The obligations under the Credit
Agreement are collateralized by: (1) a pledge of 100% of the stock of the
Company's existing and future domestic subsidiaries and 65% of the stock of
certain of the Company's existing and future foreign subsidiaries, in both cases
other than subsidiaries that hold immaterial assets (as defined in the Credit
Agreement); (2) all the equity interests held by the Company's subsidiaries in
Equistar and the La Porte Methanol Company (which pledges are limited to the
right to receive distributions made by Equistar and the La Porte Methanol
Company, respectively); and (3) all present and future accounts receivable,
intercompany indebtedness and inventory of the Company's domestic subsidiaries,
other than subsidiaries that hold immaterial assets.





                                       76





<PAGE>


                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)


Note 9 -- Long-Term Debt and Credit Arrangements - Continued

       The Company was in compliance with all covenants under the Credit
Agreement at December 31, 2002. Compliance with these covenants is monitored
frequently in order to assess the likelihood of continued compliance. The
Company currently expects that it will be in compliance with these covenants at
March 31, 2003. However, the Company believes that it will not be in compliance
with certain of these financial covenants at June 30, 2003, unless economic and
business conditions improve significantly in the second quarter of 2003.
Accordingly, the Company is seeking a waiver or amendment to the Credit
Agreement, which it expects to obtain by June 30, 2003.

       The Company had $21 outstanding ($10 of outstanding borrowings and
outstanding letters of credit of $11) under the Revolving Loans and,
accordingly, had $154 of unused availability under such facility at December 31,
2002. In addition, the Company had $49 outstanding under the Term Loans at
December 31, 2002. In addition to letters of credit outstanding under the Credit
Agreement, the Company had outstanding letters of credit under other
arrangements of $12 at December 31, 2002. The Company had unused availability
under short-term uncommitted lines of credit, other than the Credit Agreement,
of $44 at December 31, 2002.

       Millennium America also has outstanding $500 aggregate principal amount
of 7.00% Senior Notes due November 15, 2006 (the "7.00% Senior Notes") and $250
aggregate principal amount of 7.625% Senior Debentures due November 15, 2026
(the "7.625% Senior Debentures") that are fully and unconditionally guaranteed
by the Company. The indenture under which the 7.00% Senior Notes and 7.625%
Senior Debentures were issued contains certain covenants that limit, among other
things: (i) the ability of Millennium America and its Restricted Subsidiaries
(as defined) to grant liens or enter into sale/leaseback transactions; (ii) the
ability of the Restricted Subsidiaries to incur additional indebtedness; and,
(iii) the ability of Millennium America and the Company to merge, consolidate or
transfer substantially all of their respective assets. This indenture allows the
Company to grant security on loans of up to 15% of Consolidated Net Tangible
Assets ("CNTA"), as defined, of Millennium America. Accordingly, based upon CNTA
and secured borrowing levels at December 31, 2002, any reduction in CNTA below
approximately $1,600 would decrease the Company's availability under the
Revolving Loans by 15% of any such reduction. CNTA was approximately $2,000 at
December 31, 2002.

       The 9.25% Senior Notes were issued by Millennium America and are
guaranteed by the Company. The indenture under which the 9.25% Senior Notes were
issued contains certain covenants that limit, among other things, the ability of
the Company and/or certain subsidiaries of the Company to: (i) incur additional
debt; (ii) issue redeemable stock and preferred stock; (iii) create liens; (iv)
redeem debt that is junior in right of payment to the 9.25% Senior Notes; (v)
sell or otherwise dispose of assets, including capital stock of subsidiaries;
(vi) enter into arrangements that restrict dividends from subsidiaries; (vii)
enter into mergers or consolidations; (viii) enter into transactions with
affiliates; and, (ix) enter into sale/leaseback transactions. In addition, this
indenture contains a covenant that would prohibit the Company from (i) paying
dividends or making distributions on its common stock; (ii) repurchasing its
common stock; and (iii) making other types of restricted payments, including
certain types of investments, if such restricted payments would exceed a
"restricted payments basket." The basket is reduced by the amount of each such
restricted payment and is increased by: (i) 50% of the Company's Cumulative Net
Income (as defined in such indenture) since July 1, 2001 (or is reduced by 100%
of its Cumulative Net Income if such amount is negative); (ii) the net cash
proceeds from the sale by the Company of its common stock to third parties; and
(iii) 50% of any cash distributions received from Equistar. As of March 25,
2003, the date of filing of the original Annual Report on Form 10-K, and after
taking into consideration the $9 dividend declared in the first quarter of 2003
and the restatements and reclassification reflected in this Form 10-K/A, the
amount of the restricted payments basket was $11. The indenture also requires
the calculation of a Consolidated Coverage Ratio, defined as the ratio of the
aggregate amount of EBITDA, as defined, for the four most recent fiscal quarters
to Consolidated Interest Expense, as defined, for the four most recent quarters.
If this ratio were to cease to be greater than 2.00 to 1.00 (2.25 to 1.00 after
June 15, 2003), there would be certain restrictions on the Company's ability to
incur additional indebtedness and pay dividends, repurchase capital stock or
make certain other restricted payments. However, if the 9.25% Senior Notes were
to receive investment grade credit ratings from both Standard & Poor's ("S&P")
and Moody's Investor Services, Inc. ("Moody's") and meet certain other
requirements as specified in the indenture, certain of these covenants would no
longer apply. At December 31, 2002, the Company was in compliance with all
covenants in the indentures governing the 9.25% Senior Notes, 7.00% Senior Notes
and 7.625% Senior Debentures.



                                       77





<PAGE>

                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)


Note 9 -- Long-Term Debt and Credit Arrangements - Continued

       The Company is currently rated BB+ by S&P and Ba1 by Moody's. On March 7,
2003, S&P lowered the Company's credit rating from investment grade rating BBB-
to non-investment grade rating BB+ with a negative outlook, reflecting S&P's
concern regarding the Company's ability to generate the cash flow necessary to
substantially improve its financial profile during a period of economic
uncertainties and higher raw material costs. Moody's affirmed the Company's
non-investment grade rating on June 19, 2002, but revised its ratings outlook to
negative from stable, reflecting Moody's concern over the Company's cash flow
performance in the fourth quarter of 2001 and the first quarter of 2002. The
Company could be required to cash collateralize the mark-to-market positions of
certain derivative instruments dependent upon the market value of these
instruments. Based on the current market value of these instruments, the Company
would not be required to place any funds on deposit with the counterparty to
these transactions. Furthermore, the Company will also provide a $2.5 letter of
credit in accordance with a real estate lease. Obtaining this letter of credit
will result in an equal reduction of availability under the revolving credit
portion of the Credit Agreement.

       Millennium America, a wholly owned indirect subsidiary of the Company,
had an indemnity agreement with Equistar pursuant to which Millennium America
could have been required under certain circumstances to contribute to Equistar
up to $750. This indemnity terminated upon the closing of the purchase by
Lyondell of Occidental's interest in Equistar.

       The Company had outstanding Notes payable of $4 as of each of December
31, 2002 and 2001, bearing interest at an average rate of approximately 19.1%
and 17.3% in 2002 and 2001, respectively, with maturity of 30 days or less. At
December 31, 2002, the Company had outstanding standby letters of credit
amounting to $23 and had unused availability under short-term uncommitted lines
of credit and the Credit Agreement of $198.

       The Company uses gold as a component in a catalyst in the Company's La
Porte, Texas facility. In April 1998, the Company entered into an agreement that
provides the Company with the right to use gold owned by a third party for a
five-year term. The agreement requires the Company to either deliver the gold to
the third party at the end of the term or pay for it at its then-current value.
As a result of a change in accounting for this agreement, the Company's
financial statements were restated as more fully described in Note 2. The value
of the gold and the Company's obligation under this agreement was $14 and $11 at
December 31, 2002 and 2001, respectively. Such obligation at December 31, 2002
and 2001 is included in Other short-term borrowings and Other long-term
borrowings, respectively. The change in value of the gold and the Company's
obligation under this agreement, which is included in Selling, development and
administrative expense, was a loss of $3 for the year ended December 31, 2002,
and was not significant for each of the years ended December 31, 2001 and 2000.

       The maturities of Long-term debt during the next five years and
thereafter are as follows:

<TABLE>
<S>                                                    <C>
       2003............................................ $   12
       2004............................................      6
       2005............................................     26
       2006............................................    534
       2007............................................      4
       Thereafter......................................    629
       Non-cash components of long-term debt...........     13
                                                        -------
                                                        $1,224
                                                        =======

</TABLE>

Note 10 -- Derivative Instruments and Hedging Activities

       Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended ("SFAS No. 133"),
which requires that all derivative instruments be reported on the balance sheet
at fair value and establishes criteria for designation and effectiveness of
hedging relationships. The cumulative effect of adopting SFAS No. 133 as of
January 1, 2001 was not material to the Company's financial statements.





                                       78





<PAGE>


                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 10 -- Derivative Instruments and Hedging Activities - Continued

       The Company is exposed to market risk, such as changes in currency
exchange rates, interest rates and commodity pricing. To manage the volatility
relating to these exposures, the Company selectively enters into derivative
transactions pursuant to the Company's policies for hedging practices.
Designation is performed on a specific exposure basis to support hedge
accounting. The changes in fair value of these hedging instruments are offset in
part or in whole by corresponding changes in the fair value or cash flows of the
underlying exposures being hedged. The Company does not hold or issue derivative
financial instruments for speculative or trading purposes.

       Foreign Currency Exposure Management: The Company manufactures and sells
its products in a number of countries throughout the world and, as a result, is
exposed to movements in foreign currency exchange rates. The primary purpose of
the Company's foreign currency hedging activities is to manage the volatility
associated with foreign currency purchases and foreign currency sales. The
Company utilizes forward exchange contracts with various terms. As of December
31, 2002 these contracts had expiration dates within the next twelve months. The
Company utilizes forward exchange contracts with contract terms normally lasting
less than three months to protect against the adverse effect that exchange rate
fluctuations may have on foreign currency denominated trade receivables and
trade payables. These derivatives have not been designated as hedges for
accounting purposes. The gains and losses on both the derivatives and the
foreign currency denominated trade receivables and payables are recorded in
current earnings. Net amounts included in S,D&A expense, which offset similar
amounts from foreign currency denominated trade receivables and payables, also
included in S,D&A expense, were a gain of $2 in 2002 and were not significant in
2001.

       In addition, the Company utilizes forward exchange contracts that qualify
as cash flow hedges. These are intended to offset the effect of exchange rate
fluctuations on forecasted sales and inventory purchases. Gains and losses on
these instruments are deferred in OCI until the underlying transaction is
recognized in earnings. The earnings impact is reported either in Net sales or
Cost of products sold to match the underlying transaction being hedged. During
2002 and 2001, net gains of $4 and net losses of $4, respectively, on forward
exchange contracts designated as cash flow hedges were reclassified to earnings
to match the gain or loss on the underlying transaction being hedged. Hedge
ineffectiveness had no significant impact on earnings for 2002 and 2001. No
forward exchange contract cash flow hedges were discontinued during 2002 and
2001. The Company estimates that approximately $1 (less than $1 after-tax) of
net derivative losses on foreign currency cash flow hedges included in OCI at
December 31, 2002 will be reclassified to earnings during the next twelve
months.

       Commodity Price Risk Management: Raw materials used by the Company are
subject to price volatility caused by demand and supply conditions and other
unpredictable factors. The Company selectively uses commodity swap arrangements
to manage the volatility related to anticipated purchases of natural gas with
various terms. As of December 31, 2002, these swaps had expiration dates no
later than January 2004. These market instruments are designated as cash flow
hedges. The mark-to-market gain or loss on qualifying hedges is included in OCI
to the extent effective, and reclassified into Cost of products sold in the
period during which the hedged transaction affects earnings. The mark-to-market
gains or losses on ineffective portions of hedges are recognized in Cost of
products sold immediately. During 2002 and 2001, net losses on commodity swaps
designated as cash flow hedges of $6 and $5, respectively, were reclassified to
Cost of products sold to match the gain on the underlying transaction being
hedged. Hedge ineffectiveness had no significant impact on earnings for 2002 and
2001. No commodity swap cash flow hedges were discontinued in 2002 and 2001. The
Company estimates that approximately $1 ($1 after-tax) of net losses on
commodity swaps included in OCI at December 31, 2002 will be reclassified to
earnings during the next twelve months. In addition, the Company uses commodity
swap agreements to manage the volatility related to anticipated purchases of
certain commodities, a portion of which exposes the Company to natural gas price
risk. These derivatives have not been designated as hedges for accounting
purposes. Net gains of $1 were included in Cost of products sold in 2002. As of
December 31, 2002, these swaps had expiration dates no later than January 2003.

       Interest Rate Risk Management: The Company selectively uses derivative
instruments to manage its ratio of debt bearing fixed interest rates to debt
bearing variable interest rates. At December 31, 2002, the Company had
outstanding interest rate swap agreements with a notional amount of $200, which
are designated as fair value hedges of underlying fixed-rate obligations. The
fair value of these interest rate swap agreements was approximately $4 at
December 31, 2002 resulting in an increase to long-term debt carrying value and
the recognition of a corresponding swap asset. The gains and losses on both the
interest rate swaps and the hedged portion of the underlying debt are




                                       79






<PAGE>


                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)


Note 10 -- Derivative Instruments and Hedging Activities - Continued

recorded in Interest expense. In addition, at December 31, 2002, the Company had
outstanding an interest rate swap agreement with a notional amount of $50, which
is designated as a cash flow hedge of outstanding variable rate debt. The fair
value of this interest rate swap agreement was not significant at December 31,
2002. Hedge ineffectiveness had no significant impact on earnings for 2002 and
2001. In July 2002, the Company terminated all of the interest rate swap
agreements that were in effect at that time. Proceeds received upon termination
were approximately $12. Gains deferred on these interest rate swaps of
approximately $10 result in an increase to long-term debt carrying value and
will be recognized as a reduction in Interest expense ratably over approximately
four years, the remaining term of the underlying fixed-rate obligations
previously hedged. The amount of these deferred gains recognized as a reduction
of Interest expense during the year ended December 31, 2002 was approximately
$1.

       During the year 2001, the Company had entered into interest-rate swap
agreements to convert $200 of its fixed-rate debt into variable-rate debt. These
derivatives did not qualify for hedge accounting because the maturity of the
swaps was less than the maturity of the hedged debt. Accordingly, changes in the
fair value of such agreements was recognized as a reduction or increase in
Interest expense. The swap agreements were terminated in 2001 and realized gains
of $5 were recorded as a reduction of Interest expense for 2001.

Note 11--Fair Value of Non-Derivative Financial Instruments

       The fair value of all short-term financial instruments (i.e., trade
receivables, notes payable, etc.) and restricted cash approximates their
carrying value, due to their short maturity or ready availability. The fair
value of the Company's other financial instruments is based upon estimates
received from independent financial advisors as follows:

<TABLE>
<CAPTION>

                                                                         2002                      2001
                                                                ------------------------  -----------------------
                                                                (Restated -- See Note 2)  (Restated -- See Note 2)
                                                                  Carrying      Fair        Carrying      Fair
                                                                   Value        Value        Value        Value
                                                                   -----        -----        -----        -----

<S>                                                               <C>           <C>         <C>           <C>
       Amount outstanding under Revolving Loans................     $ 10         $ 10         $ 10         $ 10
       Term Loans..............................................       49           49          125          125
       7.00% Senior Notes......................................      500          480          500          469
       7.625% Senior Debentures................................      249          208          249          194
       9.25% Senior Notes......................................      377          392          275          283
       Other short-term and long-term borrowings...............       14           14           11           11
</TABLE>

       In addition, the Company has various contractual obligations to purchase
raw materials, utilities and services used in the production and distribution of
its products, including but not limited to: titanium ores for TiO[u]2, CST for
fragrance chemicals, syngas for methanol, carbon monoxide for acetic acid and
ethylene for VAM. Such commitments are generally at market prices, formula
prices based primarily on costs of raw materials, or at fixed prices but subject
to escalation for inflation. Accordingly, the fair value of such obligations
approximates their contractual value.

Note 12-- Pension and Other Postretirement Benefits

       Domestic Benefit Plans: The Company has non-contributory defined benefit
pension plans and other postretirement benefit plans that cover substantially
all of its United States employees. The benefits for the pension plans are based
primarily on years of credited service and average compensation as defined under
the respective plan provisions. The Company's funding policy is to contribute
amounts to the pension plans sufficient to meet the minimum funding requirements
set forth in the Employee Retirement Income Security Act of 1974, plus such
additional amounts as the Company may determine to be appropriate from time to
time. The pension plans' assets are held in a master asset trust and are managed
by independent portfolio managers. Such assets include the Company's Common
Stock, which account for less than 1% of master trust assets at December 31,
2002 and 2001.





                                       80



<PAGE>

                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 12 -- Pension and Other Postretirement Benefits - Continued

       The Company also sponsors defined contribution plans for its salaried and
certain union employees. Contributions relating to defined contribution plans
are made based upon the respective plan provisions.

       Foreign Benefit Arrangements: Certain of the Company's foreign
subsidiaries have defined benefit plans. The assets of these plans are held
separately from the Company in independent funds.

       The following table provides a reconciliation of the changes in the
benefit obligations and the fair value of the plan assets over the two-year
period ending December 31, 2002, and a statement of the funded status as of
December 31 for both years:

<TABLE>
<CAPTION>
                                                                                                       Other
                                                                                                   Postretirement
                                                                         Pension Benefits             Benefits
                                                                       ----------------------   ----------------------
                                                                          2002        2001         2002         2001
                                                                       ----------  ----------   ----------  ----------
                                                                       (Restated-
                                                                       See Note 2)
<S>                                                                    <C>         <C>          <C>         <C>
Reconciliation of benefit obligation
   Projected benefit obligation at beginning of year................   $     758  $     760    $      80    $      97
   Service cost, including interest.................................          12         12           --           --
   Interest in PBO..................................................          52         53            6            6
   Benefit payments.................................................         (78)       (84)         (12)         (12)
   Curtailments.....................................................          --          1           --           --
   Net experience loss (gain).......................................          74         15           15           (7)
   Amendments.......................................................          11          4          (13)          (4)
   Translation and other adjustments................................          22         (3)          --           --
                                                                       ---------- ----------   ----------   ----------
     Projected benefit obligation at end of year....................   $     851  $     758    $      76    $      80
                                                                       ---------- ----------   ----------   ----------
Reconciliation of fair value of plan assets
   Fair value of plan assets at beginning of year...................   $     778  $     895    $      --    $      --
   Return on plan assets............................................         (91)       (36)          --           --
   Employer contributions...........................................           9          8           12           12
   Benefit payments.................................................         (78)       (84)         (12)         (12)
   Translation and other adjustments................................          11         (5)          --           --
                                                                       ---------- ----------   ----------   ----------
     Fair value of plan assets at end of year.......................   $     629  $     778    $      --    $      --
                                                                       ---------- ----------   ----------   ----------
 Funded status
   Funded status at December 31.....................................   $    (222) $      20    $     (76)   $     (80)
   Unrecognized net asset...........................................          (3)        (4)          --           --
   Unrecognized prior service cost..................................          19          8          (23)         (14)
   Unrecognized loss (gain).........................................         384        146          (17)         (32)
                                                                       ---------- ----------   ----------   ----------
     Net prepaid (accrued) benefit cost.............................         178        170         (116)        (126)
     Additional minimum liabilities.................................        (309)       (11)          --           --
     Intangible asset...............................................          16          3           --           --
                                                                       ---------- ----------   ----------   ----------
     Net (accrued) prepaid benefit cost.............................   $    (115) $     162    $    (116)   $    (126)
                                                                       ---------- ----------   ----------   ----------

</TABLE>


                                       81


<PAGE>

                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 12 -- Pension and Other Postretirement Benefits - Continued

       As of December 31, 2002, the net accrued benefit cost for pension
benefits is comprised of the following:

<TABLE>
<CAPTION>

                                                                                         2002
                                                                                      -----------
                                                                                      (Restated-
                                                                                      See Note 2)
      <S>                                                                             <C>

       Prepaid benefit cost...........................................................  $    20
       Intangible asset...............................................................       16
       Accrued benefit cost...........................................................     (151)
                                                                                        --------

       Net accrued benefit cost.......................................................  $  (115)
                                                                                        ========

</TABLE>

       The net accrued benefit cost of $115 at December 31, 2002 is included in
Other liabilities in the Consolidated Balance Sheet. An equity charge of $188
($286 pre-tax) was required at December 31, 2002 to record additional minimum
liabilities associated with certain of the Company's defined benefit pension
plans and is included in Cumulative other comprehensive loss at December 31,
2002.

       At December 31, 2001, Other assets includes an intangible asset of $3 and
Cumulative other comprehensive loss includes $4 to record additional minimum
liabilities associated with certain of the Company's defined benefit pension
plans.

       Pension plans with projected benefit obligations in excess of the fair
value of assets are summarized as follows at December 31:

<TABLE>
<CAPTION>

                                                                                          2002        2001
                                                                                       ----------  ----------
                                                                                       (Restated-
                                                                                       See Note 2)
       <S>                                                                             <C>          <C>
       Projected benefit obligation................................................... $    838     $   143
       Fair value of assets...........................................................      604         109
</TABLE>


       Pension plans with accumulated benefit obligations in excess of the fair
value of assets are summarized as follows at December 31:

<TABLE>
<CAPTION>
                                                                                          2002        2001
                                                                                       ----------  ----------
                                                                                       (Restated-
                                                                                       See Note 2)
       <S>                                                                             <C>          <C>
       Accumulated benefit obligation................................................. $    751     $   45
       Fair value of assets...........................................................      604         29

</TABLE>

                                       82


<PAGE>

                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 12 -- Pension and Other Postretirement Benefits - Continued

       The following table provides the components of net periodic benefit cost:

<TABLE>
<CAPTION>

                                                                                                  Other
                                                                                              Postretirement
                                                           Pension Benefits                        Benefits
                                                   ---------------------------------- -----------------------------------
                                                      2002        2001       2000        2002        2001        2000
                                                   ----------- ----------- ---------- ----------- -----------  ----------
                                                   (Restated-
                                                   See Note 2)
<S>                                               <C>           <C>        <C>        <C>          <C>         <C>

Net periodic benefit cost
   Service cost, including interest............  $  12        $  12       $   12       $   --      $   --     $   --
   Interest on PBO.............................     52           53           54            6           6          8
   Return on plan assets.......................    (75)         (76)         (78)          --          --         --
   Amortization of unrecognized net loss.......      1           --            2           (2)         (2)        (2)
   Amortization of prior service cost..........      1            1            1           (2)         (1)        (1)
   Net effect of curtailments and settlements..      2            2           --           --          (1)        --
                                                 ------       ------      -------      -------     -------    -------
   Net periodic benefit cost...................     (7)          (8)          (9)           2           2          5
   Defined contribution plans..................      4            4            4           --          --         --
                                                 ------       ------      -------      -------     -------    -------
   Net periodic benefit cost...................  $  (3)       $  (4)      $   (5)      $    2      $    2     $    5
                                                 ======       ======      =======      =======     =======    =======

</TABLE>

       The assumptions used in the measurement of the Company's benefit
obligations are shown in the following table:


<TABLE>
<CAPTION>


                                                                                                      Other
                                                                                                  Postretirement
                                                           Pension Benefits                          Benefits
                                                  ---------------------------------- -----------------------------------
                                                     2002        2001        2000        2002        2001        2000
                                                  ---------------------- ----------- ----------- ----------- -----------
<S>                                               <C>         <C>         <C>         <C>         <C>         <C>

Weighted average assumptions
   as of December 31
     Discount rate.............................   6.35%       7.27%       7.38%       6.50%       7.50%       7.50%
     Expected return on plan assets............   8.34%       8.87%       8.86%         --          --          --
     Rate of compensation increase.............   3.52%       4.23%       4.30%         --          --          --

</TABLE>

       Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The assumed healthcare cost trend
rate used in measuring the healthcare portion of the postretirement benefit
obligation at December 31, 2002 was 9.0% for 2003, declining gradually to 5.5%
for 2010 and thereafter. A 1% increase or decrease in assumed health care cost
trend rates would affect service and interest components of postretirement
health care benefit costs by less than $1 in each of the years ended December
31, 2002 and 2001. The effect on the accumulated postretirement benefit
obligation would be $4 at each of December 31, 2002 and 2001.

Note 13--Stock-Based Compensation Plans

       Omnibus Incentive Compensation Plan: The Company's 2001 Omnibus Incentive
Compensation Plan (the "Omnibus Incentive Plan") was designed to optimize the
profitability and growth of the Company through annual and long-term incentives
that are consistent with the Company's goals and to link the personal interests
of the participants to those of the Company's shareholders and was ratified by
the Company's shareholders in 2001. Since January 1, 2001, awards under the
Company's Long Term Incentive Plan and Executive Long Term Incentive Plan
described below have been granted under the Omnibus Incentive Plan.


                                       83



<PAGE>

                            MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 13 -- Stock-Based Compensation Plans - Continued

       The Omnibus Incentive Plan provides for the following types of awards:
(i) stock options, including incentive stock options and non-qualified stock
options; (ii) stock appreciation rights; (iii) restricted shares; (iv)
performance units; (v) performance shares; (vi) stock awards; and (vii)
cash-based awards. Awards can be granted to employees and non-employee
directors. At December 31, 2002, 1,588,000 of the maximum 3,200,000 shares of
Common Stock originally reserved for delivery to participants under the Omnibus
Incentive Plan were available to be granted as awards under the plan.

       Stock Options Awards Under the Omnibus Incentive Plan: The Compensation
Committee of the Board of Directors determines the vesting schedule and
expiration date of all options granted under the Omnibus Incentive Plan, except
that options expire no later than ten years from the date of grant. Stock
options are to be granted at exercise prices no less than the market price of
the Company's Common Stock on the date of grant. All grants under the Omnibus
Incentive Plan fully vest in the event of a change-in-control (as defined by the
plan) of the Company.

       A limited number of executive officers and key employees of the Company
were awarded an aggregate of 957,000 and 655,000 non-qualified stock options in
January 2002 and May 2001, respectively. The stock option awards vest in three
equal annual installments commencing on the first anniversary of the date of
grant, and expire ten years from the date of grant. No other stock option awards
were granted under the Omnibus Incentive Plan as of December 31, 2002 and 2001,
respectively. No compensation expense was recognized for such equity-related
awards under this plan in 2002 or 2001.

       Long Term Incentive Plan: The Company has a Long Term Incentive Plan for
certain management employees. Commencing in 2001, these awards have been granted
under the Omnibus Incentive Plan by reference to the Long Term Incentive Plan.
The plan provides for awards of Common Stock to be granted if annual Economic
Value Added ("EVA'r'") targets are achieved, which can then vest at the end of
the three-year vesting period. Unvested shares will be forfeited. A trust has
been established to hold shares of Common Stock to fund this obligation. At
December 31, 2002, 46,947 shares have been purchased at a total cost of $1 and
are held in this trust. Compensation expense was $1 in 2002 and was not
significant in 2001 and 2000.

       Executive Long Term Incentive Plan: In 2000, the Company established an
Executive Long Term Incentive Plan for its senior executives. Commencing in
2001, these awards have been granted under the Omnibus Incentive Plan by
reference to the Executive Long Term Incentive Plan. One half of the award
granted to each executive provides for Common Stock to be granted if annual
EVA'r' targets are achieved, which can then vest at the end of the three-year
vesting period. Unvested shares will be forfeited. A trust has been established
to hold shares of Common Stock to fund this obligation. At December 31, 2002,
220,722 shares have been purchased at a total cost of $4 and are held in this
trust. The remaining half of the award is based on the total shareholder return
on the Common Stock compared to total shareholder return on the common stock of
the Company's peer group (companies in the Standard & Poor's Chemical Composite
Index) over a three-year period, in each case including reinvested dividends.
This award will be paid in cash. Compensation expense was $1 in 2002 and was $3
in each of 2001 and 2000.

       Stock Incentive Plan: The Company's Stock Incentive Plan was designed to
enhance the profitability and value of the Company for the benefit of its
shareholders and was ratified by the Company's shareholders in 1997.

       The Stock Incentive Plan provides for the following types of awards to
employees: (i) stock options, including incentive stock options and
non-qualified stock options; (ii) stock appreciation rights; (iii) restricted
shares; (iv) performance units; and, (v) performance shares. At December 31,
2002, 1,398,872 of the maximum 3,909,000 shares of Common Stock originally
reserved for delivery to participants under the Stock Incentive Plan were
available to be granted as awards under the plan.

       Restricted Share Awards Under the Stock Incentive Plan: The vesting
schedule for granted restricted share awards was as follows: (i) three equal
tranches aggregating 25% of the total award vesting in each of October 1999,
2000 and 2001; and, (ii) three equal tranches aggregating 75% of the total award
subject to the achievement of "value creation" performance criteria established
by the Compensation Committee for each of the three performance cycles
commencing January 1, 1997 and ending December 31, 1999, 2000 and 2001,
respectively. Half of the earned portion of a tranche relating to a particular
performance-based cycle of the award vested immediately and the remainder vests
in five equal annual installments commencing on the first anniversary of the end
of the cycle.

                                       84


 <PAGE>

                            MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 13 -- Stock-Based Compensation Plans - Continued

       Unearned and/or unvested restricted shares, based on the market value of
the shares at each balance sheet date, are included as a separate component of
Shareholders' (deficit) equity and amortized over the restricted period. Income
recognized in 2002 was not significant. Income of $2 and $6 was recognized for
the years ended December 31, 2001 and 2000, respectively.

       Stock Option Awards Under the Stock Incentive Plan: Stock options granted
under the Stock Incentive Plan vest three years from the date of grant and
expire ten years from the date of grant. All stock options have been granted at
exercise prices equal to the market price of the Company's Common Stock on the
date of grant. All grants under the Stock Incentive Plan fully vest in the event
of a change-in-control (as defined by the plan) of the Company.

       A summary of changes in all of the awards of restricted stock and stock
options under the Omnibus Incentive Plan and the Stock Incentive Plan, which are
the only plans under which such awards can be made, is as follows:

<TABLE>
<CAPTION>
                                                            Weighted-                            Weighted-
                                         Restricted          Average            Stock             Average
                                           Shares          Grant Price         Options        Exercise Price
                                       ---------------   -----------------  --------------  --------------------
<S>                                         <C>               <C>                 <C>             <C>
Balance at December 31, 1999........        2,212,224         $23.71              538,000         $21.75
   Vested and issued................         (460,914)        $23.70               (5,000)        $19.00
   Cancelled........................         (172,495)        $23.75              (40,000)        $21.24
   Granted..........................               --             --              117,000         $19.07
                                       ---------------                      --------------
Balance at December 31, 2000........        1,578,815         $23.73              610,000         $21.31
   Vested and issued................         (298,065)        $23.81                  --              --
   Cancelled........................         (641,427)        $23.39              (57,000)        $21.33
   Granted..........................               --            --               748,000         $16.83
                                       ---------------                      --------------
Balance at December 31, 2001........          639,323         $23.69            1,301,000         $18.73
   Vested and issued................          (63,447)        $24.22                  --              --
   Cancelled........................         (509,502)        $23.94             (103,000)        $20.67
   Granted..........................               --             --              999,000         $12.33
                                       ---------------                      --------------
Balance at December 31, 2002........           66,374         $21.19            2,197,000         $15.73
                                       ===============                      ==============
</TABLE>

       A summary of the Company's stock options as of December 31, 2002 is as
follows:


<TABLE>
<CAPTION>
                                              Options Outstanding                             Options Exercisable
                         -------------------------------------------------------------- --------------------------------
      Range of                              Weighted average        Weighted average                  Weighted average
   exercise price           Shares        remaining life (yrs)       exercise price       Shares       exercise price
----------------------   -------------   -----------------------  --------------------- -----------  -------------------
<S>                         <C>                   <C>                    <C>             <C>             <C>
   $12.24 - $16.00          1,044,000             9.0                    $12.48                 --              --
   $16.01 - $20.00            981,000             7.6                    $17.49            252,000          $19.35
   $20.01 - $24.00            110,000             6.1                    $22.27             54,000          $23.33
   $24.01 - $28.00             32,000             6.4                    $27.38             32,000          $27.38
   $28.01 - $34.88             30,000             5.4                    $34.88             30,000          $34.88
                         -------------                                                  -----------
   $12.24 - $34.88          2,197,000             8.2                    $15.73            368,000          $21.90
                         =============                                                  ===========
</TABLE>

       The weighted average fair value of stock options at grant date was $4.04
per share, $3.16 per share and $9.00 per share for 2002, 2001 and 2000,
respectively, using a Black-Scholes model with the following assumptions:
expected dividend yield of 5%, 4% and 2% for 2002, 2001 and 2000, respectively;
risk-free interest rate of 5% in 2002, 5% in 2001 and 6% in 2000; an expected
life of 10 years; and, an expected volatility of 62%, 39% and 60% for 2002, 2001
and 2000, respectively.

                                       85


 <PAGE>

                            MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)

Note 13 -- Stock-Based Compensation Plans - Continued

       Salary and Bonus Deferral Plan: The Company has a deferred compensation
plan under which officers and certain management employees have deferred a
portion of their compensation on a pre-tax basis in the form of Common Stock. A
rabbi trust (the "Trust") has been established to hold shares of Common Stock
purchased in open market transactions to fund this obligation. Shares purchased
by the Trust are reflected as Treasury stock, at cost, and, along with the
related obligation for this plan, are included in Shareholders' (deficit)
equity. At December 31, 2002, 440,566 shares have been purchased at a total cost
of $9 and are held in the Trust.

Note 14 -- Cumulative Other Comprehensive Loss

       Cumulative other comprehensive loss consists of changes in foreign
currency translation adjustments, net unrealized losses on certain derivative
instruments, the minimum pension liability, and the Company's share of
Equistar's Cumulative other comprehensive loss. The following table sets forth
the components of Cumulative other comprehensive loss:

<TABLE>
<CAPTION>
                                            Foreign       Unrealized                                      Cumulative
                                           Currency        Losses on       Minimum     Equity in Other      Other
                                          Translation     Derivative       Pension      Comprehensive    Comprehensive
                                          Adjustments     Instruments     Liability    Loss of Equistar      Loss
                                         --------------  --------------  ------------- ---------------- ----------------
                                                                         (Restated -     (Restated -      (Restated -
                                                                         See Note 2)     See Note 2)      See Note 2)
<S>                                      <C>             <C>             <C>           <C>              <C>
Balance, December 31, 1999............   $         (61)  $          --   $         --  $            --  $           (61)
   2000 Change........................             (46)             --             --               --              (46)
                                         --------------  --------------  ------------- ---------------- ----------------
Balance, December 31, 2000............            (107)             --             --               --             (107)
   2001 Change........................             (19)             (6)            (4)              --              (29)
                                         --------------  --------------  ------------- ---------------- ----------------
Balance, December 31, 2001............            (126)             (6)            (4)              --             (136)
   2002 Change........................              27               5           (188)              (7)            (163)
                                         --------------  --------------  ------------- ---------------- ----------------
Balance, December 31, 2002............   $         (99)  $          (1)  $       (192) $            (7) $          (299)
                                         ==============  ==============  ============= ================ ================
</TABLE>

Note 15 -- Related Party Transactions

       One of the Company's subsidiaries purchases ethylene from Equistar at
market-related prices pursuant to an agreement made in connection with the
formation of Equistar. Under the agreement, the subsidiary is required to
purchase 100% of its ethylene requirements for its La Porte, Texas facility up
to a maximum of 330 million pounds per year. The initial term of the contract
was through December 1, 2000 and automatically renews annually. Either party may
terminate on one year's notice, and neither party has provided such notice. The
subsidiary incurred charges of $43, $53 and $90 in 2002, 2001 and 2000,
respectively, under this contract.

       One of the Company's subsidiaries sells VAM to Equistar at formula-based
prices pursuant to an agreement entered into in connection with the formation of
Equistar. Under this agreement, Equistar is required to purchase 100% of its VAM
feedstock requirements for its La Porte, Texas, and Clinton and Morris,
Illinois, plants, estimated to be 48 to 55 million pounds per year, up to a
maximum of 60 million pounds per year (the "Annual Maximum") for the production
of ethylene vinyl acetate products at those locations. If Equistar fails to
purchase at least 42 million pounds of VAM in any calendar year, the Annual
Maximum quantity may be reduced by as much as the total purchase deficiency for
one or more successive years. In order to reduce the Annual Maximum quantity,
Equistar must be notified within at least 30 days prior to restricting the VAM
purchases provided that the notice is not later than 45 days after the year of
the purchase deficiency. The initial term of the contract was through December
31, 2000 and renews annually. Either party may terminate on one year's notice,
and neither party has provided such notice. During the years ended December 31,
2002, 2001 and 2000, sales to Equistar were $10, $14 and $16, respectively.

       One of the Company's subsidiaries and Equistar have entered into various
operating, manufacturing and technical service agreements. These agreements
provide the subsidiary with certain utilities, steam, administrative



                                       86




<PAGE>


                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                     (Dollars in millions, except share data)


Note 15 -- Related Party Transactions - Continued

office space, and health, safety and environmental services. The subsidiary
incurred charges of $9, $17 and $23 in 2002, 2001 and 2000, respectively, for
such services. In addition, the subsidiary charged Equistar $15, $18 and $13 in
2002, 2001 and 2000, respectively, for electricity and miscellaneous shared
services.

Note 16 -- Commitments and Contingencies

       Legal and Environmental: The Company and various Company subsidiaries are
defendants in a number of pending legal proceedings relating to present and
former operations. These include several proceedings alleging injurious exposure
of plaintiffs to various chemicals and other materials on the premises of, or
manufactured by, the Company's current and former subsidiaries. Typically, such
proceedings involve claims made by many plaintiffs against many defendants in
the chemical industry. Millennium Petrochemicals is one of a number of
defendants in 80 active premises-based asbestos cases (i.e., where the alleged
exposure to asbestos-containing materials was to employees of third-party
contractors or subcontractors on the premises of certain facilities, and did not
relate to any products manufactured or sold by the Company or any of its
predecessors). Millennium Petrochemicals is also one of a number of defendants
in one inactive premises-based asbestos case where the court placed the claim on
a formal registry for dormant claims, and for which no defense costs are being
incurred. Millennium Petrochemicals is responsible for these premises-based
cases as a result of its indemnification obligations under the Company's
agreements with Equistar; however, Equistar will be required to indemnify
Millennium Petrochemicals for any such claims filed on or after December 1, 2004
related to the assets or businesses contributed by Millennium Petrochemicals to
Equistar. Various other Company subsidiaries and alleged former subsidiaries are
among a number of defendants in 50 active premises-based asbestos cases. The
Company believes that it has valid defenses to these proceedings and is
defending them vigorously. However, litigation is subject to uncertainties and
the Company is unable to guarantee the outcome of these proceedings. In
addition, the Company may be subject to potential unknown liabilities associated
with its present and former operations, including environmental liabilities,
arising from the operations of its predecessors and prior owners or operators of
its sites or operations for which it may be responsible.

       Together with other alleged past manufacturers of lead-based paint and
lead pigments for use in paint, the Company, a current subsidiary, as well as
alleged predecessor companies, have been named as defendants in various legal
proceedings alleging that they and other manufacturers are responsible for
personal injury, property damage, and remediation costs allegedly associated
with the use of these products. The plaintiffs in these legal proceedings
include municipalities, counties, school districts, individuals and the State of
Rhode Island, and seek recovery under a variety of theories, including
negligence, failure to warn, breach of warranty, conspiracy, market share
liability, fraud, misrepresentation and public nuisance. Legal proceedings
relating to lead pigment or paint are in various procedural stages or pre-trial,
post-trial and post-dismissal settings.

       There are eight pending legal proceedings relating to lead pigment or
paint in various pre-trial stages. One proceeding relating to lead pigment or
paint was tried in 2002. On October 29, 2002, after a trial in which the jury
deadlocked, the court in the State of Rhode Island v. Lead Industry Association,
Inc., et al commenced in the Superior Court of Providence, Rhode Island, on
October 13, 1999, declared a mistrial. The sole issue before the jury in this
phase of the proceeding was whether lead pigment in paint in and on public and
private Rhode Island buildings constitutes a "public nuisance." On March 30,
2003, the court denied the motions for the judgment as a matter of law filed by
both sides during and after the trial. The State of Rhode Island may seek a new
trial.

       There are four pending legal proceedings relating to lead pigment or
paint that were dismissed after summary judgment was granted by the court in
favor of the defendants, but are now pending appeal. There are four legal
proceedings relating to lead pigment or paint which have been voluntarily
dismissed by the plaintiffs. There is also one legal proceeding relating to lead
pigment or paint that was dismissed after summary judgment was granted by the
court in favor of the defendants, but which has not been appealed. There are
four legal proceedings relating to lead pigment or paint that were abated under
the laws of the State of Texas pending the resolution of an appeal in another
legal proceeding involving lead pigment or paint where summary judgment was
granted by the court in favor of one defendant. During the abatement period,
expected to last one to two years, no defense costs will be incurred for the
abated legal proceedings. Finally, there are nine legal proceedings relating to
lead pigment or paint that have been filed with a court, are pending, but have
yet to be formally served on the Company, any of its subsidiaries, or alleged
predecessor companies.



                                       87





<PAGE>


                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                     (Dollars in millions, except share data)


Note 16 -- Commitments and Contingencies - Continued

       The Company's defense costs to date for lead-based paint and lead pigment
litigation largely have been covered by insurance. The Company has not accrued
any liabilities for any lead-based paint and lead pigment litigation. The
Company has insurance policies that potentially provide approximately $1 billion
in indemnity coverage for lead-based paint and lead pigment litigation. As a
result of insurance coverage litigation initiated by the Company, an Ohio trial
court issued a decision in 2002 effectively requiring certain insurance carriers
to resume paying defense costs in the lead-based paint and lead pigment cases.
Indemnity coverage was not at issue in the Ohio court's decision. The insurance
carriers may appeal the Ohio decision regarding defense costs, and they have in
the past and may in the future attempt to deny indemnity coverage if there is
ever a settlement or an adverse judgment in any lead-based paint or lead pigment
case.

       In 1986, a predecessor of a company that is now a subsidiary of the
Company sold its recently acquired Glidden Paints business. As part of that
sale, the seller agreed to indemnify the purchaser against certain claims made
during the first eight years after the sale; the purchaser agreed to indemnify
the seller against such claims made after the eight-year period. With the
exception of the two cases discussed below, all pending lead-based paint and
lead pigment litigation involving the Company and its subsidiaries, including
the Rhode Island case, was filed after the eight-year period. Accordingly, the
Company believes that it is entitled to full indemnification from the purchaser
against lead-based paint and lead pigment cases filed after the eight-year
period. The purchaser disputes that it has such an indemnification obligation,
and claims that the seller must indemnify it. Since the Company's defense costs
to date largely have been covered by insurance and there never has been a
settlement paid by, nor any judgment rendered against, the Company (or any other
company sued in any lead-based paint or lead pigment litigation), the parties'
indemnification claims have not been ruled on by a court.

       A current subsidiary and an alleged predecessor company are parties to
the only two remaining cases originally filed within the eight-year period
following the 1986 sale of the Glidden Paints business referred to above. In the
first of these cases, The City of New York et al. v. Lead Industries
Association, Inc., et al., commenced in the Supreme Court of the State of New
York on June 8, 1989, the New York City Housing Authority brought an action
relating to tens of thousands of public housing units. All claims in that case
have been dropped except for those relating to two housing projects. The other
remaining case, Jackson, et al. v. The Glidden Co., et al., commenced in the
Court of Common Pleas, Cuyahoga County, Ohio, on August 12, 1992, includes five
minors as plaintiffs. Dispositive motions were filed in that case in late 2002
and have yet to be ruled on by the court.

       The Company believes that it has valid defenses to all pending lead-based
paint and lead pigment proceedings and is vigorously defending them. However,
litigation is inherently subject to many uncertainties. There can be no
assurance that additional lead-based paint and lead pigment litigation will not
be filed against the Company or its subsidiaries in the future asserting similar
or different legal theories and seeking similar or different types of damages
and relief. While an outcome such as that reached in the Rhode Island proceeding
may have a positive effect on the lead-based paint and lead pigment litigation
against the Company, its subsidiaries and other defendants by reducing the
number and nature of future claims and proceedings, other adverse court rulings
or determinations of liability, among other factors, could encourage an increase
in the number of future claims and proceedings. In addition, from time to time,
legislation and administrative regulations have been enacted or proposed to
impose obligations on present and former manufacturers of lead-based paint and
lead pigment respecting asserted health concerns associated with such products
or to overturn successful court decisions. Due to the uncertainties involved,
the Company is unable to predict the outcome of lead-based paint and lead
pigment litigation, the number or nature of possible future claims and
proceedings, or the effect that any legislation and/or administrative
regulations may have on the Company or its subsidiaries. In addition, management
cannot reasonably estimate the scope or amount of the costs and potential
liabilities related to such litigation, or any such legislation and regulations.
Accordingly, the Company has not accrued any liabilities for such litigation.
However, based upon, among other things, the outcome of such litigation to date,
including the dismissal of most of the over 50 lawsuits brought in recent years,
management does not currently believe that the costs or potential liabilities
ultimately determined to be attributable to the Company arising out of such
litigation will have a material adverse effect on the consolidated financial
position, results of operations or cash flows of the Company.

       The Company's businesses are subject to extensive federal, state, local
and foreign laws, regulations, rules and ordinances concerning, among other
things, emissions to the air, discharges and releases to land and water, the



                                       88





<PAGE>



                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                     (Dollars in millions, except share data)


Note 16 -- Commitments and Contingencies - Continued

generation, handling, storage, transportation, treatment and disposal of wastes
and other materials and the remediation of environmental pollution caused by
releases of wastes and other materials (collectively, "Environmental Laws"). The
operation of any chemical manufacturing plant and the distribution of chemical
products entail risks under Environmental Laws, many of which provide for
substantial fines and criminal sanctions for violations. There can be no
assurance that significant costs or liabilities will not be incurred with
respect to the Company's operations and activities. In particular, the
production of TiO[U]2, TiCl[U]4, VAM, acetic acid, methanol and certain other
chemicals involves the handling, manufacture or use of substances or compounds
that may be considered to be toxic or hazardous within the meaning of certain
Environmental Laws, and certain operations have the potential to cause
environmental or other damage. Significant expenditures including
facility-related expenditures could be required in connection with any
investigation and remediation of threatened or actual pollution, triggers under
existing Environmental Laws tied to production or new requirements under
Environmental Laws.

       The Company cannot predict whether future developments or changes in laws
and regulations concerning environmental protection will affect its earnings or
cash flow in a materially adverse manner or whether its operating units,
Equistar or La Porte Methanol Company will be successful in meeting future
demands of regulatory agencies in a manner that will not materially adversely
affect the consolidated financial position, results of operations or cash flows
of the Company. For example, the Texas Commission on Environmental Quality (the
"TCEQ") submitted a plan to the United States Environmental Protection Agency
("EPA") requiring the eight-county Houston/Galveston, Texas area to come into
compliance with the National Ambient Air Quality Standard for ozone by 2007.
These requirements, if implemented, would mandate significant reductions of
nitrogen oxide ("NOx") emissions requiring increased capital investment by
Equistar of between $200 and $260 before the 2007 regulatory deadline, as well
as create higher annual operating costs. This result could potentially affect
cash distributions from Equistar to the Company. In January 2001, Equistar,
individually and as part of an industry coalition, filed a lawsuit in State
District Court in Travis County, Texas seeking adoption of an alternative plan
for air quality improvement. In response to the lawsuit, the TCEQ conducted an
accelerated scientific review during 2001 and 2002. In December 2002, the TCEQ
adopted revised rules, which changed the required NOx emission reduction levels
from 90% to 80% while requiring new controls on emissions of highly reactive
volatile organic compounds ("HRVOCs"), such as ethylene, propylene, butadiene
and butanes. These new rules still require approval by the EPA. Based on the 80%
NOx reduction requirement, Equistar estimates that its aggregate related capital
expenditures could total between $165 and $200 before the 2007 deadline, and
could result in higher annual operating costs. Equistar is still assessing the
impact of the new HRVOC control requirements. Additionally, the TCEQ plans to
make a final review of these rules, with final rule revisions to be adopted by
May 2004. The timing and amount of these expenditures are subject to regulatory
and other uncertainties, as well as obtaining the necessary permits and
approvals. At this time, there can be no guarantee as to the ultimate capital
cost of implementing any final plan developed to ensure ozone attainment by the
2007 deadline.

       From time to time, various agencies may serve cease and desist orders or
notices of violation on an operating unit or deny its applications for certain
licenses or permits, in each case alleging that the practices of the operating
unit are not consistent with regulations or ordinances. In some cases, the
relevant operating unit may seek to meet with the agency to determine mutually
acceptable methods of modifying or eliminating the practice in question. The
Company believes that its operating units generally operate in compliance with
applicable regulations and ordinances in a manner that should not have a
material adverse effect on the consolidated financial position, results of
operations or cash flows of the Company.

       Certain Company subsidiaries have been named as defendants, potentially
responsible parties (the "PRPs"), or both, in a number of environmental
proceedings associated with waste disposal sites or facilities currently or
previously owned, operated or used by the Company's current or former
subsidiaries or their predecessors, some of which are on the Superfund National
Priorities List of the EPA or similar state lists. These proceedings seek
cleanup costs, damages for personal injury or property damage, or both. Based
upon third-party technical reports, the projections of outside consultants or
outside counsel, or both, the Company has estimated its individual exposure at
these sites to be between $0.025 and $26.7. In the most significant of these
proceedings, a subsidiary is named as one of four PRPs at the Kalamazoo River
Superfund Site in Michigan. The site involves contamination of river sediments
and floodplain soils with polychlorinated biphenyls. Originally commenced on
December 2, 1987 in the United States District Court for the Western District of
Michigan as Kelly v. Allied Paper, Inc. et al., the matter



                                       89





<PAGE>


                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                     (Dollars in millions, except share data)


Note 16 -- Commitments and Contingencies - Continued

was stayed and is being addressed under the Comprehensive Environmental
Response, Compensation and Liability Act. In October 2000, the Kalamazoo River
Study Group (the "KRSG"), of which one of the Company's subsidiaries is a
member, submitted to the State of Michigan a Draft Remedial Investigation and
Draft Feasibility Study (the "Draft Study"), which evaluated a number of
remedial options and recommended a remedy involving the stabilization of several
miles of river bank and the long-term monitoring of river sediments at a total
collective cost of approximately $73. During 2001, additional sampling
activities were performed in discrete parts of the river. At the end of 2001,
the EPA took responsibility for the site at the request of the State. While the
State has submitted comments to the EPA on the Draft Study, the EPA has yet to
similarly comment. The Company has estimated its liability at this site based
upon the KRSG's recommended remedy. Guidance as to how the EPA will likely
proceed with further evaluation and remediation, if required, at the Kalamazoo
site is expected by early 2004. At that time, the Company's estimate of its
liability will be reevaluated. The Company's ultimate liability for the
Kalamazoo site will depend on many factors that have not yet been determined,
including the ultimate remedy selected by the EPA, the number and financial
viability of the other members of the KRSG as well as of other PRPs outside the
KRSG, and the determination of the final allocation among the members of the
KRSG and other PRPs.

       The Company believes that the reasonably probable and estimable range of
potential liability for environmental and other legal contingencies,
collectively, but which primarily relates to environmental remediation
activities, is between $67 and $95 and has accrued $71 as of December 31, 2002.
Expense associated with these contingencies included in Selling, development and
administrative expense totaled $15 and $6 in 2001 and 2000, respectively. These
expenses resulted from increases in reserves for the estimated costs to resolve
legal and environmental claims related to predecessor businesses. Included in
2002 is a benefit of $6 from a reduction of reserves due to favorable resolution
of certain environmental claims related to predecessor businesses reserved for
in prior years. The Company expects that cash expenditures related to these
potential liabilities will be made over a number of years, and will not be
concentrated in any single year. This accrual also reflects the fact that
certain Company subsidiaries have contractual obligations to indemnify other
parties against certain environmental and other liabilities. For example, the
Company agreed as part of its Demerger to indemnify Hanson and certain of its
subsidiaries against certain of such contractual indemnification obligations,
and Millennium Petrochemicals agreed as part of the December 1, 1997 formation
of Equistar to indemnify Equistar for certain liabilities related to the assets
contributed by Millennium Petrochemicals to Equistar in excess of $7, which
threshold was exceeded in 2001. The terms of these indemnification agreements do
not limit the maximum potential future payments to the indemnified parties. The
maximum amount of future indemnification payments is dependent upon many factors
and is not practicable to estimate.

       No assurance can be given that actual costs for environmental matters
will not exceed accrued amounts or that estimates made with respect to
indemnification obligations will be accurate. In addition, it is possible that
costs will be incurred with respect to contamination, indemnification
obligations or other environmental matters that currently are unknown or as to
which it is currently not possible to make an estimate.

       On January 16, 2002, Slidell Inc. ("Slidell") filed a lawsuit against
Millennium Inorganic Chemicals Inc., a wholly owned operating subsidiary of the
Company, alleging breach of contract and other related causes of action arising
out of a contract between the two parties for the supply of packaging equipment.
In the suit, Slidell seeks unspecified monetary damages. The Company believes it
has substantial defenses to these allegations and has filed a counterclaim
against Slidell.

       The Company believes that it has valid defenses to the legal proceedings
described above and intends to defend these legal proceedings vigorously.
However, litigation is subject to many uncertainties and the Company cannot
guarantee the outcome of these proceedings. Based upon information currently
available, the Company does not believe that the outcome of these proceedings
will, either individually or in the aggregate, have a material adverse effect on
the consolidated financial position, results of operations or cash flows of the
Company.

       Purchase Commitments: The Company has various agreements for the purchase
of ore used in the production of TiO[u]2 and certain other agreements to
purchase raw materials, utilities and services with various terms extending
through 2020. The fixed and determinable portion of obligations under purchase
commitments at December 31, 2002 (at current exchange rates, where applicable)
is as follows:



                                       90






<PAGE>


                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                     (Dollars in millions, except share data)


Note 16 -- Commitments and Contingencies - Continued

<TABLE>
<CAPTION>
                                             Ore          Other          Total
                                            -----         ------         ------
<S>                                         <C>           <C>            <C>
       2003........................        $  195         $  132         $  327
       2004........................           143             95            238
       2005........................           167             81            248
       2006........................            42             80            122
       2007........................            --             78             78
       Thereafter..................            --            654            654
                                           ------         ------         ------
            Total..................        $  547         $1,120         $1,667
                                           ======         ======         ======
</TABLE>

       One of the Company's subsidiaries has entered into an agreement with
DuPont to toll acetic acid through DuPont's VAM plant, thereby acquiring all of
the VAM production at such plant not utilized by DuPont. The tolling fee is
based on the market price of ethylene, plus a processing charge. The term of the
contract is from January 1, 2001 through December 31, 2006, and thereafter from
year-to-year. The total commitment over the remaining term of the contract is
expected to be $247.

       Future Minimum Rental Commitments: Future minimum rental commitments
under non-cancelable operating leases, as of December 31, 2002, are as follows:

<TABLE>
<S>                                           <C>
          2003...............................  $ 21
          2004...............................    17
          2005...............................    14
          2006...............................    11
          2007...............................    10
          Thereafter.........................    88
                                               -----
                                               $161
                                               =====

</TABLE>

       Other Contingencies: The Company is organized under the laws of Delaware
and is subject to United States federal income taxation of corporations.
However, in order to obtain clearance from the United Kingdom Inland Revenue as
to the tax-free treatment of the Demerger stock dividend for United Kingdom tax
purposes for Hanson and Hanson's shareholders, Hanson agreed with the United
Kingdom Inland Revenue that the Company would continue to be centrally managed
and controlled in the United Kingdom at least until September 30, 2001. The
Company agreed with Hanson not to take, or fail to take, during such five-year
period, any action that would result in a breach of, or constitute
non-compliance with, any of the representations and undertakings made by Hanson
in its agreement with the United Kingdom Inland Revenue. The Company also agreed
to indemnify Hanson against any liability and penalties arising out of a breach
of such agreement.

       Effective February 4, 2002, the Company ceased being centrally managed
and controlled in the United Kingdom. The Company believes that it has satisfied
all obligations that it be managed and controlled in the United Kingdom for the
requisite five-year period.

       See Note 8 for additional information regarding income tax contingencies.




                                       91



<PAGE>

                          MILLENNIUM CHEMICALS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                  (Dollars in millions, except share data)



Note 17 -- Operations by Business Segment and Geographic Area

       The Company's principal operations are managed and grouped as three
separate business segments: Titanium Dioxide and Related Products, Acetyls and
Specialty Chemicals. Operating income and expense not identified with the three
separate business segments, including certain of the Company's S,D&A costs not
allocated to its three business segments, employee-related costs from
predecessor businesses and certain other expenses, are reflected as Other. The
accounting policies of the segments are the same as those described in Note 1.

       Most of the Company's foreign operations are conducted by subsidiaries in
the United Kingdom, France, Brazil and Australia. Sales between the Company's
operations are made on terms similar to those of its third-party distributors.

       Income and expense not allocated to business segments in computing
operating income include interest income and expense, other income and expense
and (loss) earnings on Equistar investment.

       Export sales from the United States for the years ended December 31,
2002, 2001 and 2000 were approximately $254, $245 and $201, respectively.






                                       92



 <PAGE>

                          MILLENNIUM CHEMICALS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                  (Dollars in millions, except share data)



Note 17 -- Operations by Business Segment and Geographic Area - Continued

       The following is a summary of the Company's operations by business
segment:

<TABLE>
<CAPTION>
                                                                         2002            2001           2000
                                                                     ------------   -------------   ------------
                                                                     (Restated -   (Restated -      (Restated -
                                                                     See Note 2)   See Note 2)      See Note 2)
<S>                                                                  <C>            <C>             <C>
Net sales
   Titanium Dioxide and Related Products..........................   $     1,129    $      1,145    $     1,355
   Acetyls........................................................           334             355            337
   Specialty Chemicals............................................            91              90            101
                                                                     -----------    ------------    -----------
     Total........................................................   $     1,554    $      1,590    $     1,793
                                                                     ===========    ============    ===========
Operating income (loss)
   Titanium Dioxide and Related Products..........................   $        63    $         42    $       148
   Acetyls........................................................            11             (21)            47
   Specialty Chemicals............................................             6              11             20
   Other..........................................................            --             (18)           (14)
                                                                     -----------    ------------    -----------
     Total........................................................   $        80    $         14    $       201
                                                                     ===========    ============    ===========
Depreciation and amortization
   Titanium Dioxide and Related Products..........................   $        83    $         81    $        85
   Acetyls........................................................            11              21             20
   Specialty Chemicals............................................             8               8              8
                                                                     -----------    ------------    -----------
     Total........................................................   $       102    $        110    $       113
                                                                     ===========    ============    ===========
Capital expenditures
   Titanium Dioxide and Related Products..........................   $        61    $         82    $        96
   Acetyls........................................................             1               6              7
   Specialty Chemicals............................................             9               3              7
   Other..........................................................            --               6             --
                                                                     -----------    ------------    -----------
     Total........................................................   $        71    $         97    $       110
                                                                     ===========    ============    ===========
Identifiable assets
   Titanium Dioxide and Related Products..........................   $     1,389    $      1,385
   Acetyls........................................................           294             568
   Specialty Chemicals............................................            99              96
   Other (1)......................................................           614             916
                                                                     -----------    ------------
     Total........................................................   $     2,396    $      2,965
                                                                     ===========    ============
</TABLE>

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

(1)  Other assets consist primarily of cash and cash equivalents, the Company's
     interest in Equistar and other assets.


<TABLE>
<CAPTION>
                                                                      December 31,
                                                             -------------------------------
                                                                 2002             2001
                                                             --------------  ---------------
<S>                                                          <C>             <C>
Goodwill
   Titanium Dioxide and Related Products...................  $          58   $           58
   Acetyls.................................................             48              323
                                                             -------------   --------------
       Total...............................................  $         106   $          381
                                                             =============   ==============
</TABLE>


                                       93


 <PAGE>

                          MILLENNIUM CHEMICALS INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                  (Dollars in millions, except share data)



Note 17 -- Operations by Business Segment and Geographic Area - Continued

       The following is a summary of the Company's operations by geographic
region:

<TABLE>
<CAPTION>
                                                                         2002           2001            2000
                                                                      ------------  ------------   --------------
                                                                       (Restated -  (Restated -     (Restated -
                                                                       See Note 2)  See Note 2)     See Note 2)
<S>                                                                   <C>           <C>           <C>
Net sales
   United States..................................................    $       923   $       983    $       1,077
                                                                      -----------   -----------    -------------
   Non-United States
     United Kingdom...............................................            404           364              428
     France.......................................................            183           179              205
     Asia/Pacific.................................................            178           160              183
     Brazil.......................................................            103           113              148
                                                                      -----------   -----------    -------------
                                                                              868           816              964
                                                                      -----------   -----------    -------------
   Inter-area elimination.........................................           (237)         (209)            (248)
                                                                      -----------   -----------    -------------
     Total........................................................    $     1,554   $     1,590    $       1,793
                                                                      ===========   ===========    =============

Operating income (loss)
   United States                                                      $         6   $       (50)   $         128
                                                                      -----------   -----------    -------------
   Non-United States
     United Kingdom...............................................              5            (7)              10
     France.......................................................            (11)           (8)              15
     Asia/Pacific.................................................             54            51               55
     Brazil.......................................................             23            30               21
                                                                      -----------   -----------    -------------
                                                                               71            66              101
                                                                      -----------   -----------    -------------
   Inter-area elimination.........................................              3            (2)             (28)
                                                                      -----------   -----------    -------------
     Total........................................................    $        80   $        14    $         201
                                                                      ===========   ===========    =============

Identifiable assets
   United States                                                      $     1,536   $     2,129
                                                                      -----------   -----------
   Non-United States
     United Kingdom...............................................            346           363
     France.......................................................            250           216
     Asia/Pacific.................................................            137           114
     Brazil.......................................................            116           134
     All Other....................................................             11             9
                                                                      -----------   -----------
                                                                              860           836
                                                                      -----------   -----------
     Total........................................................    $     2,396   $     2,965
                                                                      ===========   ===========
</TABLE>


                                       94



<PAGE>


                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)


Note 18 - Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>

                                                            1st Qtr.       2nd Qtr.       3rd Qtr.       4th Qtr.
                                                           -----------     ----------    -----------    -----------
                                                           (Restated -    (Restated -    (Restated -    (Restated -
                                                           See Note 2)    See Note 2)    See Note 2)    See Note 2)

<S>                                                            <C>            <C>            <C>            <C>
2002
----
Net sales...............................................       $  351         $  405         $  411         $  387
Operating income........................................            7             20 (1)         30             23 (2)
Net (loss) income before cumulative effect of
   accounting change....................................          (33)             2 (1)          5             (2)(3)
Cumulative effect of accounting change..................         (305)            --             --             --
                                                               ------         ------         ------         ------
Net (loss) income after cumulative effect of accounting
   change...............................................         (338)             2 (1)          5             (2)(3)
                                                               ======         ======         ======         ======
Basic (loss) earnings per share before cumulative
   effect of accounting change..........................        (0.52)          0.02 (1)       0.08          (0.03)(3)
Cumulative effect of accounting change..................        (4.80)            --             --             --
                                                               ------         ------         ------         ------
Basic (loss) earnings per share after cumulative effect
   of accounting change.................................        (5.32)          0.02 (1)       0.08          (0.03)(3)
                                                               ======         ======         ======         ======
Diluted (loss) earnings per share before cumulative
   effect of accounting change..........................        (0.52)          0.02 (1)       0.08          (0.03)(3)
Cumulative effect of accounting change..................        (4.80)            --             --             --
                                                               ------         ------         ------         ------
Diluted (loss) earnings per share after cumulative
   effect of accounting change..........................        (5.32)          0.02 (1)       0.08          (0.03)(3)
                                                               ======         ======         ======         ======
2001
----
Net sales...............................................       $  444         $  419         $  393         $  334
Operating income (loss).................................           20 (4)         (9)(6)         11 (7)         (8)(8)
Net (loss) income.......................................          (17)(5)        (26)(6)        (16)(7)          5 (9)
Basic (loss) earnings per share.........................        (0.27)(5)      (0.41)(6)      (0.25)(7)       0.08 (9)
Diluted (loss) earnings per share.......................        (0.27)(5)      (0.41)(6)      (0.25)(7)       0.08 (9)

</TABLE>

--------------
(1)    Includes a benefit of $5 ($3 after-tax or $0.05 per share) from a
       reduction of reserves due to favorable resolution of environmental claims
       related to predecessor businesses reserved for in prior years.

(2)    Includes a benefit of $1 from a reduction of reserves due to favorable
       resolution of environmental claims related to predecessor businesses
       reserved for in prior years.

(3)    Includes a benefit of $1 after-tax or $0.01 per share from a reduction of
       reserves due to favorable resolution of environmental claims related to
       predecessor businesses reserved for in prior years, a tax benefit of $22
       or $0.35 per share, primarily related to a federal tax refund claim, and
       a tax charge of $10 or $0.16 per share to establish a valuation allowance
       against deferred tax assets for the Company's French subsidiaries.

(4)    Includes $5 in reorganization and plant closure charges and a charge of
       $4 to increase reserves for the estimated costs to resolve legal and
       environmental claims related to predecessor businesses.

(5)    Includes $4 after-tax or $0.07 per share in reorganization and plant
       closure charges, an additional $4 or $0.07 per share representing the
       Company's after-tax share of costs related to the shutdown of Equistar's
       Port Arthur, Texas plant and $3 after-tax or $0.05 per share to increase
       reserves for the estimated costs to resolve legal and environmental
       claims related to predecessor businesses.

(6)    Includes $31 ($20 after-tax or $0.31 per share) in reorganization and
       plant closure charges and a charge of $3 ($2 after-tax or $0.03 per
       share) to increase reserves for the estimated costs to resolve legal and
       environmental claims related to predecessor businesses.





                                       95





<PAGE>


                           MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
                    (Dollars in millions, except share data)


(7)    Includes a charge of $4 ($3 after-tax or $0.05 per share) to increase
       reserves for the estimated costs to resolve legal and environmental
       claims related to predecessor businesses.

(8)    Includes a charge of $4 to increase reserves for the estimated costs to
       resolve legal and environmental claims related to predecessor businesses.

(9)    Includes a tax benefit of $42 or $0.66 per share from a reduction in the
       Company's income tax accruals due to favorable developments related to
       matters reserved for in prior years and a $2 charge after-tax or $0.03
       per share to increase reserves for the estimated costs to resolve legal
       and environmental claims related to predecessor businesses.

Note 19 - Supplemental Financial Information

       Millennium America, a wholly owned indirect subsidiary of the Company, is
a holding company for all of the Company's operating subsidiaries other than its
operations in the United Kingdom, France, Brazil and Australia. Millennium
America is the issuer of the 7% Senior Notes, the 7.625% Senior Debentures, and
the 9.25% Senior Notes, and is the principal borrower under the Credit
Agreement. Millennium America guarantees all obligations under the Credit
Agreement. The 7% Senior Notes, the 7.625% Senior Debentures and the 9.25%
Senior Notes, as well as outstanding amounts under the Credit Agreement, are
guaranteed by the Company. Accordingly, the following Condensed Consolidating
Balance Sheets at December 31, 2002 and 2001, and the Condensed Consolidating
Statements of Operations and Cash Flows for each of the three years in the
period ended December 31, 2002, are provided for the Company as supplemental
financial information to the Company's consolidated financial statements to
disclose the financial position, results of operations and cash flows of (i) the
Company, (ii) Millennium America, and (iii) all subsidiaries of the Company
other than Millennium America (the "Non-Guarantor Subsidiaries"). The investment
in subsidiaries of Millennium America and the Company are accounted for by the
equity method; accordingly, the shareholders' (deficit) equity of Millennium
America and the Company are presented as if each of those companies and their
respective subsidiaries were reported on a consolidated basis.




                                       96






<PAGE>



                            MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
                    (Dollars in millions, except share data)

Note 19 - Supplemental Financial Information - Continued

                     CONDENSED CONSOLIDATING BALANCE SHEETS
                        As of December 31, 2002 and 2001

<TABLE>
<CAPTION>

                                        Millennium    Millennium                                     Millennium
                                         America      Chemicals                                    Chemicals Inc.
                                           Inc.          Inc.      Non-Guarantor                        and
                                         (Issuer)    (Guarantor)    Subsidiaries    Eliminations   Subsidiaries
                                       ------------- ------------- ---------------  ------------- ---------------

<S>                                    <C>             <C>           <C>           <C>              <C>
2002 (Restated - See Note 2)
----------------------------
               ASSETS
Inventories..........................        $   --          $ --          $  406        $    --          $  406
Other current assets.................            10            --             403             --             413
Property, plant and equipment, net...            --            --             862             --             862
Investment in Equistar...............            --            --             563             --             563
Investment in subsidiaries...........           349            95              --           (444)             --
Other assets.........................            15            --              31             --              46
Goodwill.............................            --            --             106             --             106
Due from parent and
   affiliates........................           638            --              --           (638)             --
                                             ------          ----          ------        -------          ------
   Total assets......................        $1,012          $ 95          $2,371        $(1,082)         $2,396
                                             ======          ====          ======        =======          ======
    LIABILITIES AND SHAREHOLDERS'
            (DEFICIT) EQUITY
Current maturities of long-term debt.        $    3          $ --          $    9        $    --          $   12
Other current liabilities............             8            --             455             --             463
Long-term debt.......................         1,196            --              16             --           1,212
Deferred income taxes................            --            --             337             --             337
Other liabilities....................            --            --             388             --             388
Due to parent and affiliates.........            --           130             508           (638)             --
                                             ------          ----          ------        -------          ------
   Total liabilities.................         1,207           130           1,713           (638)          2,412
Minority interest....................            --            --              19             --              19
Shareholders' (deficit) equity.......          (195)          (35)            639           (444)            (35)
                                             ------          ----          ------        -------          ------
   Total liabilities and
     shareholders' (deficit) equity..        $1,012          $ 95          $2,371        $(1,082)         $2,396
                                             ======          ====          ======        =======          ======
2001 (Restated - See Note 2)
----------------------------
               ASSETS
Inventories..........................        $   --          $ --          $  399        $    --          $  399
Other current assets.................             6            --             384             --             390
Property, plant and equipment, net...            --            --             880             --             880
Investment in Equistar...............            --            --             677             --             677
Investment in subsidiaries...........           657           580              --         (1,237)             --
Other assets.........................            13            --             225             --             238
Goodwill.............................            --            --             381             --             381
Due from parent and affiliates.......           590            --              --           (590)             --
                                             ------          ----          ------        -------          ------
   Total assets......................        $1,266          $580          $2,946        $(1,827)         $2,965
                                             ======          ====          ======        =======          ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt.        $    3          $ --          $    8        $    --          $   11
Other current liabilities............             8            --             363             --             371
Long-term debt.......................         1,156            --              16             --           1,172
Deferred income taxes................            --            --             373             --             373
Other liabilities....................            --             1             526             --             527
Due to parent and affiliates.........            --            89             501           (590)             --
                                             ------          ----          ------        -------          ------
   Total liabilities.................         1,167            90           1,787           (590)          2,454
Minority interest....................            --            --              21             --              21
Shareholders' equity.................            99           490           1,138         (1,237)            490
                                             ------          ----          ------        -------          ------
   Total liabilities and
     shareholders' equity............        $1,266          $580          $2,946        $(1,827)         $2,965
                                             ======          ====          ======        =======          ======

</TABLE>



                                       97




<PAGE>


                            MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
                    (Dollars in millions, except share data)

Note 19 - Supplemental Financial Information - Continued

                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
              For the Years Ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                            Millennium     Millennium                                       Millennium
                                           America Inc.   Chemicals Inc.   Non-Guarantor                   Chemicals Inc.
                                             (Issuer)      (Guarantor)     Subsidiaries    Eliminations  and Subsidiaries
                                             --------      -----------     ------------    ------------  ----------------
<S>                                          <C>             <C>             <C>             <C>             <C>
2002 (Restated - See Note 2)
----------------------------
Net sales ...........................        $    --         $    --         $ 1,554         $    --         $ 1,554
Cost of products sold ...............             --              --           1,234              --           1,234
Depreciation and amortization .......             --              --             102              --             102
Selling, development and
   administrative expense ...........              1               1             136              --             138
                                             -------         -------         -------         -------         -------
   Operating (loss) income ..........             (1)             (1)             82              --              80
Interest expense, net ...............            (86)             --              --              --             (86)
Intercompany interest income
   (expense) ........................            103              (5)            (98)             --              --
Loss on Equistar investment .........             --              --             (73)             --             (73)
Equity in loss of subsidiaries ......           (402)           (328)             --             730              --
Other expense .......................             --              --              (7)             --              (7)
(Provision for) benefit from
   income taxes .....................             (6)              1              63              --              58
Cumulative effect of accounting
   change ...........................             --              --            (305)             --            (305)
                                             -------         -------         -------         -------         -------
   Net loss .........................        $  (392)        $  (333)        $  (338)        $   730         $  (333)
                                             =======         =======         =======         =======         =======
2001 (Restated - See Note 2)
----------------------------
Net sales ...........................        $    --         $    --         $ 1,590         $    --         $ 1,590
Cost of products sold ...............             --              --           1,261              --           1,261
Depreciation and amortization .......             --              --             110              --             110
Selling, development and
   administrative expense ...........             --              --             169              --             169
Reorganization and plant closure.....             --              --              36              --              36
                                             -------         -------         -------         -------         -------
   Operating income .................             --              --              14              --              14
Interest expense, net ...............            (81)             --              (1)             --             (82)
Intercompany interest income
   (expense) ........................            108              (4)           (104)             --              --
Loss on Equistar investment .........             --              --             (83)             --             (83)
Equity in loss of subsidiaries ......            (76)            (51)             --             127              --
Other expense .......................             (2)             (1)             --              --              (3)
(Provision for) benefit from
   income taxes .....................             (9)              2             107              --             100
                                             -------         -------         -------         -------         -------
   Net loss .........................        $   (60)        $   (54)        $   (67)        $   127         $   (54)
                                             =======         =======         =======         =======         =======
2000 (Restated - See Note 2)
----------------------------
Net sales ...........................        $    --         $    --         $ 1,793         $    --         $ 1,793
Cost of products sold ...............             --              --           1,264              --           1,264
Depreciation and amortization .......             --              --             113              --             113
Selling, development and
   administrative expense ...........             --              --             215              --             215
                                             -------         -------         -------         -------         -------
   Operating income .................             --              --             201              --             201
Interest expense, net ...............            (76)             --              (1)             --             (77)
Intercompany interest income
   (expense) ........................            109              (4)           (105)             --              --
Earnings on Equistar investment .....             --              --              45              --              45
Equity in earnings of subsidiaries ..             48             114              --            (162)             --
Other income ........................             --              --               7              --               7
(Provision for) benefit from
   income taxes .....................            (12)              1             (54)             --             (65)
                                             -------         -------         -------         -------         -------
   Net income .......................        $    69         $   111         $    93         $  (162)        $   111
                                             =======         =======         =======         =======         =======
</TABLE>

                                       98



 <PAGE>



                            MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
                    (Dollars in millions, except share data)

Note 19 - Supplemental Financial Information - Continued

                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
              For the Years Ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                                   Millennium     Millennium                                 Millennium
                                                    America       Chemicals                                Chemicals Inc.
                                                      Inc.           Inc.       Non-Guarantor                   and
                                                    (Issuer)     (Guarantor)    Subsidiaries  Eliminations  Subsidiaries
                                                    --------     -----------    ------------  ------------  ------------
<S>                                                  <C>            <C>            <C>            <C>         <C>
2002
----
Cash flows from operating activities .......         $  18          $  (6)         $  72          $--         $  84
Cash flows from investing activities:
   Capital expenditures ....................            --             --            (71)          --           (71)
   Proceeds from sales of property, plant
      & equipment ..........................            --             --              1           --             1
                                                     -----          -----          -----          ---         -----
Cash used in investing activities ..........            --             --            (70)          --           (70)
Cash flows from financing activities:
   Dividends to shareholders ...............            --            (35)            --           --           (35)
   Proceeds from long-term debt ............           290             --             12           --           302
   Repayment of long-term debt .............          (264)            --             (8)          --          (272)
   Intercompany ............................           (43)            41              2           --            --
   Increase in notes payable ...............            --             --              3           --             3
                                                     -----          -----          -----          ---         -----
Cash (used in) provided by financing
   activities ..............................           (17)             6              9           --            (2)
                                                     -----          -----          -----          ---         -----
Effect of exchange rate changes on cash.....            --             --             (1)          --            (1)
                                                     -----          -----          -----          ---         -----
Increase in cash and cash equivalents ......             1             --             10           --            11
Cash and cash equivalents at beginning
   of year .................................             5             --            109           --           114
                                                     -----          -----          -----          ---         -----
Cash and cash equivalents at end of year ...         $   6          $  --          $ 119          $--         $ 125
                                                     =====          =====          =====          ===         =====
2001
----
Cash flows from operating activities .......         $   7          $  (5)         $ 110          $--         $ 112
Cash flows from investing activities:
   Capital expenditures ....................            --             --            (97)          --           (97)
   Proceeds from sales of property, plant
      & equipment ..........................            --             --             19           --            19
                                                     -----          -----          -----          ---         -----
Cash used in investing activities ..........            --             --            (78)          --           (78)
Cash flows from financing activities:
   Dividends to shareholders ...............            --            (35)            --           --           (35)
   Proceeds from long-term debt ............           741             --             42           --           783
   Repayment of long-term debt .............          (675)            --            (61)          --          (736)
   Intercompany ............................           (51)            40             11           --            --
   Decrease in notes payable ...............           (17)            --            (17)          --           (34)
                                                     -----          -----          -----          ---         -----
Cash (used in) provided by financing
   activities ..............................            (2)             5            (25)          --           (22)
                                                     -----          -----          -----          ---         -----
Effect of exchange rate changes on cash ....            --             --             (5)          --            (5)
                                                     -----          -----          -----          ---         -----
Increase in cash and cash equivalents ......             5             --              2           --             7
Cash and cash equivalents at beginning
   of year .................................            --             --            107           --           107
                                                     -----          -----          -----          ---         -----
Cash and cash equivalents at end of year ...         $   5          $  --          $ 109          $--         $ 114
                                                     =====          =====          =====          ===         =====
</TABLE>

                                       99



 <PAGE>



                            MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
                    (Dollars in millions, except share data)

Note 19 - Supplemental Financial Information - Continued

          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS - Continued
              For the Years Ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                                    Millennium     Millennium                                Millennium
                                                      America      Chemicals                               Chemicals Inc.
                                                       Inc.           Inc.      Non-Guarantor                    and
                                                     (Issuer)     (Guarantor)    Subsidiaries Eliminations  Subsidiaries
                                                     --------     -----------    ------------ ------------  ------------
<S>                                                   <C>            <C>            <C>            <C>         <C>
2000
----
Cash flows from operating activities ........         $  21          $  (3)         $   2          $--         $  20
Cash flows from investing activities:
   Capital expenditures .....................            --             --           (110)          --          (110)
   Distributions from Equistar ..............            --             --             83           --            83
   Proceeds from sales of property,
       plant & equipment ....................            --             --              4           --             4
                                                      -----          -----          -----          ---         -----
Cash used in investing activities ...........            --             --            (23)          --           (23)
Cash flows from financing activities:
   Dividends to shareholders ................            --            (35)            --           --           (35)
   Repurchase of common stock ...............            --             --            (65)          --           (65)
   Proceeds from long-term debt .............           275             --             36           --           311
   Repayment of long-term debt ..............          (165)            --            (22)          --          (187)
   Intercompany .............................          (114)            38             76           --            --
   Decrease in notes payable ................           (17)            --             --           --           (17)
                                                      -----          -----          -----          ---         -----
Cash (used in) provided by financing
   activities ...............................           (21)             3             25           --             7
                                                      -----          -----          -----          ---         -----
Effect of exchange rate changes on cash .....            --             --             (7)          --            (7)
                                                      -----          -----          -----          ---         -----
Decrease in cash and cash equivalents .......            --             --             (3)          --            (3)
Cash and cash equivalents at beginning
   of year ..................................            --             --            110           --           110
                                                      -----          -----          -----          ---         -----
Cash and cash equivalents at end of year.....         $  --          $  --          $ 107          $--         $ 107
                                                      =====          =====          =====          ===         =====
</TABLE>

                                      100



<PAGE>


                                    PART III



Item 14.  Controls and Procedures

(a)   The Company maintains disclosure controls and procedures that are designed
      to ensure that information required to be disclosed in the Company's
      filings under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported within the periods specified in the rules and
      forms of the Securities and Exchange Commission. Such information
      is accumulated and communicated to the Company's management, including
      its principal executive officer and principal financial officer, as
      appropriate, to allow timely decisions regarding required disclosure.
      Within 90 days prior to filing the initial Annual Report on Form 10-K for
      the year ended December 31, 2002, the Company carried out an evaluation,
      under the supervision and with the participation of the Company's
      management, including the Company's principal executive officer and the
      Company's principal financial officer, of the effectiveness of the design
      and operation of the Company's disclosure controls and procedures. In
      addition, in October and early November 2003, prior to filing this
      Amendment to the Annual Report on Form 10-K, the Company carried out a
      further evaluation, also under the supervision and with the participation
      of the Company's management, including the Company's principal executive
      officer and the Company's principal financial officer, of the
      effectiveness of the design and operation of the Company's disclosure
      controls and procedures. Based on both of these evaluations, the Company's
      principal executive officer and principal financial officer concluded that
      the Company's disclosure controls and procedures were and are effective.

(b)   In light of the restatements described in Note 2 to the Consolidated
      Financial Statements included in this Amendment to the Annual Report on
      Form 10-K, the Company is considering whether any changes to enhance the
      Company's internal control processes and procedures are warranted. There
      were no significant changes in the Company's internal controls over
      financial reporting that occurred since the date of the further
      evaluation described above that have materially affected, or are
      reasonably likely to materially affect, the Company's internal
      controls over financial reporting.


                                      101


 <PAGE>


                                     PART IV

Item 15.  Exhibits, Financial Statement Schedule and Reports on Form 8-K

       (a) The Following Documents are Filed as Part of This Report:


1.    Financial Statement Schedule.

      Financial Statement Schedule II -- Valuation and Qualifying Accounts,
      located on page S-1 of this Annual Report, should be read in conjunction
      with the Financial Statements included in Item 8 of this Annual Report.
      Schedules, other than Schedule II, are omitted because of the absence of
      the conditions under which they are required or because the information
      called for is included in the Consolidated Financial Statements of the
      Company or the Notes thereto.

2.    Exhibits.

<TABLE>
<CAPTION>
     Exhibit
     Number                      Description of Document
     ------                      -----------------------
      <S>        <C>
       3.1(a)    Amended and Restated Certificate of Incorporation of the Company
                 (Filed as Exhibit 3.1 to the Company's Registration Statement on
                 Form 10 (File No. 1-12091) (the "Form 10"))*

       3.1(b)    Certificate of Elimination of Series A Junior Preferred Stock
                 of Millennium Chemicals Inc. (Filed as Exhibit 3.1(b) to the
                 Company's Annual Report on Form 10-K, as filed on March 25,
                 2003 (the "Original 2002 Form 10-K"))*

       3.2       By-laws of the Company (as amended on February 4, 2002) (Filed
                 as Exhibit 3.2 to the Company's Annual Report on Form 10-K for
                 the year ended December 31, 2001 (the "2001 Form 10-K"))*

       4.1(a)    Form of Indenture, dated as of November 27, 1996, among
                 Millennium America (formerly named Hanson America Inc.), the
                 Company and The Bank of New York, as Trustee, in respect of the
                 7% Senior Notes due November 15, 2006 and the 7.625% Senior
                 Debentures due November 15, 2026 (Filed as Exhibit 4.1 to the
                 Registration Statement of the Company and Millennium America on
                 Form S-1 (Registration No. 333-15975) (the "Form S-1"))*

       4.1(b)    First Supplemental Indenture dated as of November 21, 1997
                 among Millennium America, the Company and The Bank of New York,
                 as Trustee (Filed as Exhibit 4.1(b) to the Company's Annual
                 Report on Form 10-K for the year ended December 31, 1997 (the
                 "1997 Form 10-K"))*

       4.2       Indenture, dated as of June 18, 2001, among Millennium America
                 as Issuer, the Company as Guarantor, and The Bank of New York,
                 as Trustee (including the form of 9 1/4% Senior Notes due 2008
                 and the Note Guarantee) (filed as Exhibit 4.1 to the
                 Registration Statement of the Company and Millennium America
                 (Registration Nos. 333-65650 and 333-65650-1 on Form S-4 (the
                 "Form S-4"))*

      10.1       Form of Post-Demerger Stock Purchase Agreement, dated as of
                 September 30, 1996, between Hanson and MHC Inc. (including
                 related form of Indemnification Agreement and Tax Sharing and
                 Indemnification Agreement) (Filed as Exhibit 10.6 to the Form
                 10)*

      10.2       Demerger Agreement, dated as of September 30, 1996, between
                 Hanson, Millennium Overseas Holdings Ltd. (formerly Hanson
                 Overseas Holdings Ltd.) and the Company (Filed as Exhibit 10.7
                 to the Form 10)*

      10.3       Form of Indemnification Agreement, dated as of September 30,
                 1996, between Hanson and the Company (Filed as Exhibit 10.8 to
                 the Form 10)*

      10.4       Form of Tax Sharing and Indemnification Agreement, dated as of
                 September 30, 1996, between Hanson, Millennium Overseas
                 Holdings Ltd., Millennium America Holdings Inc. (formerly
                 HM Anglo American Ltd.), Hanson North America Inc. and the
                 Company (Filed as Exhibit 10.9(a) to the Form 10)*

      10.5(a)    Deed of Tax Covenant, dated as of September 30, 1996, between
                 Hanson, Millennium Overseas Holdings Ltd., Millennium Inorganic
                 Chemicals Limited (formerly SCM Chemicals Limited), SCMC
                 Holdings B.V. (formerly Hanson SCMC B.V.), Millennium Inorganic
                 Chemicals Ltd. (formerly SCM Chemicals Ltd.), and the Company
                 (the "Deed of Tax Covenant") (Filed as Exhibit 10.9(b) to the
                 Form 10)*

      10.5(b)    Amendment to the Deed of Tax Covenant dated January 28, 1997
                 (Filed as Exhibit 10.9(c) to the Company's Annual Report on
                 Form 10-K for the year ended December 31, 1996 (the "1996 Form
                 10-K"))*
</TABLE>


                                      102


 <PAGE>

<TABLE>
<CAPTION>
     Exhibit
     Number      Description
     ------      -----------
      <S>        <C>
      10.6(a)    Credit Agreement, dated June 18, 2001, among Millennium America
                 Inc., as Borrower, Millennium Inorganic Chemicals Limited, as
                 Borrower, certain borrowing subsidiaries of Millennium
                 Chemicals Inc., from time to time party thereto, Millennium
                 Chemicals Inc., as Guarantor, the lenders from time to time
                 party thereto, Bank of America, N.A., as Syndication Agent and
                 The Chase Manhattan Bank as Administrative Agent and collateral
                 agent (filed as Exhibit 10.1 to the Form S-4)*

      10.6(b)    First Amendment, dated as of December 14, 2001, to the Credit
                 Agreement dated as of June 18, 2001, with Bank of America, N.A.
                 and JP Morgan Chase Bank and the lenders party thereto (filed
                 as Exhibit 99.1 to the Company's Current Report on Form 8-K
                 dated December 18, 2001)*

      10.6(c)    Second Amendment, dated as of June 19, 2002, to the Credit
                 Agreement dated as of June 18, 2001, with the Bank of America,
                 N.A. and JP Morgan Chase Bank and the lenders party thereto
                 (Filed as Exhibit 10.1 to the Company's Quarterly Report on
                 Form 10-Q for the quarter ended June 30, 2002 (the "June 30,
                 2002, Form 10-Q"))*

       10.7      Form of Agreement between Millennium America Holdings Inc., (or
                 certain of its subsidiaries), and each of William M. Landuyt,
                 Robert E. Lee, C. William Carmean, Timothy E. Dowdle, Marie S. Dreher,
                 Peter P. Hanik, John E. Lushefski, Myra J. Perkinson, David L.
                 Vercollone and certain other executives of the Company (Filed as
                 Exhibit 10.7 to the Original 2002 Form 10-K) *'D'

      10.8       Form of Agreement between each of the Company's operating
                 subsidiaries and certain officers of such subsidiaries (Filed
                 as Exhibit 10.8 to the Original 2002 Form 10-K) *'D'

      10.9(a)    Millennium Chemicals Inc. Annual Performance Incentive Plan (Filed
                 as Exhibit 10.23 to the Form 10)*'D'

      10.9(b)    Amendment Number 1 dated January 20, 1997, to the Millennium
                 Chemicals Inc. Annual Performance Plan. (Filed as Exhibit
                 10.23(b) to the 1996 Form 10-K)*'D'

      10.9(c)    Amendment Number 2 dated January 23, 1998, to the Millennium
                 Chemicals Inc. Annual Performance Incentive Plan (Filed as
                 Exhibit 10.23(c) to the 1997 Form 10-K)*'D'

      10.9(d)    Amendment Number 3 dated January 22, 1999, to the Millennium
                 Chemicals Inc. Annual Performance Incentive Plan (Filed as
                 Exhibit 10.20(d) to the 1998 Form 10-K)*'D'

      10.9(e)    Amendment Number 4 dated as of June 1, 2002, to the Millennium
                 Chemicals Inc. Annual Performance Incentive Plan (Filed as
                 Exhibit 10.9(e) to the Original 2002 Form 10-K) *'D'

      10.10(a)   Millennium Chemicals Inc. Long Term Stock Incentive Plan (Filed
                 as Exhibit 10.25 to the Form 10)*'D'

      10.10(b)   Amendment Number 1 to the Millennium Chemicals Inc. Long Term
                 Stock Incentive Plan (Filed as Exhibit 10.6 to the Company's
                 Quarterly Report on Form 10-Q for the quarter ended September
                 30, 1997)*'D'

      10.10(c)   Amendment dated July 24, 1997 to the Millennium Chemicals Inc.
                 Long Term Stock Incentive Plan (Filed as Exhibit 10.25(c) to
                 the 1997 Form 10-K)*'D'

      10.10(d)   Amendments dated January 23, 1998 and December 10, 1998, to the
                 Millennium Chemicals Inc. Long Term Stock Incentive Plan (Filed
                 as Exhibit 10.23(d) to the 1998 Form 10-K)*'D'

      10.10(e)   Amendment to the Millennium Chemicals Inc. Long Term Stock
                 Incentive Plan (Filed as Exhibit 10.23(d) to the 1998 Form
                 10-K) (Filed as Exhibit 10.10(e) to the Original 2002 Form
                 10-K)*'D'

      10.11(a)   Amended and Restated Millennium Chemicals Inc. Supplemental
                 Executive Retirement Plan (Filed as Exhibit 10.11(a) to the
                 Original 2002 Form 10-K)*'D'

      10.11(b)   Millennium Chemicals Inc. 2003 Supplemental Executive Retirement
                 Plan (Filed as Exhibit 10.11(b) to the Original 2002 Form 10-K)*'D'

      10.15      Millennium Chemicals Grandfathered Supplemental Executive Retirement
                 Plan (Filed as Exhibit 10.15(b) to the 2000 Form 10-K)*'D'

      10.16      Millennium Petrochemicals Grandfathered Supplemental Executive
                 Retirement Plan (Filed as Exhibit 10.16 to the 2000 Form 10-K)*'D'

      10.17      Millennium Inorganic Chemicals Grandfathered Supplemental Executive
                 Retirement Plan (Filed as Exhibit 10.17 to the 2000 Form 10-K)*'D'
</TABLE>


                                      103


 <PAGE>

<TABLE>
<CAPTION>
     Exhibit
     Number      Description
     ------      -----------
      <S>        <C>
      10.18      Millennium Specialty Chemicals Grandfathered Supplemental Executive
                 Retirement Plan (Filed as Exhibit 10.18 to the 2000 Form 10-K)*'D'

      10.19(a)   Millennium Chemicals Inc. Salary and Bonus Deferral Plan (Filed
                 as Exhibit 10.30 to the 1996 Form 10-K)*'D'

      10.19(b)   Amendment Number 1 dated January 23, 1998, to the Millennium
                 Chemicals Inc. Salary and Bonus Deferral Plan (Filed as Exhibit
                 10.30(b) to the 1997 Form 10-K)*'D'

      10.19(c)   Amendment Number 2 dated January 22, 1999, to the Millennium
                 Chemicals Inc. Salary and Bonus Deferral Plan (Filed as Exhibit
                 10.28(c) to the 1998 Form 10-K)*'D'

      10.19(d)   Amendment Number Three to the Millennium Chemicals Inc. Salary
                 and Bonus Deferral Plan (Filed as Exhibit 10.19(d) to the
                 Original 2002 Form 10-K)*'D'

      10.20(a)   Millennium Chemicals Inc. Supplemental Savings and Investment
                 Plan (Filed as Exhibit 10.29 to the 1998 Form 10-K)*'D'

      10.20(b)   Amendment to the Millennium Chemicals Inc. Supplemental Savings
                 and Investment Plan (Filed as Exhibit 10.20(b) to the Original
                 2002 Form 10-K)*'D'

      10.21(a)   Millennium Chemicals Inc. Long Term Incentive Plan (Filed as
                 Exhibit 10.21 to the 2000 Form 10-K)*'D'

      10.21(b)   Amendment Number 1 to the Millennium Chemicals Inc. Long Term
                 Incentive Plan (Filed as Exhibit 10.21(b) to the Original 2002
                 Form 10-K)*'D'

      10.22(a)   Millennium Chemicals Inc. Executive Long Term Incentive Plan
                 (Filed as Exhibit 10.22 to the 2000 Form 10-K)*'D'

      10.22(b)   Amendment Number 1 to the Millennium Chemicals Inc. Executive
                 Long Term Incentive Plan (Filed as Exhibit 10.22(b) to the
                 Original 2002 Form 10-K)*'D'

      10.23(a)   Millennium America Holdings Inc. Long Term Incentive Plan and
                 Executive Long Term Incentive Plan Trust Agreement (Filed as
                 Exhibit 10.23 to the 2000 Form 10-K)*'D'

      10.23(b)   Amendment Number 1 to the Millennium America Holdings Inc. Long
                 Term Incentive Plan Trust Agreement (Filed as Exhibit 10.23(b)
                 to the Original 2002 Form 10-K)*'D'

      10.24(a)   Millennium Chemicals Inc. Omnibus Incentive Compensation Plan
                (Filed as Exhibit 10.24 to the 2000 Form 10-K)*'D'

      10.24(b)   Form of Stock Option Agreement under Omnibus Incentive
                 Compensation Plan (Filed as Exhibit 10.24(b) to the 2001
                 Form 10-K)*'D'

      10.24(c)   Amendment to Millennium Chemicals Inc. 2001 Omnibus Incentive
                 Compensation Plan (Filed as Exhibit 10.24(c) to the Original
                 2002 Form 10-K)*'D'

      10.25(a)   Master Transaction Agreement between the Company and Lyondell
                 (Filed as an Exhibit to the Company's Current Report on Form
                 8-K dated July 25, 1997)*

      10.25(b)   First Amendment to Master Transaction Agreement between
                 Lyondell and the Company (Filed as an Exhibit to the Company's
                 Current Report on Form 8-K dated October 17, 1997)*

      10.26      Amended and Restated Limited Partnership Agreement of Equistar
                 Chemicals, LP dated as of November 6, 2002 (Filed as Exhibit
                 10.26 to the Company's Current Report on Form 8-K dated
                 November 25, 2002 (the "November 26, 2002 Form 8-K"))*

      10.27(a)   Asset Contribution Agreement (the "Millennium Asset
                 Contribution Agreement") among Millennium Petrochemicals,
                 Millennium Petrochemicals LP LLC and Equistar (Filed as an
                 Exhibit to the Company's Current Report on Form 8-K dated
                 December 10, 1997)*

      10.27(b)   First Amendment to the Millennium Asset Contribution Agreement
                 dated as of May 15, 1998 (Filed as Exhibit 10.23(b) to the 1999
                 Form 10-K)*

      10.27(c)   Second Amendment to the Asset Contribution Agreement among
                 Millennium Chemicals Inc., Millennium Petrochemicals LP LLC,
                 and Equistar Chemicals, LP*

      10.28      First Amendment to Lyondell Asset Contribution Agreement dated as of
                 May 15, 1998 (Filed as Exhibit 10.24(b) to the 1999 Form 10-K)*
</TABLE>

                                      104


 <PAGE>

<TABLE>
<CAPTION>
     Exhibit
     Number      Description
     ------      -----------
      <S>        <C>
      10.29(a)   Amended and Restated Parent Agreement among Lyondell, the
                 Company and Equistar, dated as of November 6, 2002, (Filed as
                 Exhibit 10.29 to the November 26, 2002 8-K)*

      11.1       Statement re: computation of per share earnings (Filed as
                 Exhibit 11.1 to the Original 2002 Form 10-K)*

      11.2       Statement re: computation of per share earnings**

      18.1       Change in Accounting Principle (Filed as Exhibit 18.1 to the
                 Original 2002 Form 10-K)*

      21.1       Subsidiaries of the Company (Filed as Exhibit 21.1 to the Original
                 2002 Form 10-K)*

      23.1       Consent of PricewaterhouseCoopers LLP (Filed as Exhibit 23.1 to the
                 Original 2002 Form 10-K)*

      23.2       Consent of PricewaterhouseCoopers LLP (Filed as Exhibit 23.2 to the
                 Original 2002 Form 10-K)*

      23.3       Consent of PricewaterhouseCoopers LLP**

      31.1       Certificate of Principal Executive Officer pursuant to Section 302
                 of the Sarbanes-Oxley Act of 2002**

      31.2       Certificate of Principal Financial Officer pursuant to Section 302
                 of the Sarbanes-Oxley Act of 2002**

      32.1       Certificate of Principal Executive Officer pursuant to Section
                 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed, in
                 accordance with Item 601(b)(32)(ii) of Regulation S-K, 17 CFR
                 229.601(b)(32)(ii))**

      32.2       Certificate of Principal Financial Officer pursuant to Section
                 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed, in
                 accordance with Item 601(b)(32)(ii) of Regulation S-K, 17 CFR
                 229.601(b)(32)(ii))**

      99.1       Information relevant to forward-looking statements (Filed as
                 Exhibit 99.1 to the Original 2002 Form 10-K). For a revised and
                 updated statement regarding information relevant to
                 forward-looking statements, please see Exhibit 99.1 to the
                 Company's Quarterly Report on Form 10-Q for the quarter ended
                 June 30, 2003, which is incorporated by reference herein.*

      99.2       Form of Letter Agreement, dated July 3, 1996, between Hanson
                 and United Kingdom Inland Revenue (Filed as Exhibit 99.2 to the
                 Form 10)*
</TABLE>

In addition, the Company hereby agrees to furnish to the Securities and Exchange
Commission, upon request, a copy of any instrument not listed above that defines
the rights of the holders of long-term debt of the Company and its subsidiaries.

--------------
    *  Incorporated by reference.
   **  Filed herewith.
  'D'  Management contract or compensatory plan or arrangement required to be
       filed pursuant to Item 14(c).

(b)    Reports on Form 8-K.

Current Reports on Form 8-K dated October 30, 2002, November 14, 2002, November
26, 2002, December 3, 2002, December 16, 2002, December 19, 2002, January 9,
2003, January 27, 2003, January 31, 2003 and March 19, 2003, were filed during
the quarter ended December 31, 2002 and through March 25, 2003, the date the
original Form 10-K was filed with the Securities and Exchange Commission.

                                      105


 <PAGE>


                                    SIGNATURE

       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.

                                            MILLENNIUM CHEMICALS INC.

                                            By:          /s/ ROBERT E. LEE
                                                --------------------------------
                                                           Robert E. Lee
                                                           President and
                                                      Chief Executive Officer

November 12, 2003


                                      106



<PAGE>


                                                                     SCHEDULE II


                            MILLENNIUM CHEMICALS INC.
                        VALUATION AND QUALIFYING ACCOUNTS
                     For the Years Ended 2000, 2001 and 2002

<TABLE>
<CAPTION>
                                                                        Additions
                                                               ----------------------------
                                                   Balance      Charged to    Charged to                      Balance at
                                                at Beginning    Costs and        Other                          End of
                                                   of Year       Expenses      Accounts       Deductions         Year
                                                -------------  ------------- --------------   ------------    -----------
<S>                                             <C>            <C>           <C>               <C>             <C>
Year ended December 31, 2000
     Deducted from asset accounts:
     Allowance for doubtful accounts..........  $          2   $          2             --     $       --      $       4
     Valuation allowance for deferred tax
       assets.................................            76             --             --             (6)(a)         70
Year ended December 31, 2001
     Deducted from asset accounts:
     Allowance for doubtful accounts..........             4              4             --             (1)(b)          7
     Valuation allowance for deferred tax
       assets.................................            70             --             --            (61)(c)          9
Year ended December 31, 2002 (Restated)*
     Deducted from asset accounts:
     Allowance for doubtful accounts..........             7             --             --             --              7
     Valuation allowance for deferred tax
       assets.................................             9             --             10(d)          --             19
</TABLE>

--------------
   *   The Company's financial statements have been restated as disclosed in
       Note 2 to the Company's Consolidated Financial Statements included in the
       Company's Annual Report on Form 10-K/A for the year ended December 31,
       2002.
  (a)  Valuation allowance for capital loss carryover.
  (b)  Uncollected accounts written off, net of recoveries.
  (c)  Portion of underlying capital loss carryover expired.
  (d)  Valuation allowance related to the net deferred tax assets of the
       Company's French subsidiaries.


                                      S-1




<PAGE>



                                  Exhibit Index

<TABLE>
<CAPTION>
     Exhibit
     Number                   Description of Document
     ------                   -----------------------
      <S>        <C>
      11.2       Statement re: computation of per share earnings

      23.3       Consent of PricewaterhouseCoopers LLP

      31.1       Certificate of Principal Executive Officer pursuant to Section 302
                 of the Sarbanes-Oxley Act of 2002

      31.2       Certificate of Principal Financial Officer pursuant to Section 302
                 of the Sarbanes-Oxley Act of 2002

      32.1       Certificate of Principal Executive Officer pursuant to Section
                 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed, in
                 accordance with Item 601(b)(32)(ii) of Regulation S-K, 17 CFR
                 229.601(b)(32)(ii))

      32.2       Certificate of Principal Financial Officer pursuant to Section
                 906 of the Sarbanes-Oxley Act of 2002 (Furnished, not filed, in
                 accordance with Item 601(b)(32)(ii) of Regulation S-K,
                 17 CFR 229.601(b)(32)(ii))
</TABLE>

                                      107


                         STATEMENT OF DIFFERENCES
                         ------------------------
The registered trademark symbol shall be expressed as................... 'r'
The section symbol shall be expressed as................................ 'SS'
The dagger symbol shall be expressed as................................. 'D'
Characters normally expressed as subscript shall be preceded by......... [u]