<PAGE>


================================================================================
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K/A

                                 --------------
                                 AMENDMENT NO. 2

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

              FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                       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)

                230 Half Mile Road                                              07701
                   Red Bank, NJ                                               (Zip Code)
     (Address of principal executive offices)
</TABLE>

        Registrant's telephone number, including area code: 732-933-5000

                                 --------------
           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]

       The aggregate market value of voting stock held by non-affiliates as of
March 22, 2002 (based upon the closing price of $14.85 per common share as
quoted on the New York Stock Exchange), is approximately $900 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 22, 2002, was 62,900,173 shares, excluding
14,996,413 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
2002 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>

                                EXPLANATORY NOTE

         Millennium Chemicals Inc. (the "Company") is filing this amendment to
its Form 10-K for the fiscal year ended December 31, 2001 to revise the
information in Part I, Item 1 (Business); Part II, Item 7 (Management's
Discussion and Analysis of Financial Condition and Results of Operations); and
Part II, Item 8 (Financial Statements and Supplementary Data). The only
revisions to the Company's Form 10-K are as follows:

     o    In Item 1, the fourth and fifth paragraphs on page 4 of the original
          Form 10-K have been revised, and the second paragraph under "Specialty
          Chemicals" on page 10 of the original 10-K have been expanded,
          becoming the second and third paragraphs in the revised text under
          such heading.

     o    In Item 7, under the heading "Segment Analysis," revisions have been
          made to quantify the factors affecting operating profit of each of the
          Company's three business segments. Such revisions have been made to
          the first and/or second paragraphs of each subsection headed "2001
          Verses 2000" and "2000 Verses 1999."

     o    In Item 8, revisions have been made to Note 10 to revise the table on
          page 66 of the original 10-K disclosing the assumptions used in the
          measurement of the Company's benefit obligations and to add a new
          sentence below this table. In addition, Note 15 has been added. Please
          note that the information in Note 15 was also included in its entirety
          in Part II, Item 6 of the original Form 10-K.

     o    Part IV, Item 14 has been revised to add Exhibits 23.5 and 23.6, the
          Consents of PricewaterhouseCoopers LLP.

         Items 1, 7, 8 and 14, as revised, are hereby provided in their
entirety.




                                       2





<PAGE>



                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
     Item                                                                                             Page
     ----                                                                                             ----
<S>                                                                                                   <C>
                                                   PART I

      1. Business..................................................................................      5

                                                  PART II

      7. Management's Discussion and Analysis of Financial Condition and Results of
          Operations..............................................................................      23

      8. Financial Statements and Supplementary Data...............................................     39

                                                  PART IV

     14. Exhibits, Financial Statement Schedule and Reports on Form 8-K............................     68

         Signature.................................................................................     73

         Certifications............................................................................     73
</TABLE>

Disclosure Concerning Forward-Looking Statements

       The statements in this Annual Report on Form 10-K (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, Millennium Chemicals Inc. (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. Actual
events or results may differ materially. Factors that could cause such a
difference include:

       o   the cyclicality and volatility of the segments of the chemical
           industry in which the Company and Equistar Chemicals, LP ("Equistar")
           operate, particularly fluctuations in the demand for ethylene, its
           derivatives and acetyls and the sensitivity of these industry
           segments 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;

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

       o   changes in the cost of energy and raw materials;

       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;

       o   the occurrence of operating problems at manufacturing facilities of
           the Company or Equistar; fluctuations in currency exchange rates and
           other risks of doing business abroad; the cost of compliance with the
           extensive environmental regulations affecting the chemical industry
           and exposure to liabilities for environmental remediation and other
           environmental matters;



                                       3





<PAGE>

       o   pricing and other competitive pressures; and

       o   exposure to legal proceedings relating to present and former
           operations (including proceedings based on exposure to lead pigments,
           asbestos and other materials) and other claims.

       A further description of these risks, uncertainties and other matters can
be found in Exhibit 99.1 to this Annual Report.

       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 hereof. 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.


                                       4






<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, Lyondell Chemical
Company ("Lyondell") and Occidental Petroleum Corporation ("Occidental"). 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 major 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;

       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.

         In 2001, to lower costs and facilitate the sharing of best practices,
the Company refocused its operations from a divisional model, with separate
functional organizations within each division, to a single company model. The
Company now has a centralized Shared Services organization 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. In
addition, the Company refocused its management strategy based on "Operational
Excellence" and "Growth and Development" models. The Operational Excellence
strategy 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
business, as well as its interest in Equistar, are managed pursuant to the
Operational Excellence strategy. The Growth and Development strategy 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 strategy.

       Regarding the Company's legal structure, the Company's wholly owned
businesses are operated through Millennium Inorganic Chemicals Inc.
(collectively, with its non-United States affiliates, "Millennium Inorganic
Chemicals"), Millennium Petrochemicals Inc. ("Millennium Petrochemicals") and
Millennium Specialty Chemicals Inc. ("Millennium Specialty Chemicals"). In
addition to its 29.5% interest in Equistar, the Company also owns an 85%
interest in La Porte Methanol Company, L.P. (the "La Porte Methanol Company"), a
Delaware limited partnership that is included in the Company's Consolidated
Financial Statements, which owns a methanol plant located in La Porte, Texas,
and certain related facilities that were contributed to the partnership by
Millennium Petrochemicals.

       The Company was incorporated in Delaware on April 18, 1996. 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.

       In this Annual Report: (i) references to the Company are to the Company
and its consolidated subsidiaries, except as the context otherwise requires;
(ii) references to "tpa" are to metric tons per annum (a metric ton is equal to
1,000 kilograms or 2,204.6 pounds); and, (iii) references to the Company's and
Equistar's annual rated,




                                       5





<PAGE>

processing or production capacity are based upon engineering assessments made by
the Company and Equistar, respectively. 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. See Note 14 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 4 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 and opacity 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 and
                                                            extend the shelf life of beer, 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.

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


   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.
</TABLE>






                                       6





<PAGE>

<TABLE>
<CAPTION>

                        Product                                                       Uses
                        -------                                                       ----
<S>                                                         <C>
Specialty Chemicals

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

   Terpene 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 and opacity in a wide range of products, including paint
and coatings, plastics, paper and elastomers.

       In the third quarter of 2001, the Company idled its high-cost 44,000 tpa
sulfate-process plant in Hawkins Point, Maryland for an indefinite period. The
idled plant primarily served the United States fine paper industry. Customers
are now being provided product from the Company's other TiO[u]2 plants.
Additionally, as a result of minor debottlenecking and demonstrated operating
results, the chloride-process TiO[u]2 plants in Kemerton, Australia and
Ashtabula, Ohio have been re-rated, increasing capacity by 10,000 and 12,000
tpa, respectively.

       The following table sets forth the Company's annual production capacity
(excluding the idled Hawkins Point, Maryland sulfate-process plant and including
the re-rated Kemerton, Australia and Ashtabula, Ohio chloride plants) 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>

       Process                                   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 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.





                                       7





<PAGE>

       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 100,000 tpa of
titanium ores, which are generally consumed in the Salvador TiO[u]2 plant, and
16,000 tpa of zircon, 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 83% of
installed capacity during 2001, 93% of installed capacity during 2000 and 88% of
installed capacity during 1999. The decline in the operating rate in 2001
compared to 2000 was primarily due to planned curtailment of production at
certain facilities in response to reduced market demand.

       Titanium-bearing ores used in the TiO[u]2 extraction process (ilmenite,
natural rutile and leucoxene) 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 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, Ukraine and Norway, generally pursuant to one-- to
three-year supply contracts expiring in 2002 through 2005. 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 82% of the titanium ores and upgraded titaniferous
raw materials purchased by the Company in 2001.

       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.

       At the present time, chloride- and sulfate-process feedstock is
sufficiently available due to reduced demand and additional new capacity. 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.

       Of the total 586,000 metric tons of TiO[u]2 sold by the Company in 2001,
approximately 60% was sold to customers in the paint and coatings industry,
approximately 20% to customers in the plastics industry, approximately 16% to
customers in the paper industry, and approximately 4% to other customers. The
Company's ten largest customers accounted for approximately 40% of its TiO[u]2
sales in 2001. 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 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 are E. I. DuPont deNemours and Company
("DuPont"); Kerr-McGee Chemical Corporation (both directly and through various
joint ventures) ("Kerr-McGee Chemicals"), a



                                       8





<PAGE>

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, Huntsman, Kronos, and
Kerr-McGee Chemicals 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 Ashtabula, Ohio, and Thann, Alsace, France, plants. 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 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 Thann facility in Alsace, France. These non-pigmentary products 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 are produced at the Rockingham, Western Australia and Thann, Alsace,
France plants. 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 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 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 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 the 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.



                                       9





<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.............................................       1,000

</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, and has an annual production capacity of 850 million pounds as of
December 31, 2001. 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 supplies 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.

       On May 26, 2000, the Company executed 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 term of the contract is from
January 1, 2001 through December 31, 2006 and thereafter from year-to-year. The
tolling arrangement provided one-third of the VAM available for sale by the
Company in 2001.

       The Company sells VAM under contracts that range in term from one to
seven years, as well as on a spot basis into domestic and export markets. The
majority of sales are completed under contract. The pricing for domestic
contracts is generally 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 long-term 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, Indonesia, Malaysia and Korea,
to better serve its customers' requirements in those regions.

       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, and has an
annual production capacity as of December 31, 2001, of 1 billion pounds. In
2001, the Company used approximately 75% of its acetic acid production
internally 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, which is leased by Linde from the Company pursuant to a
long-term lease that commenced on January 18, 1999. La Porte




                                       10





<PAGE>

Methanol Company, 85% owned by the Company, supplies all of the Company's
requirements for methanol. (See "La Porte Methanol Company," below.)

       Acetic acid not consumed internally by the Company is sold predominantly
under contract into domestic and export markets. These contracts range in term
from one to five years. Pricing for domestic sales under these contracts is
generally 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.

       The Company's principal competitors in the acetic acid business are
Celanese; BP; Kyodo Sakusan, Acetex and Eastman Chemical Corp.

                               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 by distillation 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,
1-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 and coolants are each
flavor ingredients. 1-carvone is the primary component in spearmint oil.
Coolants are used in confectionery, oral care and other food applications. The
Brunswick site produces linalool and geraniol from the alpha-pinene component of
CST. Linalool is a fragrance ingredient used in a wide range of fragrance
applications including soaps, detergents and fine fragrances, and geraniol is a
fragrance rose alcohol used in soaps, detergents and fine fragrances. Linalool
and geraniol are produced utilizing a proprietary and, the Company believes,
unique technology. The Company believes this technology provides a significant
advantage in raw material availability and quality. 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 five million pounds. Dihydromyrcenol is a terpene-based
fragrance ingredient used in soaps and fine fragrances.

       CST is a by-product of the kraft process of papermaking. The Company
purchases CST from approximately 50 pulp mills in North America. Additionally,
the Company purchases quantities of gum turpentine or its derivatives from Asia,
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. The sale of CST generates relatively insignificant
revenues and profits for the pulp mills that serve as the Company's principal
suppliers. Accordingly, the Company attempts to work closely and cooperatively
with its suppliers and provides them with incentives to produce more CST. For
example, the Company provides technical services to its suppliers to ensure
turpentine recovery is maximized.

       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 a lesser extent, producers of cosmetics and
toiletries. Approximately 80% of the Company's specialty chemical sales are to
users of fragrance ingredients. Approximately 60% of the Company's 2001 terpene
fragrance ingredient sales were made outside the United States, to more than 40
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.



                                       11





<PAGE>

       The markets in which the Company's terpene fragrance business 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 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 terpene chemical customers accounted for approximately 58% of its
total specialty chemicals sales in 2001. 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, $26 million and $26 million in 2001, 2000 and 1999, respectively.
Research and development expense decreased by approximately $6 million from 2000
to 2001 due to the Company's efforts to reduce selling, development and
administrative ("S,D&A") costs in the current economic environment. The Company
conducts research at facilities in Baltimore, Maryland; Stallingborough, United
Kingdom; Bunbury, Western Australia; 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
approximately 90 countries, amounted to approximately 13%, 11% and 9% of total
revenues in 2001, 2000 and 1999, respectively. Revenue from non-United States
operations amounted to approximately 41%, 40% and 42% of total revenues in 2001,
2000, and 1999 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 28% and 29% of total identifiable assets at December 31, 2001 and
2000, principally reflecting the assets of these operations. In addition, 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, Ukraine
and Norway. 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 as 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 decreased approximately $13 million during
2001, $46 million during 2000, and $46 million during 1999. 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.

       In addition, 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




                                       12





<PAGE>

speculative purposes. Net foreign currency transaction losses aggregated $7
million in 2001, $4 million in 2000 and $9 million in 1999.

                           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 2001 revenues of $5.9
billion and assets of $6.3 billion at the end of 2001. 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 propylene, polypropylene, 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 Occidental's
chemicals subsidiary. On January 31, 2002, Lyondell and Occidental, the
Company's partners in Equistar, announced that they had agreed in principle on a
proposed transaction whereby Occidental would sell its 29.5% equity interest in
Equistar to Lyondell. If completed, this would bring Lyondell's ownership
interest in Equistar to 70.5%, with the Company holding the remaining 29.5%
interest. These transactions are subject to negotiation, completion and
execution of definitive documentation, compliance with the applicable provisions
of the Amended and Restated Limited Partnership Agreement of Equistar (the
"Equistar Partnership Agreement") and the Amended and Restated Parent Agreement
of Equistar (the "Equistar Parent Agreement"), approval by the Boards of
Directors of Lyondell and Occidental, approval by Lyondell's stockholders and
other customary conditions. There can be no assurance that the proposed
transaction will be completed. See the description of the Equistar Partnership
Agreement and Equistar Parent Agreement in "Equity Interest in Equistar --
Management of Equistar; Agreements between Equistar, Lyondell, Occidental and
the Company".

       Equistar's petrochemicals business unit 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 polymers business unit 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 Business Unit

       Equistar produces petrochemicals at twelve facilities located in six
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. 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"). 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. Olefin plants with the flexibility to consume a wide range
of raw materials historically have had lower variable costs than olefin plants
that are restricted in their raw material processing capability to NGLs.
Equistar's Channelview and Corpus Christi, Texas facilities can process 100% and
70% Petroleum Liquids, respectively, or up to 80% and 70%




                                       13





<PAGE>

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 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, and Anaheim, California.
Equistar is outsourcing the operations of its Anaheim, California facility and
anticipates shutting down the facility in the second quarter of 2002.

       The following table outlines Equistar's primary petrochemical products
and the annual processing capacity for each product:

<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.



                                       14





<PAGE>

       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, 2001, approximately 85% 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.

       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 the industry in fewer and larger competitors.

Equistar's Polymer Business Unit

       Through facilities located at ten plant sites in five 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.

       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. These annual capacities exclude the capacity of the
Port Arthur, Texas facility, which was permanently shut down February 28, 2001.
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




                                       15





<PAGE>

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 fifty percent 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.

       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
Atofina, BP Solvay Polyethylene, Chevron Phillips, Dow, Eastman Chemical
Company, ExxonMobil, Formosa Plastics, Huntsman, NOVA Chemicals and Westlake
Polymers. Industry consolidation has concentrated the industry in fewer and
larger competitors.

Management of Equistar; Agreements between Equistar, Lyondell, Occidental 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, 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 nine representatives, three
appointed by each general partner. Matters requiring agreement by the
representatives of Lyondell, Occidental 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,
Occidental 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 and Occidental) 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 affiliates of Occidental entered
into a similar agreement with Equistar with respect to the transfer of their
respective assets and Equistar's assumption of liabilities.

       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 and affiliates of Occidental also entered into
agreements with Equistar for the provision of services. Pursuant to the Equistar
Parent Agreement, the Company, Lyondell and an affiliate of




                                       16






<PAGE>

Occidental 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.

       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 partners and the non-selling partners shall have the option,
exercisable by delivering written acceptance notice of the exercise to the
selling partners within 45 days after receiving notice of the sale, to elect to
purchase all of the partnership interests of the selling partners on the terms
described in the initial notice. If all of the other non-selling partners
deliver notice of acceptance, then all of the partnership interests shall be
transferred in proportion to the partners' current percentage interest unless
otherwise agreed. If less than all of the non-selling partners deliver notice of
acceptance, the partner who delivers notice of acceptance will have the option
of purchasing all of the partnership interests up for sale. 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 partners do not elect to purchase the selling
partners' partnership interests within 45 days after the receipt of initial
notice of sale, the selling partners will have a further 180 days during which
they may consummate the sale of their 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
partners. 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 partners may make any transfer of their partnership
interests.

       Before the selling partners may consummate a transfer of their
partnership interests to a third party under the Equistar Partnership Agreement,
the selling partners 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 partners and to Equistar
substantially in the form of the Equistar Parent Agreement.

       Equistar Parent Agreement: Without the consent of each of Lyondell,
Millennium, Oxy CH Corporation ("Oxy CH") and Occidental Chemical Holding
Corporation (collectively, the "Ownership Parents"), no Ownership Parent may
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 Ownership Parent may transfer all, but not less than all, of its
Partner Sub Stock, without the consent of the other Ownership Parents, if the
transfer is in connection with either (1) a merger, consolidation, conversion or
share exchange of the Ownership 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 Ownership Parent's assets (or in the case of each of Oxy CH
and Occidental Chemical Holding Corporation, 50% of the book value of Oxy CH'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 Ownership 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
Ownership 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 Ownership Parent under the Equistar Parent
Agreement, with the same effect as if it had been named in the instrument.

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



                                       17





<PAGE>

       Unless a transfer is permitted under the provisions described above, any
Ownership Parent desiring to transfer all of its Partner Sub Stock to any
person, including another Ownership Parent or any affiliate of an Ownership
Parent, may only transfer its Partner Sub Stock for cash consideration and will
give a written right of first option to Equistar and each of the other Ownership
Parents. Each offeree parent will have the option to elect to purchase all of
its proportional share, in the case of both the limited partner and general
partner, of all of the Partner Sub Stock of the selling parent, on the terms
described in the right of first offer. If one of the offeree parents, but not
the other, elects to so purchase, the selling parent shall give written notice
thereof to the offeree parent electing to purchase, and that parent shall have
the option to purchase all of the Parent Sub Stock held by the selling parent,
including the Partner Sub Stock it has not previously elected to purchase. Any
election by an offeree parent not to purchase all of the Partner Sub Stock shall
be deemed a rescission of the parent's original notice of acceptance of the
Partner Sub Stock of that selling parent. If one or both of the offeree parents
do not elect to purchase all of the selling parent's Partner Sub Stock within 45
days after the receipt of the initial notice or within 15 days after the receipt
of the notice to an offeree parent electing to purchase, if applicable, 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
parents. If the sale is not completed within the further 180-day period, the
right of first offer will be deemed to have expired and a new right of first
offer shall be required before the selling parent may make any transfer of its
Partner Sub Stock.

       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 Ownership Parents
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, an Ownership 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 bears 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 each of the other
Ownership Parents and Equistar substantially in the form of the Equistar Parent
Agreement; and (F) the proposed 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, 2001. 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 70 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 three years and
on a spot basis to large domestic customers. The product is shipped by barge and
pipeline.





                                       18





<PAGE>

       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 syngas
plant at La Porte, Texas, owned by the Company and leased to Linde pursuant to a
long-term lease that commenced 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, Lyondell
Methanol Company, L.P. and Caribbean Petrochemical Marketing Company Limited.
The methanol produced by Lyondell Methanol Company, L.P. is marketed by
Equistar.

                                    Employees

       At December 31, 2001, the Company had approximately 3,875 full- and
part-time employees. Approximately 3,167 of the Company's employees were engaged
in manufacturing, 495 were engaged in sales, distribution and technology, and
213 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 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 (the "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 $63 million, $47 million and $45 million in 2001, 2000 and
1999, 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 $19 million, $7 million and $12
million in 2001, 2000 and 1999, 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 2001 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.

       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.





                                       19





<PAGE>

       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 United States Environmental Protection Agency (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
$25,000 and $29 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, 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
the year, the EPA took over lead responsibility for the site at the request of
the State. Neither the State of Michigan nor the EPA has commented on the draft
study. The Company's liability at the site will depend on many factors 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 two matters that involve the potential for civil
penalties or sanctions in excess of $100,000. 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). In
addition, on August 17, 2000, the South Carolina Department of Health and
Environmental Control commenced an action in the United States District Court
for the District of South Carolina against Millennium Petrochemicals, Henkel
Corporation, Piedmont Chemicals Inc., Ethox Chemicals, L.L.C., and other parties
seeking to establish liability for alleged waste disposal activities at a site
in Simpsonville, South Carolina. The Company believes it has substantial
defenses to both actions.

       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 and other environmental proceedings, is between $80 million and $90
million and has accrued $83 million as of December 31, 2001. 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 (i.e.,
spinoff) on October 1, 1996 (the "Demerger") from Hanson plc ("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 was exceeded in 2001.

       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.

       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 Natural Resources Conservation Commission
(the "TNRCC") submitted a plan to EPA requiring the eight-county
Houston/Galveston 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 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,




                                       20





<PAGE>

individually and as part of an industry coalition, filed a lawsuit against the
TNRCC in State District Court in Travis County, Texas seeking adoption of an
alternative plan to achieve the same level of air quality improvement with less
adverse effects on the region. The parties have entered into a consent order
whereby TNRCC will review certain scientific data regarding ozone formation in
the Houston/Galveston area and, if such data conforms to the coalition's
alternative plan, the regulations will be modified accordingly, subject to EPA
approval. In the interim, however, EPA approved the TNRCC Plan, and the industry
coalition, including Equistar, has sought judicial review of such approval.

                        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. For a discussion of litigation related to the
Company's acetic acid process see Item 3, Legal Proceedings, in this Annual
Report.

                               Executive Officers

       The following individuals serve as executive officers of the Company:

<TABLE>
<CAPTION>

             Name                                                Position
             ----                                                --------
<S>                               <C>
William M. Landuyt.............   Chairman of the Board, President and Chief Executive Officer

Robert E. Lee..................   Executive Vice President--Growth and Development

C. William Carmean.............   Senior Vice President--General Counsel and Secretary

Timothy E. Dowdle..............   Senior Vice President--Manufacturing, Operational Excellence
                                     Businesses

Marie S. Dreher................   Vice President--Finance

Peter P. Hanik.................   Senior Vice President--Technology

Richard A. Lamond..............   Senior Vice President--Human Resources and Administration

John E. Lushefski..............   Senior Vice President and Chief Financial Officer

David L. Vercollone............   Senior Vice President--Commercial, Operational Excellence Businesses

</TABLE>

       Mr. Landuyt, 46, has served as Chairman of the Board and Chief Executive
Officer of the Company since the Demerger. He has served as the President of the
Company since June 1997. Mr. Landuyt was Director, President and Chief Executive
Officer of Hanson Industries (which managed the United States operations of
Hanson until the Demerger) from June 1995 until the Demerger, a Director of
Hanson from 1992 until September 29, 1996, Finance Director of Hanson from 1992
to May 1995, and Vice President and Chief Financial Officer of Hanson Industries
from 1988 to 1992. He joined Hanson Industries in 1983. He is a member and a
Co-Chairman of the Equistar Partnership Governance Committee. He is also a
director of Bethlehem Steel Corporation.

       Mr. Lee, 45, has served as the Executive Vice President--Growth and
Development of the Company since March 21, 2001. He was President and Chief
Executive Officer of Millennium Inorganic Chemicals from June 1997 to March 21,
2001. From the Demerger to June 1997, he served as the President and Chief
Operating Officer of the Company. He has been a Director of the Company since
the Demerger. Mr. Lee was a Director and the Senior Vice




                                       21





<PAGE>

President and Chief Operating Officer of Hanson Industries from June 1995 until
the Demerger, an Associate Director of Hanson from 1992 until the Demerger, Vice
President and Chief Financial Officer of Hanson Industries from 1992 to June
1995, Vice President and Treasurer of Hanson Industries from 1990 to 1992, and
Treasurer of Hanson Industries from 1987 to 1990. He joined Hanson Industries in
1982. Mr. Lee is a member of the Equistar Partnership Governance Committee.

       Mr. Carmean, 49, has served as Senior Vice President--General Counsel and
Secretary of the Company since January 1, 2002. He was Vice President--Legal of
the Company from December 1997 to December 2001. He was Associate General
Counsel of the Company from the Demerger to December 1997, Associate General
Counsel of Hanson Industries from 1993 to the Demerger, and Corporate Counsel of
Quantum Chemical Corporation from 1990 until its acquisition by Hanson in 1993.

       Mr. Dowdle, 50, has served as Senior Vice President--Manufacturing,
Operational Excellence Businesses, of the Company since March 21, 2001. He
served as Senior Vice President--Global Manufacturing of Millennium Inorganic
Chemicals from January 1999 to March 21, 2001 and as Vice President--
Manufacturing of Millennium Inorganic Chemicals from September 1997 to January
1999. Mr. Dowdle served as General Manager of Millennium Petrochemicals' Morris
Complex from June 1993 to September 1997. He joined Millennium Petrochemicals in
December 1980.

       Ms. Dreher, 43, has served as Vice President--Finance of the Company
since March 21, 2001. She served as Senior Vice President and Chief Financial
Officer of Millennium Inorganic Chemicals from August 1, 2000 to March 21, 2001.
She was Vice President--Corporate Controller of the Company from October, 1996
to August 1, 2000. Ms. Dreher joined Hanson Industries in 1994 as Assistant
Corporate Controller, and was appointed Director -- Planning and Budgeting in
1995.

       Mr. Hanik, 55, has served as Senior Vice President -- Technology of the
Company since March 21, 2001. He was President and Chief Executive Officer of
Millennium Petrochemicals from March 1998 to March 21, 2001. Prior to that time,
he was Vice President, Chemicals and Supply Chain of Millennium Petrochemicals,
where he was responsible for the Company's Acetyls business segment. Mr. Hanik
joined Millennium Petrochemicals in 1974.

       Mr. Lamond, 55, has served as Senior Vice President -- Human Resources
and Administration of the Company since March 21, 2001 and as Vice President --
Human Resources of the Company from November 1997 to March 21, 2001. He served
as Vice President -- Human Resources for Millennium Inorganic Chemicals from
March 1997 to November 1997 and as Vice President -- Human Resources for Grove
Worldwide, a subsidiary of Hanson, from September 1994 to March 1997.

       Mr. Lushefski, 46, has served as Senior Vice President and Chief
Financial Officer of the Company since the Demerger. He was a Director and the
Senior Vice President and Chief Financial Officer of Hanson Industries from June
1995 until the Demerger. He was Vice President and Chief Financial Officer of
Peabody Holding Company, a Hanson subsidiary that held Hanson's coal mining
operations, from 1991 to May 1995 and Vice President and Controller of Hanson
Industries from 1990 to 1991. Mr. Lushefski initially joined Hanson Industries
in 1985. Mr. Lushefski is a member of the Equistar Partnership Governance
Committee.

       Mr. Vercollone, 54, has served as Senior Vice President -- Commercial,
Operational Excellence Businesses, of the Company since March 21, 2001. He
served as Senior Vice President, Commercial Operations of Millennium Inorganic
Chemicals from 1998 to March 21, 2001, and as Senior Vice President -- Global
Sales and Marketing and General Manager -- Americas of Millennium Inorganic
Chemicals from 1997 to 1998. From 1990 to 1997, he was Vice President and
General Manager -- Americas of Millennium Inorganic Chemicals. Mr. Vercollone
joined Millennium Inorganic Chemicals as Vice President Sales and Marketing in
1986 and served in that position until 1990.



                                       22







<PAGE>



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


                                  Introduction

         The Company's principal operations are grouped into three business
segments: Titanium Dioxide and Related Products, Acetyls, and Specialty
Chemicals. The Company also holds a 29.5% interest in Equistar. The Company's
interest in Equistar is accounted for using the equity method. (See Note 1 to
the Consolidated Financial Statements.) 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 Products

         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 and acetyls 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 the economic conditions create
caution on the part of customers to build inventory. Reaction by producers,
including the Company and Equistar, is dependent on the particular circumstances
in effect at the time, but could include meeting competitive price reductions,
short-term curtailment of production, and 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 ethylene and its derivatives has fluctuated from year to
year. However, over the last ten years, demand for ethylene and its primary
derivative, polyethylene, has increased an average of approximately 4% per year.
The industry is particularly sensitive to capacity additions. Producers have
historically experienced alternating periods of inadequate ethylene and/or
polyethylene 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. The
cyclicality of petrochemicals' profitability is further influenced by
fluctuations in the price of feedstocks for ethylene, which generally follow
price trends for crude oil. Producers of ethylene for merchant supply to
unaffiliated customers typically experience greater variations in profitability
when industry supply and demand relationships are at extremes, in comparison to
more integrated competitors. Equistar currently consumes or sells approximately
85% of its ethylene production in its or its partners' downstream derivative
facilities, which has the effect of reducing volatility. It is not possible to
predict accurately the effect that future changes in feedstock costs, market
conditions and other factors (including the cost of crude oil and natural gas)
will have on Equistar's profitability.

         Currently, there is overcapacity in the petrochemical and polymer
industries. Moreover, a number of Equistar's competitors in various segments of
the petrochemical and polymer industries have added or are expected to add
capacity. There can be no assurance that future growth in product demand will be
sufficient to utilize this additional, or even current, capacity. Excess
industry capacity has depressed and may continue to depress Equistar's volume
and margins.

         Demand for TiO[u]2 is influenced by changes in the gross domestic
product of various regions of the world and has fluctuated from year to year,
averaging an increase of approximately 2.5% 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.


                                       23




<PAGE>


Major Factors Affecting 2001 Results

         o  Weak demand for TiO[u]2 occurred in all regions of the world. The
            Company reduced operating rates at its plants in response to
            weakening demand, which increased unit production costs.

         o  TiO[u]2 prices fell during 2001.

         o  The value of the euro, British pound, Brazilian real, and the
            Australian dollar declined steadily versus the US dollar, further
            contributing to declining sales revenue when translated back to US
            dollars.

         o  Weak demand coupled with higher natural gas costs and lower
            operating rates led to decreased volume and margins in Acetyls.
            Unfavorable fixed-price natural gas purchase positions negatively
            impacted operating profit for 2001 by $19 million.

         o  Conditions in the worldwide fragrance chemical markets remained
            competitive due to excess capacity, and volume was negatively
            affected by the weak global economy.

         o  At Equistar, the benefits from the lower cost of crude oil and
            declining natural gas prices were more than offset by falling
            product prices and lower demand.

         o  Higher interest costs were incurred due to higher average debt
            levels and the refinancing of credit facilities with more expensive
            senior notes and term loans during 2001.

         o  The Company reduced S,D&A costs by $54 million or 27% from 2000.

Outlook for 2002

         The Company believes the United States economy is beginning to recover
and the pace of economic growth should increase in the second half of 2002.
Until the economy improves, demand will continue to be soft in most world
markets for most of the Company's and Equistar's products, limiting the
possibility of increased sales volume or prices. Economic recovery is expected
to be accompanied by a pick-up in demand, with customers first rebuilding
inventory levels depleted during 2001.

         In addition, the Company has announced worldwide price increases for
TiO[u]2 and Acetyls' principal products during the first quarter of 2002. The
Company's major competitors have also announced price increases. The success of
such increases is dependent on a rebound in demand expected from an economic
turnaround. Contracts with most of the Company's large-volume TiO[u]2 customers
include periods of price protection. Therefore, if the price increases are fully
implemented, the benefits of such price increases may not be fully realized by
the Company for several months.

         The level of natural gas prices is critical to Acetyls business segment
profitability in 2002. Natural gas fixed-price purchase contracts entered into
by the Acetyls business segment in 2001 will expire at the end of the first
quarter of 2002. If natural gas prices remain at current levels, the Acetyls
segment operating profit should be favorably impacted in the second quarter of
2002.

         Demand and pricing for Specialties' products, on average, are showing
some signs of recovery from a very poor second half of 2001.

         Considering these factors and the uncertainty surrounding their
outcome, the Company believes that the fundamentals of its wholly owned
businesses during the first quarter of 2002 will be similar to those in the
fourth quarter of 2001. The continued focus on cost reduction as well as the
suspension of goodwill amortization in accordance with a recently enacted
accounting pronouncement should result in reduced overall costs during the first
quarter of 2002.

         Equistar expects continued trough conditions in the first quarter of
2002 for the global chemical markets that it serves. Pricing pressures are
expected to continue for the petrochemicals and polymers businesses.


                                       24




<PAGE>




                       Results of Consolidated Operations


<TABLE>
<CAPTION>
                                                                                2001        2000       1999
                                                                                ----        ----       ----
                                                                                (Millions, except share data)
<S>                                                                           <C>         <C>          <C>
Net sales..................................................................    $1,590      $1,793     $1,589
Operating income...........................................................        46         213        168
Equity in (loss) earnings of Equistar......................................       (90)         39        (19)
Net (loss) income..........................................................       (43)        122       (288)
Basic (loss) earnings per share............................................     (0.68)       1.90      (4.16)
Diluted (loss) earnings per share..........................................     (0.68)       1.89      (4.16)
</TABLE>


         The results for 2001 and 1999 included unusual items. These items
should be considered in the comparison of annual results. The results for 2000
did not include any unusual items.

         Results for 2001 were increased by net after-tax income of $14 million,
or $0.22 per share, for unusual items. The components of unusual items, on a
before- and after-tax basis, were: a benefit from a reduction in the Company's
income tax accruals by $42 million or $0.66 per share due to favorable
developments related to matters reserved for in prior years; $36 million in
reorganization and plant closure charges ($24 million after-tax or $0.38 per
share); and $6 million ($4 million after-tax or $0.06 per share) representing
the Company's share of costs related to the shutdown of Equistar's Port Arthur,
Texas plant.

         The provision for reorganization and plant closure costs recorded in
2001 related to reorganization activities within each of the Company's business
segments. During the second quarter of 2001, $31 million was recorded in
connection with the Company's announced decision to indefinitely idle its
sulfate-process TiO[u]2 plant in Hawkins Point, Maryland and reduce its
worldwide workforce by 10%. The $31 million charge includes 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. Payments of $16 million for severance and related costs and $4
million for other costs related to reorganization and plant closure have been
made during the year ended December 31, 2001.

         During 1999, the Company disposed of its remaining partnership
interests in Suburban Propane Partners, L.P. and Suburban Propane, L.P.
(collectively "Suburban Propane") for $75 million, resulting in a gain of
approximately $48 million ($38 million after tax or $0.55 per share).

         In 1999, results were decreased by net after-tax expense of $351
million, or $5.07 per share, for unusual items. The components of unusual items,
on a before- and after-tax basis, were: a loss in value of the Equistar interest
of $639 million ($400 million after tax or $5.78 per share); a charge of $28
million ($18 million after tax, or $0.26 per share) for the Company's share of
costs incurred by Equistar associated with a decision to mothball certain
polymer reactors and the consolidation of certain functions at Equistar with
Lyondell income from insurance and legal settlements of $24 million ($15 million
after tax or $0.21 per share); $14 million ($0.20 per share) of tax benefits
related to prior years; a $12 million gain ($5 million after tax or $0.08 per
share) representing the Company's share of Equistar's gain on the sale of its
concentrates and compounds business; charges of $7 million ($5 million after tax
or $0.07 per share) for costs of an early retirement program and the initial
devaluation of Brazil's currency on local debt levels; and the above-mentioned
gain of $48 million ($38 million after tax or $0.55 per share) from the sale of
the Company's interests in Suburban Propane.


                                       25




<PAGE>


Results Exclusive of Unusual Items

<TABLE>
<CAPTION>
                                                                                    2001       2000       1999
                                                                                   ------     ------     ------
                                                                                  (Millions, except share data)
<S>                                                                              <C>        <C>         <C>
Net sales.....................................................................     $1,590     $1,793     $1,589
Operating Income..............................................................         82        213        168
Equity in (loss) earnings of Equistar.........................................        (84)        39         (3)
Net (loss) income.............................................................        (57)       122         63
</TABLE>


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 $82
million (excluding the reorganization charge of $36 million) decreased $131
million or 62% from last year. All three business segments were affected by the
slowdown in the global economy. Excluding unusual items, operating income in the
Titanium Dioxide and Related Products segment decreased $65 million or 45% from
2000. The Titanium Dioxide and Related Products business segment has 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
profit, excluding unusual items, declined by $58 million from 2000. Profits in
the Acetyls business segment decreased 118% from the prior year 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 as well as the impact of
unfavorable fixed-price natural gas purchase positions entered during the first
quarter which negatively impacted operating profit by $19 million in the last
three quarters of the year. Specialty Chemicals operating profit of $12 million,
excluding unusual items, was down $8 million or 40% from 2000. The Specialty
Chemicals business segment remains under significant competitive pressure.
Excluding the reorganization charge of $36 million, the Company reduced S,D&A
costs by $54 million or 27% from 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 and 10% reduction in workforce,
reduced external consultant fees, reduced employee bonuses and travel, and
various other cost reductions.

         Excluding unusual items, the Company reported a net loss of $57 million
or $0.90 per share for 2001 compared to net income of $122 million or $1.90 per
share for 2000. The decrease was primarily due to an equity loss from Equistar,
excluding unusual items, of $84 million, compared to equity earnings of $39
million in 2000, and decreased operating profits in all three business segments.

2000 Versus 1999

         Net sales for 2000 increased $204 million or 13% from 1999 primarily
due to strong demand for TiO[u]2 in all market areas and strong demand and
higher prices for Acetyls. Operating income increased $45 million or 27% to $213
million. The Titanium Dioxide and Related Products and Acetyls business segments
generated operating income 28% and 81%, respectively, higher than 1999.
Operating income for the Specialty Chemicals business segment was $20 million,
29% lower than 1999. Equity earnings in Equistar increased to $39 million from a
loss of $3 million in 1999, exclusive of unusual items. Basic earnings per share
increased $0.99 to $1.90 in 2000 from what would have been $0.91, excluding
unusual items for 1999.


                                       26




<PAGE>




                                Segment Analysis

         A description of the products and markets for each of the business
segments is included on pages 5 through 11 of this Annual Report. Additional
segment information is included in Note 14 to the Consolidated Financial
Statements.

Titanium Dioxide and Related Products

<TABLE>
<CAPTION>
                                                                                    2001       2000       1999
                                                                                   ------     ------     ------
                                                                                             (Millions)
<S>                                                                               <C>        <C>        <C>
Net sales......................................................................    $1,145     $1,355     $1,250
Operating income...............................................................        49        144        112
Operating income, excluding unusual items......................................        79        144        112
</TABLE>


2001 Versus 2000

         Operating income for 2001 of $79 million (excluding a reorganization
charge of $30 million) decreased $65 million or 45% from the prior year. The
decrease was primarily due to lower sales volume ($43 million), lower selling
prices ($42 million) and higher manufacturing costs ($19 million), partially
offset by lower S,D&A expenses ($39 million).

         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 in US
dollar terms. In local currencies, 2001 average selling prices were down 2% from
2000. 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 was $9 million for the fourth
quarter of 2001 compared to $21 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
83% compared to 93% 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 thousand to 690 thousand 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.

         As more fully described under Recent Accounting Developments in Note 1
to the Consolidated Financial Statements, due to the adoption of a new
accounting pronouncement as of January 1, 2002, the amortization of goodwill has
been suspended. Goodwill amortization expense of $2 million was included in
Operating income of the Titanium Dioxide and Related Products business segment
in 2001.


                                       27




<PAGE>


Outlook for 2002

         Market conditions in TiO[u]2 remain very competitive in the currently
weak economic environment. Accordingly, first quarter 2002 operating results are
expected to be similar to the fourth quarter of 2001. Global TiO[u]2 prices at
the start of 2002 were lower than the fourth quarter 2001 average, but price
increases have been announced by most major producers, including the Company.
The Company's announced TiO[u]2 price increases scheduled to become effective
beginning March 1, 2002 are: USD $0.05 per pound in the United States; CAN $0.10
per pound in Canada; euro 150 per metric ton in Western Europe, Eastern Europe,
Middle East and Africa; USD $100 per metric ton in Asia/Pacific; AUS $150 per
metric ton in Australia; USD $100 per metric ton in Latin America; and USD $50
per metric ton in Brazil. The increases were announced to begin to restore
margins, which have become unacceptably poor after more than a year of rapid and
excessive price decreases in all world areas. The success of the implementation
of these increases is dependent upon an increase in downstream customer demand.
Contracts with most of the Company's large-volume TiO[u]2 customers include
periods of price protection. Therefore, if the price increases are fully
implemented, the benefits of such price increases may not be fully realized by
the Company for several months. Demand in 2002 has begun the year weaker than
last year, but better than the end of 2001. The Company will continue to reduce
operating rates at its plants to match market demand with supply and remains
focused on realizing benefits from cost containment measures.

2000 Versus 1999

         Operating income for 2000 of $144 million was $32 million, or 29%
higher than 1999. The increase was primarily due to higher sales volume ($28
million) and lower manufacturing costs ($17 million), partially offset by lower
selling prices ($13 million).

         Net sales for 2000 of $1.355 billion increased 8% from $1.250 billion
in 1999. Strong demand across all regions, except Latin America where demand was
flat, drive increased sales volume. Sales volume for 2000 increased 9% over
1999. The strongest gains were in Asia/Pacific (27%) and Europe, including the
Middle East and Africa (11%). The average worldwide selling price for TiO[u]2
was 1% lower than in 1999. Local currency price increases were successfully
implemented in all regions. The most significant local currency price increases
were in Europe (10%) and Asia/Pacific (18%). However, declines in the value of
the euro and the Australian dollar versus the US dollar more than offset these
local currency price increases when ultimately translated into US dollars for
reporting purposes.

       The overall operating rate of the Company's TiO[u]2 plants in 2000 was
93% versus 88% in 1999 based on annual effective capacity of 712 thousand
metric tons. The improvement in the operating rate was due to increases in
demand in most regions and to better plant reliability, principally resulting
from the elimination of operational difficulties experienced during 1999 in
connection with an expansion of capacity and introduction of new technology at
the Stallingborough, United Kingdom facility.

         The overall TiO[u]2 cost per metric ton declined 2% in 2000.
Productivity and reliability improvements and the benefit of translating local
currency manufacturing costs into a stronger US dollar more than offset
increases in raw material costs.

Acetyls

<TABLE>
<CAPTION>
                                                                                    2001       2000       1999
                                                                                   ------     ------     ------
                                                                                              (Millions)
<S>                                                                                  <C>      <C>         <C>
Net sales..........................................................................  $355       $337       $227
Operating (loss) income............................................................   (14)        49         27
Operating (loss) income, excluding unusual items...................................    (9)        49         27
</TABLE>


2001 Versus 2000

         Acetyls operating loss for 2001 was $9 million (excluding a
reorganization charge of $5 million), a decrease of $58 million or 118% from
2000. The decrease was primarily due to higher production costs ($68 million),
lower sales volume ($2 million) and lower selling prices ($1 million), partially
offset by lower S,D&A expenses ($13 million).


                                       28




<PAGE>



         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 $10 million
compared to a loss of $1 million in the third quarter of 2001 and income of $19
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 profit by approximately $19 million for the
year. Additionally, the Acetyls operating profit in 2001 was unfavorably
impacted by approximately $8 million as the tolling arrangement with DuPont
restricted the Company's ability to operate its VAM plant at normal rates and
limited external sales of acetic acid.

         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 $13 million or 59% 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.

Outlook for 2002

         First quarter 2002 results are expected to be similar to the fourth
quarter 2001 results. Pricing and demand remain weak. The fixed-price purchase
positions for natural gas expire at the end of the first quarter of 2002. If
natural gas prices remain at current levels, the Acetyls segment operating
profit should be favorably impacted in the second quarter of 2002.

         As more fully described under Recent Accounting Developments in Note 1
to the Consolidated Financial Statements, due to the adoption of a new
accounting pronouncement as of January 1, 2002, the Company expects to report a
reduction in goodwill of $275 million associated with the Acetyls business
segment in the first quarter of 2002 as a charge for the cumulative effect of a
change in accounting principle. Additionally, under the new guidelines, goodwill
amortization will be suspended and no longer included in Operating income of the
Acetyls business segment. Goodwill amortization expense of $11 million was
included in Operating income of the Acetyls business segment in 2001.

2000 Versus 1999

         Acetyls 2000 operating profit was 81% or $22 million higher than 1999,
at $49 million. The increase was primarily due to higher selling prices ($77
million) and higher sales volume ($8 million), partially offset by higher costs
($63 million).

         Net sales for 2000 of $337 million were 48% above 1999 primarily due to
increased demand for VAM, as well as higher selling prices for all products.
Demand for VAM was strong in all regions for all of 2000. Sales volume increased
24% over 1999 levels, although it began to drop off late in the fourth quarter
of 2000 due to a general slowdown in worldwide business conditions and the
effects of customers' year-end inventory reduction. Selling prices in 2000
increased 27% over 1999.

         Acetic acid sales volume declined approximately 2% from 1999 levels.
Domestic volume was down significantly during the first half of 2000 because a
major customer experienced problems at its facility. These lost sales were
partially offset by unplanned sales to one of the Company's competitors.
European sales volume was strong for all of 2000. Overall, selling prices for
2000 were up 24%.


                                       29




<PAGE>



         Methanol volume for 2000 was 15% below 1999 primarily due to production
problems at the Company's supplier of syngas. Prices increased during 2000 due
to production problems at several of the Company's competitors and higher
natural gas costs.

Specialty Chemicals

<TABLE>
<CAPTION>
                                                                                    2001       2000       1999
                                                                                   ------     ------     ------
                                                                                            (Millions)
<S>                                                                             <C>        <C>         <C>
Net sales......................................................................       $90       $101       $112
Operating income................................................................       11         20         28
Operating income, excluding unusual items.......................................       12         20         28
</TABLE>


2001 Versus 2000

         Operating income for 2001 was $12 million (excluding a reorganization
charge of $1 million), a decrease of $8 million or 40% from the prior year. The
decrease was 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.

Outlook for 2002

         The market for fragrance chemicals remains competitive and this
situation continues to be exacerbated by the strong US dollar. Even so, price
increases were enacted for most fragrance chemical offerings, as well as for
most cleaners and solvents. After the very difficult year in 2001, some volume
recovery is expected in 2002. In addition, new product development efforts
continue, with a new cooling agent and a new flavor chemical being launched at
the beginning of 2002. CST costs are expected to remain flat for the first
quarter of 2002, due to the unfavorable conditions in the broader market for
that feedstock.

2000 Versus 1999

         The worldwide fragrance chemicals business remained very competitive
during 2000 due to industry overcapacity. Operating profits declined 29% to $20
million from $28 million in 1999 primarily due to lower selling prices ($13
million), partially offset by lower costs ($4 million) and higher sales volume
($1 million).

         Net sales declined 10% to $101 million from $112 million in 1999.
Average selling prices for 2000 declined 18% from 1999. The decline in the value
of the euro and industry overcapacity placed significant pressure on the
Specialty Chemicals business segment to reduce prices. Sales volume increased
10% in 2000, primarily due to higher sales of lower margin products.

         The average cost of CST was $0.85 per gallon versus $1.27 per gallon in
1999.


                                       30




<PAGE>



Equistar

<TABLE>
<CAPTION>
                                                                                    2001       2000       1999
                                                                                   ------     ------     ------
                                                                                            (Millions)
    <S>                                                                           <C>         <C>       <C>
       Equity in (loss) earnings of Equistar..............................           $(90)       $39       $(19)
       Equity in (loss) earnings of Equistar -- excluding unusual items...            (84)        39         (2)
</TABLE>


2001 Versus 2000

         An equity loss of $84 million (excluding a $6 million charge
representing the Company's share of costs related to the shutdown of Equistar's
Port Arthur, Texas plant) was recorded in 2001 compared to equity income of $39
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 petrochemicals segment, whose primary product is ethylene.
Equistar's other segment experienced operating losses similar to those incurred
in 2000. 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.

         Petrochemicals 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.

Outlook for 2002

         Weak business conditions for the industry have continued through
February 2002, and so far there has been no evidence of solid demand growth in
Equistar's markets that would indicate dramatic change. Equistar expects
continued trough conditions in the first quarter of 2002 for the global chemical
markets it serves. Pricing pressures are expected to continue for the
petrochemicals and polymers businesses.

         As described more thoroughly under Recent Accounting Developments in
Note 1 to the Consolidated Financial Statements, due to the adoption of a new
accounting pronouncement as of January 1, 2002, Equistar expects to report an
impairment of goodwill in the first quarter of 2002. The expected write-off
would require an adjustment of approximately $30 million to reduce the carrying
value of the Company's investment in Equistar. Under the new guidelines,
goodwill amortization will be suspended. The Company's share of Equistar's
goodwill amortization expense for 2001 included in Equity in (loss) earnings on
Equistar was approximately $10 million.

2000 Versus 1999

         Business conditions at Equistar, which declined slightly in the fourth
quarter of 1999, continued to decline in the first quarter of 2000. The second
quarter of 2000 and the early third quarter began to improve as product pricing
increased and feedstock costs stabilized. Late in the third quarter, however,
rising crude oil and natural gas prices, as well as declining ethylene and
polymer selling prices, led to trough-like conditions in the fourth quarter of
2000 and into 2001.

         Equistar's net income for 2000 increased from $32 million in 1999 to
$153 million in 2000. Ethylene sales volume declined 3% from 1999 levels. Sales
volume for the first half of 2000 exceeded 1999 levels, but fell in the second
half of the year. Average selling prices increased steadily throughout the first
half of 2000, peaked in the second quarter and then declined throughout the
remainder of the year. Average selling prices for ethylene increased 38% in
2000.

         Polymer sales volume declined 2% from 1999 levels. Although selling
prices increased 10-15% on average from 1999 levels, margins were negatively
impacted by the significantly higher cost of ethylene.


                                       31





<PAGE>



         Feedstock costs were volatile during the year. Crude oil prices started
the year at $26 per barrel and peaked at $34 per barrel in November 2000. The
steep increase in natural gas prices during the second half of the year also had
a significant negative impact on profits.

                                Interest Expense

<TABLE>
<CAPTION>
                                                                                    2001       2000       1999
                                                                                   ------     ------     ------
                                                                                            (Millions)
     <S>                                                                         <C>        <C>       <C>
       Interest expense, net.............................................             $82        $77        $69
</TABLE>


         During 2001, interest expense, net of interest income, increased $5
million to $82 million from $77 million in the prior year. Included in
determining interest expense for 2001 is a benefit of approximately $5 million
from interest rate swap agreements. The gross increase in interest expense
(excluding the $5 million benefit from the swap agreements) 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 refinancing of debt described below in
Liquidity and Capital Resources, which included the issuance of seven-year notes
at 9.25%. Interest expense, net in 2000 was $77 million versus $69 million in
1999, primarily due to slightly higher debt levels.

                         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 are affected by its results of
operations and current and expected future cash flow requirements. The Company
did not receive any cash distributions from Equistar during 2001 and it is
unlikely the Company will receive any cash distributions from Equistar in 2002.

         Cash provided by operating activities for the year ended December 31,
2001 was $112 million compared to $20 million provided in the year ended
December 31, 2000. The increase was due to favorable changes in working capital,
primarily favorable movements in accounts receivable, inventory, and accounts
payable during 2001. The Company also made a large unusual payment of legacy tax
liabilities in 2000, which did not recur in 2001. Aggressive efforts in 2001 to
collect accounts receivable, reduce raw materials inventory levels and extend
vendor terms resulted in cash generation of $137 million in 2001.

         Cash used in investing activities in the year ended December 31, 2001
was $78 million compared to $23 million used in 2000. The Company spent
approximately $97 million in 2001 for capital expenditures, down from $110
million in 2000, and received $19 million in proceeds from sales of Property,
plant and equipment (including proceeds of $17 million from the Research Center
Sale Leaseback transaction more fully described in Note 3 to the Consolidated
Financial Statements) in 2001 compared to $4 million in the prior year. There
were no distributions from Equistar in 2001, while $83 million was received
during 2000.

         Cash used in financing activities was $22 million in the year ended
2001 compared to $7 million provided in 2000. Financing activities in 2001
included $13 million of net debt proceeds, while 2000 included $107 million of
net debt proceeds and $65 million used for the repurchase of Common Stock.
Dividends paid to shareholders totaled $35 million in both years.

         In 2000, the Company's cash flows from operations decreased slightly to
$20 million versus $23 million in 1999. Cash flow was negatively impacted by
increases in trade receivables and inventories, as well as decreases in accrued
expenses and other liabilities. Capital expenditures for 2000 were $110 million,
which were $1 million more than 1999. Distributions from Equistar were $83
million, 11% more than in 1999. Cash flows from investing activities in 1999
included proceeds from the transactions with Linde relating to the Company's
syngas unit and methanol production facility and the sale of the Suburban
Propane investment, of $123 million and $75 million, respectively. 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 to repurchase shares of outstanding Common Stock, as described
below.

         During 2001, the Company refinanced $425 million of borrowings and paid
refinancing expenses of $11 million with the combined proceeds of a new
five-year credit agreement (the "Credit Agreement"), which provided a


                                       32




<PAGE>


$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 due
June 15, 2008 (the "9.25% Senior Notes"). At December 31, 2001, $157 million was
available under the revolving credit facility. 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. In the fourth quarter of 2001, the Company requested and obtained an
amendment to these and certain other covenants given the difficult business
environment at the time, which continued in early 2002. The Company was in
compliance with these amended covenants at December 31, 2001. The Company is
required to maintain a Leverage Ratio of no more than 6.75 to 1.00 for the first
and second quarters of 2002, 6.50 to 1.00 for the third quarter of 2002 and 6.00
to 1.00 for the fourth quarter of 2002 and an Interest Coverage Ratio of no less
than 2.00 to 1.00 for all quarters of 2002. If economic and business conditions
improve during 2002, as expected, it is likely that such covenant requirements
will be met by the Company. However, if such conditions do not improve and the
Company operates at similar levels as in the fourth quarter of 2001, the Company
may be required to request either a waiver of or an amendment to one or both of
these financial covenants. The Company believes it would be able to obtain such
waiver or amendment if required. This situation is monitored frequently in order
to assess the likelihood of such compliance.

         The indenture governing the Company's $500 million aggregate principal
amount of 7.00% Senior Notes due November 15, 2006 (the "7.00% Senior Notes")
and $250 million aggregate principal amount of 7.625% Senior Debentures due
November 15, 2026 (the "7.625% Senior Debentures") allows the Company to grant
security on loans of up to 15% of Consolidated Net Tangible Assets, as defined,
of Millennium America, Inc. ("Millennium America"), a wholly owned indirect
subsidiary of the Company. Any reduction in Consolidated Net Tangible Assets
below $1.933 billion would reduce the Company's availability under the revolving
credit portion of the Credit Agreement.

         The indenture governing the Company's 9.25% Senior Notes includes 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, there would be certain
restrictions on the Company's ability to incur additional indebtedness and the
Company's ability to pay dividends would be limited.

         At December 31, 2001, the Company was in compliance with all covenants
in the Credit Agreement as amended, and in the indentures governing the 9.25%
Senior Notes, 7.00% Senior Notes and 7.625% Senior Debentures.

         In the ordinary course of business, the Company enters into contractual
obligations to purchase raw materials and utilities for fixed or minimum
amounts. Following is a schedule that shows unconditional purchase obligations
with terms greater than one year as well as certain other contractual
obligations with terms greater than one year:

<TABLE>
<CAPTION>
                                               2002  2003  2004  2005  2006  Thereafter  Total
                                               ----  ----  ----  ----  ----  ----------  -----
                                                                 (Millions)
<S>                                            <C>   <C>   <C>   <C>   <C>     <C>       <C>
       Long-Term Debt......................    $ 11  $ 11  $  9  $ 59  $566    $  527    $1,183
       Operating Leases....................      19    17    15    13    11        99       174
       VAM Toll............................      55    57    59    64    61        --       296
       Unconditional Purchase Obligations..     176   184   141   109    85       831     1,526
                                               ----  ----  ----  ----  ----    ------    ------
          Total Contractual Obligations....    $261  $269  $224  $245  $723    $1,457    $3,179
                                               ====  ====  ====  ====  ====    ======    ======
</TABLE>


       The Company is currently rated BBB- by S&P and Ba1 by Moody's. The
Company's investment grade rating was placed on negative outlook by S&P on
October 1, 2001. If the Company were to be downgraded by S&P, the Company could
be required to cash collateralize the mark-to-market positions of certain
derivative instruments. Based on current market prices of these instruments, the
Company could be required to place an additional $8 million on deposit with the
counterparty of these transactions. In addition, the Company could be required
to provide


                                       33




<PAGE>


a $2.5 million letter of credit in accordance with a real estate lease.
Obtaining this letter of credit could result in an equal reduction of
availability under the revolving credit portion of the Credit Agreement.

         The Company's focus in 2002 is to continue to reduce costs, working
capital levels and capital spending. The Company believes these efforts, as
necessary, along with the borrowing availability under the Credit Agreement,
will be sufficient to fund the Company's cash requirements until business
conditions improve. At March 27, 2002, the Company had $68 million outstanding
(outstanding borrowings of $60 million and outstanding letters of credit of $8
million) of the maximum available credit line of $175 million under the
revolving credit portion of the Credit Agreement and $115 million outstanding
under the term loan portion of the Credit Agreement.

         On March 27, 2002, the Company completed a European accounts receivable
securitization transaction. Proceeds from this transaction were approximately
$43 million and will be used, primarily, to pay down debt outstanding under the
Credit Agreement.

Share Repurchase Programs

         In January 1999, the Board of Directors authorized the Company to spend
up to $200 million to repurchase Common Stock. This program was completed in
October 1999 with a total of 8,893,600 shares repurchased, representing over 10%
of total outstanding shares. In March 2000, the Board of Directors authorized
the repurchase of up to 3,500,000 additional shares. This stock repurchase
program was completed in June 2000 with a total of 3,500,000 shares repurchased,
representing 5% of the total shares outstanding at the beginning of the year.

Capital Expenditures

<TABLE>
<CAPTION>
                                                                                    2001       2000       1999
                                                                                   ------     ------     ------
                                                                                            (Millions)
     <S>                                                                          <C>       <C>        <C>
       Additions to property, plant and equipment..............................       $97       $110       $109
</TABLE>


         Capital spending for 2001 was $97 million compared to depreciation and
amortization of $110 million. The 12% decrease in capital spending from 2000
reflects the Company's current 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 installation 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. Planned capital
spending in 2002 is expected to be reduced further in alignment with the
Company's Operational Excellence strategy to optimize its current capital asset
base and maintain disciplined capital investment focused primarily on safety,
environmental and cost reduction projects, and is currently estimated between
$60 and $70 million.

         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 installation of new packaging equipment at
several of the Company's TiO[u]2 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.

         Capital expenditures in 1999 totaled $109 million, a 49% decrease from
1998. Additions to plant and equipment in 1999 were largely in support of
completing the SAP-based enterprise resource planning system implementation
worldwide, excluding Brazil; creating a new research and technology center; and
various cost reduction and yield improvement projects in all the business units.
The Company spent $98 million over the course of 1999 and 1998 related to the
implementation of the SAP-based enterprise resource planning system. In
connection with this implementation, $80 million of costs were capitalized, and
$18 million of costs were expensed.

Financing and Capital Structure

         Net debt (short-term and long-term debt less cash) at December 31, 2001
totaled $1.073 billion versus $1.090 billion at the end of 2000. At December 31,
2001, the Company had approximately $167 million of unused availability under
short-term uncommitted lines of credit and its Credit Agreement.


                                       34




<PAGE>



         Millennium America has entered into an indemnity agreement with
Equistar pursuant to which Millennium America may be required to contribute to
Equistar an amount equal to up to the lesser of $750 million or the sum of the
principal amount outstanding under the term loan portion of Equistar's credit
facility (not to exceed $275 million) and Equistar's 10.125% Senior Notes due
2008 (not to exceed $475 million), in each case together with interest. However,
pursuant to the terms of this indemnity agreement, the Company is only required
to pay this amount to Equistar if the lenders under such credit facility or the
holders of such Senior Notes have not been able to obtain payment after pursuing
and exhausting all their remedies against Equistar, including the liquidation of
Equistar's assets. The indemnity expressly does not create any right in favor of
such lenders or such holders or any person other than Millennium America,
Equistar and the partners in Equistar. The indemnity may be amended or
terminated at any time by the agreement of the partners in Equistar without the
consent of the lenders under such credit facility or the holders of such Senior
Notes. The indemnity agreement was entered into in 2001 to replace a prior
guarantee by Millennium America of up to $750 million of Equistar's debt.

         The indemnity will remain in effect indefinitely but at any time after
December 31, 2004 Millennium America may, without the consent of the other
partners in Equistar, elect to terminate the indemnity if certain conditions are
met, including financial ratios and covenants relating to Equistar. In addition,
Millennium America may, without the consent of the other partners in Equistar,
elect to terminate the indemnity in the event the Company sells its interests in
the subsidiaries that directly hold the partnership interests of Equistar or if
those subsidiaries sell their interests in Equistar, provided a financial
condition relating to Equistar is met.

                      Environmental and Litigation Matters

         Certain subsidiaries of the Company have been named as defendants, PRPs
or both in a number of environmental proceedings, including the Kalamazoo River
site for which a study group of which the Company's subsidiary is a member has
proposed a long term remedy at a total collective cost of approximately $73
million. In addition, the Company and various of its subsidiaries are defendants
in a number of other 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 lead 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, Legal
and Tax Matters" below, the Company believes that the reasonably probable and
estimable range of potential liability for such contingencies collectively,
which primarily relates to environmental remediation activities and other
environmental proceedings, is between $80 million and $90 million and has
accured $83 million as of December 31, 2001. 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 Note 13 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 decreased approximately $13 million in 2001, $46 million in 2000, and $46
million in 1999, as


                                       35




<PAGE>


a result of translating subsidiary financial statements into US dollars. The
1999 devaluation of Brazil's currency, the real, had a $6 million negative
impact on the Company's consolidated operations despite a majority of sales in
Brazil being referenced to US dollar prices. 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 54%, 51% and 51% of total revenues in 2001, 2000
and 1999, respectively. These revenues were denominated in US dollars as well as
other currencies.

         Net foreign currency transaction losses aggregated $7 million in 2001,
$4 million in 2000 and $9 million in 1999.

                  Derivative Instruments and Hedging Activities

         As more fully described in Note 8 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, 2001 were as follows:

                       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 US$/Pay AUS$.............                  $ 19               $--   0.5089 US$/AUS$
       Receive AUS$/Pay US$.............                    51                 1   0.4969 US$/AUS$
       Receive US$/Pay euro.............                     4                --   0.9017 US$/euro
       Receive GBP/Pay euro.............                   111                 2   0.6233 GBP/euro
       Receive US$/Pay GBP..............                    39                (1)   1.4380 US$/GBP
       Receive GBP/Pay JPY..............                     1                --  169.0300 JPY/GBP
       Receive GBP/Pay US$..............                     9                --    1.4488 US$/GBP
       Receive euro/Pay US$.............                     4                --   0.8819 US$/euro
                                                                             ---
                                                                             $ 2

       1-2 years
       ---------
       Receive US$/Pay GBP..............                  $ 29               $--         1.4158 US$/GBP
                                                                             ---
          Total.........................                                     $ 2
                                                                             ===
</TABLE>

--------------
(1) US$ equivalent was determined based upon currency exchange rates at
    December 31, 2001.
(2) As of December 31, 2001.


                                       36




<PAGE>




                        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 $4.42/mmbtu,
                                                                                           Receive NYMEX
Natural Gas Swap Contracts.................                  $ 1                $ (1)      settlement

2-3 Years
---------
                                                                                           Pay $5.01/mmbtu,
                                                                                           receive NYMEX
Natural Gas Swap Contracts.................                   17                  (9)      settlement
                                                                                ----
   Total                                                                        $(10)
                                                                                ====
</TABLE>

--------------
  (1) As of December 31, 2001.


       Non-Derivative Financial Instruments and Other Market-Related Risks

         See Note 9 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, Legal and Tax Matters -- The Company
periodically reviews matters associated with potential environmental
obligations, legal matters and tax claims brought against the Company, its
subsidiaries and predecessor companies and evaluates, accounts, reports and
discloses these matters in accordance with Statement of Financial Accounting
Standards ("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, legal matters and tax claims 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 the amount of loss can only be reasonably estimated within a range of loss,
the Company records a minimum reserve for the loss contingency at the low end of
the range but also applies judgment to specific matters as to whether an 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 payment has been received or 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.


                                       37




<PAGE>



         Goodwill -- Goodwill represents the excess of the purchase price over
the fair value of net assets allocated to 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, are
compared to the carrying value of the tangible and intangible assets, and if
impairment is indicated, the carrying value of goodwill is adjusted. In the
opinion of management, no impairment of goodwill existed at December 31, 2001
under SFAS No. 121. In July 2001, the Financial Accounting Standards Board (the
"FASB") issued 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, will not be amortized but must be
tested for impairment at least annually at the reporting unit level, as defined
in the standard. Amortization expense for goodwill that is recorded in the
Company's balance sheet was $13 million for 2001. 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 2001. This new
standard is effective for fiscal years beginning after December 15, 2001. The
Company must adopt this standard on January 1, 2002. The Company expects to
report a charge for the cumulative effect of a change in accounting principle of
approximately $275 million in the first quarter of 2002 to write off goodwill
related to its Acetyls business in accordance with SFAS No. 142. Additionally,
Equistar expects to report an impairment of goodwill in the first quarter of
2002 in accordance with SFAS No. 142. The expected write-off at Equistar would
require an adjustment of approximately $30 million to reduce the carrying value
of the Company's investment in Equistar, which the Company will also report as a
charge for the cumulative effect of a change in accounting principle.

         Equity Interest in Equistar -- The Company has evaluated the carrying
value of its investment in Equistar at December 31, 2001 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, Lyondell and Occidental
have agreed in principle on a transaction whereby Occidental would sell its
29.5% interest in Equistar to Lyondell. The value of this transaction is 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. There can be
no assurance that the proposed transaction will be completed. See Equity
Interest in Equistar; Management of Equistar; Agreements between Equistar,
Lyondell, Occidental and the Company. The carrying value of the Company's
investment in Equistar at December 31, 2001 was $677 million.

                         Recent Accounting Developments

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



                                       38




<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,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the supplemental financial information and financial
statement schedule listed in the index appearing under Item 14(A) on page 68
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements, supplemental financial information and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements, supplemental financial
information 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.

/s/ PricewaterhouseCoopers LLP


PRICEWATERHOUSECOOPERS LLP
Florham Park, NJ
January 25, 2002

                                       39




<PAGE>


                            MILLENNIUM CHEMICALS INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                            As of December 31,
                                                                                       --------------------------
                                                                                          2001             2000
                                                                                       ---------         --------
                                                                                       (Millions, except share data)
<S>                                                                                       <C>             <C>
                                      ASSETS
Current assets
   Cash and cash equivalents....................................................          $  114          $  107
   Trade receivables, net.......................................................             215             306
   Inventories..................................................................             370             373
   Other current assets.........................................................              61             101
                                                                                          ------          ------
     Total current assets.......................................................             760             887
Property, plant and equipment, net..............................................             880             957
Investment in Equistar..........................................................             677             760
Deferred income taxes...........................................................              72              --
Other assets....................................................................             237             225
Goodwill........................................................................             378             391
                                                                                          ------          ------
     Total assets...............................................................          $3,004          $3,220
                                                                                          ======          ======
                       LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
   Notes payable................................................................         $     4          $  39
   Current maturities of long-term debt.........................................              11             391
   Trade accounts payable.......................................................             222             165
   Income taxes payable.........................................................               7              --
   Accrued expenses and other liabilities.......................................             139             188
                                                                                         -------          ------
     Total current liabilities..................................................             383             783
Long-term debt..................................................................           1,172             767
Deferred income taxes...........................................................              --              19
Other liabilities...............................................................             550             646
                                                                                          ------          ------
     Total liabilities..........................................................           2,105           2,215
                                                                                          ------          ------
Commitments and contingencies (Note 13)
Minority interest...............................................................              21              22
Shareholders' 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 2001 and 2000).................................               1               1
   Paid in capital..............................................................           1,299           1,326
   Retained (deficit) earnings..................................................             (20)             55
   Unearned restricted shares...................................................              --             (25)
   Cumulative other comprehensive loss..........................................            (136)           (107)
   Treasury stock, at cost (14,594,614 and 13,747,228 shares in 2001 and 2000,
     respectively)..............................................................            (283)           (282)
   Deferred compensation........................................................              17              15
                                                                                          ------          ------
     Total shareholders' equity.................................................             878             983
                                                                                          ------          ------
       Total liabilities and shareholders' equity...............................          $3,004          $3,220
                                                                                          ======          ======
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                       40




<PAGE>


                            MILLENNIUM CHEMICALS INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                                 -------------------------------
                                                                                  2001        2000         1999
                                                                                 ------      ------       ------
                                                                                  (Millions, except share data)
<S>                                                                              <C>         <C>          <C>
Net sales..................................................................      $1,590      $1,793       $1,589
Operating costs and expenses
   Cost of products sold...................................................       1,252       1,267        1,112
   Depreciation and amortization...........................................         110         113          105
   Selling, development and administrative expense.........................         146         200          204
   Reorganization and plant closure costs..................................          36          --           --
                                                                                 ------      ------       ------
     Operating income......................................................          46         213          168
Interest expense...........................................................         (85)        (80)         (72)
Interest income............................................................           3           3            3
Equity in (loss) earnings of Equistar......................................         (90)         39          (19)
Other income, net..........................................................           1          14           29
Loss in value of Equistar investment.......................................          --          --         (639)
                                                                                 ------      ------       ------
Income (loss) from continuing operations before income taxes and minority
   interest................................................................        (125)        189         (530)
Benefit (provision) for income taxes.......................................          86         (60)         209
                                                                                 ------      ------       ------
(Loss) income from continuing operations before minority interest..........         (39)        129         (321)
Minority interest..........................................................          (4)         (7)          (5)
                                                                                 ------      ------       ------
(Loss) income from continuing operations...................................         (43)        122         (326)
Income from discontinued operations (net of income taxes of $10)...........          --          --           38
                                                                                 ------      ------       ------
Net (loss) income..........................................................      $  (43)     $  122       $ (288)
                                                                                 ======      ======       ======
(Loss) income per share from continuing operations.........................      $(0.68)     $ 1.90       $(4.71)
                                                                                 ------      ------       ------
Income per share from discontinued operations..............................          --          --         0.55
                                                                                 ------      ------       ------
(Loss) income per share -- basic...........................................      $(0.68)     $ 1.90       $(4.16)
                                                                                 ------      ------       ------
(Loss) income per share -- diluted.........................................      $(0.68)     $ 1.89       $(4.16)
                                                                                 ------      ------       ------
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                       41




<PAGE>


                            MILLENNIUM CHEMICALS INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                       Year Ended December 31,
                                                                                   ------------------------------
                                                                                    2001      2000          1999
                                                                                   ------    -------       ------
                                                                                           (Millions)

<S>                                                                                <C>        <C>          <C>
Cash flows from operating activities
   (Loss) income from continuing operations..................................      $ (43)     $ 122        $(326)
   Adjustments to reconcile net (loss) income to net cash provided by
     operating activities
   Write-off of assets related to plant closure..............................         10         --           --
   Depreciation and amortization.............................................        110        113          105
   Loss in value of Equistar investment......................................         --         --          639
   Deferred income tax (benefit) provision...................................        (54)        36         (247)
   Non-cash income tax benefit...............................................        (42)        --           --
   Restricted stock amortization and adjustments, net........................          1         (6)           8
   Equity in loss (earnings) of Equistar.....................................         90        (39)          19
   Minority interest.........................................................          4          7            5
   Changes in assets and liabilities (net of dispositions):
     Decrease (increase) in trade receivables................................         83        (52)         (29)
     Increase in inventories.................................................        (10)       (30)         (43)
     Decrease (increase) in other current assets.............................         30         24          (11)
     Increase in investments and other assets................................        (19)       (18)         (27)
     Increase in trade accounts payable......................................         64         19           45
     (Decrease) increase in accrued expenses and other liabilities and
       income taxes payable..................................................        (35)       (93)          31
     Decrease in other liabilities...........................................        (77)       (63)        (146)
                                                                                   -----      -----        -----
   Cash provided by operating activities.....................................        112         20           23
                                                                                   -----      -----        -----
Cash flows from investing activities
   Capital expenditures......................................................        (97)      (110)        (109)
   Distributions from Equistar...............................................         --         83           75
   Proceeds from syngas transaction..........................................         --         --          123
   Proceeds from sale of Suburban Propane investment.........................         --         --           75
   Proceeds from sales of property, plant & equipment........................         19          4           13
                                                                                   -----      -----        -----
     Cash (used in) provided by investing activities.........................        (78)       (23)         177
                                                                                   -----      -----        -----
Cash flows from financing activities
   Dividends to shareholders.................................................        (35)       (35)         (38)
   Repurchases of common stock...............................................         --        (65)        (200)
   Proceeds from long-term debt..............................................        783        311          118
   Repayment of long-term debt...............................................       (736)      (187)         (93)
   (Decrease) increase in notes payable......................................        (34)       (17)          27
                                                                                   -----      -----        -----
     Cash (used in) provided by financing activities.........................        (22)         7         (186)
                                                                                   -----      -----        -----
Effect of exchange rate changes on cash......................................         (5)        (7)          (7)
                                                                                   -----      -----        -----
Increase (decrease) in cash and cash equivalents.............................          7         (3)           7
Cash and cash equivalents at beginning of year...............................        107        110          103
                                                                                   -----      -----        -----
Cash and cash equivalents at end of year.....................................      $ 114      $ 107        $ 110
                                                                                   =====      =====        =====

</TABLE>

                 See Notes to Consolidated Financial Statements.

                                       42






<PAGE>


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

<TABLE>
<CAPTION>

                                     Common Stock
                                     -------------                                                        Cumulative
                                                                           Paid      Retained  Unearned     Other
                                  Outstanding       Treasury  Deferred      in       Earnings Restricted Comprehensive
                                     Shares  Amount   Stock  Compensation Capital    (Deficit)  Shares      Loss       Total
                                     ------  ------   ------ ------------ -------    ---------  ------      ----       -----
                                                                       (Millions)

<S>                                    <C>     <C>    <C>        <C>     <C>          <C>        <C>       <C>       <C>
Balance at December 31, 1998 ....      76      $1     $  (7)     $ 7     $ 1,333      $ 294      $(35)     $(15)     $ 1,578
Comprehensive income
   Net loss .....................      --       -        --       --          --       (288)       --        --         (288)
   Other comprehensive loss
     Currency translation
     adjustment .................      --       -        --       --          --         --        --       (46)         (46)
                                       --       -      ----       --       -----        ---       ---       ---        -----
Total comprehensive loss ........      --       -        --       --          --       (288)       --       (46)        (334)
Amortization and adjustment of
   unearned restricted shares ...       1       -        --       --           1         --         7        --            8
Shares repurchased ..............      (9)      -      (200)      --          --         --        --        --         (200)
Shares purchased by employee
   benefit plan trusts ..........      --       -        (3)       3          --         --        --        --           --
Options exercised ...............      --       -        --       --           1         --        --        --            1
Dividend to shareholders ........      --       -        --       --          --        (38)       --        --          (38)
                                       --       -      ----       --       -----        ---       ---       ---        -----
Balance at December 31, 1999 ....      68       1      (210)      10       1,335        (32)      (28)      (61)       1,015
Comprehensive income (loss)
   Net income ...................      --       -        --       --          --        122        --        --          122
   Other comprehensive loss
     Currency translation
     adjustment .................      --       -        --       --          --         --        --       (46)         (46)
                                       --       -      ----       --       -----        ---       ---       ---        -----
Total comprehensive income (loss)      --       -        --       --          --        122        --       (46)          76
Amortization and adjustment of
   unearned restricted shares ...      --       -        --       --          (9)        --         3        --           (6)
Shares repurchased ..............      (3)      -       (65)      --          --         --        --        --          (65)
Shares purchased by employee
   benefit plan trusts ..........      (1)      -        (7)       5          --         --        --        --           (2)
Dividend to shareholders ........      --       -        --       --          --        (35)       --        --          (35)
                                       --       -      ----       --       -----        ---       ---       ---        -----
</TABLE>

                                       43







<PAGE>


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

<TABLE>
<CAPTION>

                                     Common Stock
                                     -------------                                                        Cumulative
                                                                           Paid      Retained  Unearned     Other
                                  Outstanding       Treasury  Deferred      in       Earnings Restricted Comprehensive
                                     Shares  Amount   Stock  Compensation Capital    (Deficit)  Shares      Loss       Total
                                     ------  ------   ------ ------------ -------    ---------  ------      ----       -----
                                                                       (Millions)
<S>                                 <C>      <C>      <C>     <C>       <C>          <C>         <C>     <C>           <C>
Balance at December 31, 2000 ........  64       1     $(282)      15      1,326         55       $(25)     $(107)    $983
Comprehensive loss
   Net loss .........................  --      --        --       --         --        (43)        --         --      (43)
   Other comprehensive loss
     Net losses on derivative
     financial instruments:
       Losses arising during
       the year......................  --      --        --       --         --         --         --        (17)     (17)
       Less: reclassification
         adjustment for losses
         included in net income .....  --      --        --       --         --         --         --          9        9
                                       --      --     -----      ---     ------       ----        ---       ----      ---
         Net losses .................  --      --        --       --         --         --         --         (8)      (8)
     Minimum pension liability
       adjustment ...................  --      --        --       --         --         --         --         (8)      (8)
     Currency translation adjustment   --      --        --       --         --         --         --        (13)     (13)
                                       --      --     -----      ---     ------       ----        ---       ----      ---
Total comprehensive loss ............  --      --        --       --         --        (43)        --        (29)     (72)
Amortization and adjustment of
   unearned restricted shares .......  --      --        --       --        (27)        --         25         --       (2)
Dividends related to forfeitures of
   restricted shares ................  --      --        --       --         --          3         --         --        3
Shares purchased by employee benefit
   plan trusts ......................  (1)     --        (1)       2         --         --         --         --        1
Dividend to shareholders ............  --      --        --       --         --        (35)        --         --      (35)
                                       --      --     -----      ---     ------       ----        ---       ----      ---
Balance at December 31, 2001 ........  63      $1     $(283)     $17     $1,299       $(20)        --      $(136)    $878
                                       ==      ==     =====      ===     ======       ====        ===      =====      ===


</TABLE>


                 See Notes to Consolidated Financial Statements


                                       44




<PAGE>


                            MILLENNIUM CHEMICALS INC.
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                    (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.
Minority interest represents the minority ownership of the Company's Brazilian
subsidiary. All significant intercompany accounts and transactions have been
eliminated. The Company's investment in 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 generally accepted accounting principles 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, 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. Actual results
could differ from those estimates.

         Reclassification: Certain prior year balances have been reclassified to
conform with the current year presentation.

         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 $4 and $28 in
restricted cash at December 31, 2001 and 2000, respectively, which is on deposit
to satisfy insurance claims.

         Inventories: Inventories are stated at the lower of cost or market
value. For certain United States operations representing 27% and 26% of
consolidated inventories at December 31, 2001 and 2000, respectively, cost is
determined under the last-in, first-out ("LIFO") method. The first-in, first-out
("FIFO") method, or methods that approximate FIFO, are used by all other
subsidiaries.

         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). Other less substantial maintenance and repair
costs are expensed as incurred. Unamortized capitalized turnaround costs were
$21 and $15 at December 31, 2001 and 2000, 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, through
December 31, 2001, are subject to impairment evaluation under SFAS No. 121. See
Recent Accounting Developments below. Unamortized capitalized software costs of
$53 and $64 at December 31, 2001 and 2000, respectively, are included in
Property, plant and equipment.

         Goodwill: Goodwill represents the excess of the purchase price over the
fair value of net assets allocated to 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. Such expected
cash flows, on an undiscounted basis, are compared to the carrying value of the
tangible and intangible assets, and if impairment is indicated, the carrying
value of goodwill is adjusted. In the opinion of

                                       45




<PAGE>


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

management, no impairment of goodwill existed at December 31, 2001 under SFAS
No. 121. See Recent Accounting Developments below.

         Environmental Liabilities, Legal and Tax Matters -- The Company
periodically reviews matters associated with potential environmental
obligations, legal matters and tax claims brought against the Company and
evaluates, accounts, reports and discloses these matters in accordance with SFAS
No. 5. In order to make estimates of liabilities, the Company's evaluation of
and judgments about environmental obligations, legal matters and tax claims are
based upon the individual facts and circumstances around 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 the amount of loss can only be reasonably estimated within a range of loss,
the Company records a minimum reserve for the loss contingency at the low end of
the range but also applies judgment to specific matters as to whether an 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 payment has been received or 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' 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 ("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

                                       46




<PAGE>


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

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.

         Income Taxes: Deferred income taxes result from temporary differences
between the financial statement basis and income tax basis of assets and
liabilities and are computed using enacted marginal tax rates of the respective
tax jurisdictions. Valuation allowances are provided against deferred tax assets
that are not likely to be realized in full. 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.

         Research and Development: The cost of research and development efforts
is expensed as incurred. Such costs aggregated $20, $26 and $26 for the years
ended December 31, 2001, 2000 and 1999, respectively.

         Earnings Per Share: The weighted-average number of equivalent shares of
Common Stock outstanding used in computing earnings per share for 2001, 2000 and
1999 was as follows:

<TABLE>
<CAPTION>
                                                                 2001            2000            1999
                                                              ----------      ----------      ----------
       <S>                                                    <C>             <C>             <C>
       Basic............................................      63,564,497      64,304,594      69,198,258
       Options..........................................              --           3,314              --
       Restricted shares................................              --         281,729              --
                                                              ----------      ----------      ----------
       Diluted..........................................      63,564,497      64,589,637      69,198,258
                                                              ==========      ==========      ==========
</TABLE>

         The 2001 and 1999 computation of diluted earnings per share does not
include 5,608 restricted shares issued under the Company's Long Term Stock
Incentive Plan ("The Stock Incentive Plan") in 2001 and 33,628 options to
purchase Common Stock and 464,079 restricted shares issued under the Stock
Incentive Plan in 1999 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 and natural gas
derivative contracts and accounts receivable. The Company maintains its
investments and enters contracts with high-credit-quality financial
institutions, generally those that provide the Company with debt financing.
Similarly, counterparties to the Company's natural gas derivative contracts are
institutions considered to be of high credit quality. For some of these natural
gas derivative contracts, either party may be required to establish some form of
collateral such as a letter of credit or cash escrow, if the fair value of such
contracts exceeds a pre-determined dollar amount and/or either party's credit
rating by both S&P and Moody's falls below investment grade.

         The Company sells a broad range of commodity, industrial, performance
and specialty chemicals to a diverse group of customers operating throughout the
world. During 2001, revenue generated outside the United States accounted for
54% of total revenues, from sales to customers in over 90 countries.
Accordingly, there is no significant concentration of risk in any one particular
country. In addition, 60% of the revenues of the Titanium Dioxide and Related
Products business segment (which accounts for approximately 73% of consolidated
revenues in 2001) 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 2001 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.
141, "Business Combinations" ("SFAS No. 141"); SFAS No. 142 and, SFAS No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No. 141
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method of accounting and prohibits the use of
the pooling-of-interests method for such transactions. SFAS No. 142 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, will not be amortized but must be

                                       47




<PAGE>


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

tested for impairment at least annually at the reporting unit level, as defined
in the standard. Amortization expense for goodwill that is recorded in the
Company's balance sheet was $13 for 2001. Additionally, the Company's share of
amortization expense reported by Equistar for its goodwill, included in Equity
in (loss) earnings of Equistar, was $10 for 2001. Intangible assets other than
goodwill will be amortized over their useful lives and reviewed for impairment.
This new standard is effective for fiscal years beginning after December 15,
2001. The Company must adopt this standard on January 1, 2002. The Company
expects to report a charge for the cumulative effect of a change in accounting
principle of approximately $275 in the first quarter of 2002 to write off
goodwill related to its Acetyls business in accordance with SFAS No. 142.
Additionally, Equistar expects to report an impairment of goodwill in the first
quarter of 2002 in accordance with SFAS No. 142. The expected write-off at
Equistar would require an adjustment of approximately $30 to reduce the carrying
value of the Company's investment in Equistar, which the Company will also
report as a charge for the cumulative effect of a change in accounting
principle. 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 and is currently evaluating the potential impact on its consolidated
financial position and results of operations.

         In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
applies to all long-lived assets, including discontinued operations, and
provides guidance on the measurement and recognition of impairment charges for
assets to be held and used, assets to be abandoned and assets to be disposed of
by sale. SFAS No. 144 supersedes SFAS No. 121; however, it retains the
fundamental provisions of SFAS No. 121 for (1) the recognition and measurement
of the impairment of long-lived assets to be held and used and (2) the
measurement of long-lived assets to be disposed of by sale. Although earlier
application is permitted, the Company must adopt this standard on January 1,
2002. The provisions of this standard are to be applied prospectively. The
Company does not expect the adoption of SFAS No. 144 to have a material impact
on its consolidated financial position and results of operations.

Note 2 -- 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 indefinitely idle its sulfate-process TiO2
plant in Hawkins Point, Maryland and reduce its worldwide workforce by 10%. The
$31 charge includes 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.

         Payments of $16 for severance and related costs and $4 for other costs
related to reorganization and plant closure have been made during the year ended
December 31, 2001.

Note 3 -- Significant Transactions

         On January 18, 1999, the Company completed transactions with Linde
relating to the Company's syngas unit in La Porte, Texas, and a 15% interest in
its methanol business, whereby the Company received $123 in cash. Linde operates
the syngas facility under a lease with a purchase option. In addition, Linde
operates and holds a 15% interest in the methanol facility. No gain or loss
resulted from these transactions.

                                       48




<PAGE>


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

         On May 26, 1999, the Company sold its 26.4% combined subordinated and
general partnership interests in Suburban Propane to Suburban Propane and its
management for $75 in cash, resulting in an after-tax gain of $38. As such,
Suburban Propane is reflected as a discontinued operation for 1999.

         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 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 4 -- Investment in Equistar

         On December 1, 1997, the Company and 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 Occidental's chemical subsidiary.
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 is now owned 41% by Lyondell, 29.5% by Occidental and 29.5% by
the Company. No gain or loss resulted from these transactions.

         On January 31, 2001, Lyondell and Occidental announced that they have
agreed in principle on a proposed transaction whereby Occidental would sell its
29.5% equity interest in Equistar to Lyondell. The Company has evaluated the
carrying value of its investment in Equistar at December 31, 2001 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.
Lyondell and Occidental have agreed in principle on a transaction whereby
Occidental would sell its 29.5% interest in Equistar to Lyondell. The value of
this transaction is 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. There can be no assurance that the proposed transaction will be
completed. The carrying value of the Company's investment in Equistar at
December 31, 2001 was $677.

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

         In furthering the Company's business strategy to de-emphasize commodity
chemicals, the Board of Directors of the Company approved actions in December
1999 to advance the Company's efforts to dispose of its Equistar interest. As a
result of the Board's adopting the strategy to dispose of the Equistar interest
in the short-term, the Company reduced the carrying amount of its interest at
December 31, 1999 to an estimated fair value of $800 by recording a charge of
$639 ($400 after tax) in the fourth quarter of 1999. The estimated fair value of
$800 was determined by evaluating, among other things, the estimated discounted
future cash flows of Equistar, current market interest and estimated disposal
costs, including income taxes.

         During 1999 Equistar recorded income and expense from various unusual
items, for which the Company's share is included in Equity in (loss) earnings
from Equistar. In the fourth quarter of 1999, Equistar announced the closure of
certain of its facilities and the reorganization of certain support services
with Lyondell. A charge of $96 was made, which included asset write-downs and
severance and related costs of $72 and $24, respectively. The Company's share of
such charge was $28. Also in 1999, Equistar recorded a gain of $41 on the sale
of its concentrates and compounds business. The Company's share of such gain was
$12. In addition, certain costs related to the formation of Equistar were
incurred, the Company's share of which was $1 in 1999.

                                       49




<PAGE>


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

         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 the Company's 2001 Annual Report.

Note 5 -- Supplemental Financial Information

<TABLE>
<CAPTION>
                                                                       2001       2000
                                                                       ----       ----
<S>                                                                    <C>        <C>
Trade receivables
   Trade receivables..............................................     $222       $310
   Allowance for doubtful accounts................................       (7)        (4)
                                                                       ----       ----
                                                                       $215       $306
                                                                       ====       ====
Inventories
   Finished products..............................................     $204       $188
   In-process products............................................       21         26
   Raw materials..................................................       93        111
   Other inventories..............................................       52         48
                                                                       ----       ----
                                                                       $370       $373
                                                                       ====       ====
</TABLE>

       Inventories valued on a LIFO basis were approximately $29 and $35 less
than the amount of such inventories valued at current cost at December 31, 2001
and 2000, respectively.

<TABLE>
<CAPTION>
                                                                       2001         2000
                                                                       ----         ----
<S>                                                                   <C>          <C>
Property, plant and equipment
   Land and buildings.............................................    $  218       $  247
   Machinery and equipment........................................     1,291        1,346
   Construction-in-progress.......................................       121          119
                                                                      ------       ------
                                                                       1,630        1,712
                                                                      ------       ------
   Accumulated depreciation and amortization......................      (750)        (755)
                                                                      $  880       $  957
                                                                      ======       ======

Goodwill..........................................................    $  484       $  484
   Accumulated amortization.......................................      (106)         (93)
                                                                      ------       ------
                                                                      $  378       $  391
                                                                      ======       ======
</TABLE>


<TABLE>
<CAPTION>

                                                                       2001         2000            1999
                                                                       ----         ----            ----
<S>                                                                   <C>          <C>             <C>
Amortization expense................................................  $   13       $   13          $  12
                                                                      ======       ======          =====
</TABLE>

Rental expense on operating leases is as follows:

<TABLE>
<CAPTION>

                                                                       2001         2000            1999
                                                                       ----         ----            -----
<S>                                                                   <C>          <C>             <C>
Rental expense....................................................... $   19       $   14          $  13
                                                                      ======       ======          =====

</TABLE>

                                       50





<PAGE>


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

         Future minimum rental commitments under non-cancelable operating
leases, as of December 31, 2001, are as follows:

<TABLE>
          <S>                                                                 <C>
          2002...............................................................  $ 19
          2003...............................................................    17
          2004...............................................................    15
          2005...............................................................    13
          2006...............................................................    11
          Thereafter.........................................................    99
                                                                               ----
                                                                               $174
                                                                               ====
</TABLE>

         Cash paid for interest and taxes:


<TABLE>
<CAPTION>
                                                                   2001           2000          1999
                                                                   ----           ----          ----
       <S>                                                         <C>             <C>          <C>
       Interest (net of interest received)....................    $  81           $ 77         $  69
       Taxes (net of refunds).................................        1            169            41
</TABLE>


Note 6 -- Income Taxes

<TABLE>
<CAPTION>
                                                                   2001           2000          1999
                                                                   ----           ----          ----
       <S>                                                         <C>             <C>          <C>
       Pretax (loss) income is generated from:

          United States........................................    $(196)         $ 96         $(556)
          Foreign..............................................       71            93            26
                                                                   -----          ----         -----
                                                                    (125)          189          (530)
                                                                   =====          ====         =====

       Income tax (benefit) provision is comprised of:

       Federal

          Current..............................................     $(54)         $ --         $   9
          Deferred.............................................      (54)           36          (247)
       Foreign.................................................       21            21            22
       State and local.........................................        1             3            17
                                                                    ----          ----         -----
                                                                     (86)           60          (199)
                                                                    ====          ====         =====
          Income tax (benefit) provision is classified as:

          Continuing operations................................      (86)           60          (209)
          Discontinued operations..............................       --            --            10
                                                                    ----          ----         -----
                                                                    $(86)         $ 60         $(199)
                                                                    ====          ====         =====

</TABLE>

                                       51




<PAGE>


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

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

<TABLE>
<CAPTION>
                                                                    2001         2000         1999
                                                                    ----         ----         ----
<S>                                                                <C>           <C>          <C>
       Continuing Operations
          Statutory federal income tax rate....................    (35.0)%       35.0%        (35.0)%
          State and local income taxes, net of federal
            benefit............................................     (0.3)         1.2           1.0
          Provision for nondeductible expenses, primarily
            goodwill amortization..............................      6.3          4.4           2.5
          Foreign rate differential............................    (13.0)        (7.0)         (2.5)
          Loss in value of Equistar............................       --           --          (2.9)
          Tax benefit from previous years......................    (29.6)          --          (1.6)
          Other................................................      2.8         (1.6)         (0.9)
                                                                   -----         ----         -----
          Effective income tax rate............................    (68.8)%       32.0%        (39.4)%
                                                                   =====         ====         =====
       Discontinued operations

          Effective income tax rate............................       --%          --%         20.8%
                                                                   =====         ====         =====
</TABLE>

         The Company recorded a benefit of $42 in 2001 due to favorable
developments related to items reserved for in prior years, and a benefit of $14
in 1999 for taxes recoverable from previous years' tax filings resulting from
favorable tax settlements and judgments. The difference in 1999 between the
statutory tax rate and effective tax rate for discontinued operations relates to
the difference in tax basis of stock sold compared to the carrying value of
related assets.

         Significant components of deferred taxes are as follows:

<TABLE>
<CAPTION>

                                                                                     2001       2000
                                                                                     ----       ----
<S>                                                                                  <C>        <C>
       Deferred tax assets
          Environmental and legal obligations....................................    $ 18       $ 16
          Other post-retirement benefits and pension obligations.................      17         29
          Net operating loss carryforwards.......................................     143         52
          Capital loss carryforwards.............................................      --         70
          AMT credits............................................................     105        101
          Other accruals.........................................................      78         75
                                                                                     ----       ----
                                                                                      361        343
          Valuation allowance against capital loss carryforwards.................      --        (70)
                                                                                     ----       ----
            Total deferred tax assets............................................     361        273
                                                                                     ----       ----
       Deferred tax liabilities
          Excess of book over tax basis in property, plant and equipment.........      79         81
          Taxes related to potential disposal of Equistar........................     184        184
          Other..................................................................      26         27
                                                                                     ----       ----
            Total deferred tax liabilities.......................................     289        292
                                                                                     ----       ----
              Net deferred tax assets (liabilities)..............................    $ 72       $(19)
                                                                                     ====       ====
</TABLE>


         At December 31, 2001, certain subsidiaries of the Company had available
foreign net operating loss carryforwards aggregating $215, which do not expire
but are subject to certain limitations on their use, and United States net
operating loss carryforwards aggregating $223 that expire in 2021. The capital
loss carryforwards expired in 2001, while the AMT credits have no expiration.
Deferred taxes are not provided on the undistributed earnings of subsidiaries
operating outside the United States, which have been or are intended to be
permanently reinvested.

                                       52




<PAGE>


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

         The Company settled certain issues relating to the tax years 1986
through 1988 and a payment of $151 in taxes was made in July 2000.

         Certain of the income tax returns of the Company's subsidiaries are
currently under examination by the Internal Revenue Service and various state
tax agencies. In the opinion of management, any assessments that may result will
not have a material adverse effect on the consolidated financial position,
results of operations or cash flows of the Company.

Note 7 -- Long-Term Debt and Credit Arrangements

<TABLE>
<CAPTION>
                                                                                               2001       2000
                                                                                               ----       ----
<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      $  --
Revolving Credit Facility bearing interest at the bank's prime lending rate, or at LIBOR
   or NIBOR plus .275% at the option of the Company plus, in each case, a facility fee of
   .15% to be paid quarterly..............................................................       --        388
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................................................      125         --
7% Senior Notes due 2006..................................................................      500        500
7.625% Senior Debentures due 2026.........................................................      249        249
9.25% Senior Notes due 2008...............................................................      275         --
Debt payable through 2007 at interest rates ranging from 2% to 9.5%.......................       24         21
Less current maturities of long-term debt.................................................      (11)      (391)
                                                                                             ------      -----
                                                                                             $1,172      $ 767
                                                                                             ======      =====
</TABLE>


         On June 18, 2001, Millennium America entered into the five-year Credit
Agreement to replace the previously existing Revolving Credit Facility, which
was due to expire in July 2001, and issued $275 of seven-year 9.25% Senior
Notes. At December 31, 2001, under the new Credit Agreement, certain of the
Company's subsidiaries including Millennium America may borrow up to $175 under
the revolving credit portion of the Credit Agreement (the "Revolving Loans") and
have borrowed $125 under the term loan portion of the Credit Agreement (the
"Term Loans"). The Company and Millennium America guarantee the obligations
under the Credit Agreement.

         The Revolving Loans are available in US dollars, pounds sterling 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, 2001, $8 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 credit facilities, including facility fees, was
5.8%, 6.7%, and 4.1% for 2001, 2000, and 1999, respectively. The weighted-
average interest rate for borrowings under the Term Loans was 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.
In the fourth quarter of 2001, the Company requested and obtained an amendment
to these and certain other covenants given the difficult business environment at
the time, which continued in early 2002. The Company was in compliance with
these amended covenants at December 31, 2001. The Company is required to
maintain a Leverage Ratio of no more than 6.75 to

                                       53




<PAGE>


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

1.00 for the first and second quarters of 2002, 6.50 to 1.00 for the third
quarter of 2002 and 6.00 to 1.00 for the fourth quarter of 2002 and an Interest
Coverage Ratio of no less than 2.00 to 1.00 for all quarters of 2002. If
economic and business conditions improve during 2002, as expected, it is likely
that such covenant requirements will be met by the Company. However, if such
conditions do not improve and the Company operates at similar levels as in the
fourth quarter of 2001, the Company may be required to request either a waiver
of or an amendment to one or both of these financial covenants. The Company
believes it would be able to obtain such waiver or amendment if required. This
situation is monitored frequently in order to assess the likelihood of such
compliance. The covenants 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; (x) increase the amount of the
         $750 indemnity by Millennium America related to certain Equistar
         long-term debt (as described below in this note); and (xi) 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. In addition, the
         Credit Agreement requires the Company to satisfy financial performance
         criteria with respect to debt coverage and interest coverage ratios.

         The obligations 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 (as defined in
the Credit Agreement).

         On March 27, 2002, the Company completed a European accounts receivable
securitization transaction. Proceeds from this transaction were approximately
$43 and will be used, primarily, to pay down debt outstanding under the Credit
Agreement.

         The 7.00% Senior Notes and 7.625% Senior Debentures were issued by
Millennium America and are guaranteed by the Company. The indenture under which
the Senior Notes and 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.

       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) pay dividends or
make distributions; (iv) repurchase capital stock; (v) make other restricted
payments including, without limitation, investments; (vi) create liens; (vii)
redeem debt that is junior in right of payment to the 9.25% Senior Notes; (viii)
sell or otherwise dispose of assets, including capital stock of subsidiaries;
(ix) enter into arrangements that restrict dividends from subsidiaries; (x)
enter into mergers or consolidations; (xi) enter into transactions with
affiliates; and, (xii) enter into sale/leaseback transactions. However, if the
9.25% Senior Notes receive credit ratings from both S&P and Moody's as specified
in the indenture and meet certain other requirements, certain of these covenants
will no longer apply. The indenture governing the Company's 9.25% Senior Notes
includes 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, there
would be certain restrictions on the Company's ability to incur additional
indebtedness and the Company's ability to pay dividends would be limited.

         At December 31, 2001, the Company was in compliance with all covenants
in the Credit Agreement as amended, and in the indentures governing the 9.25%
Senior Notes, 7.00% Senior Notes and 7.625% Senior Debentures.

                                       54




<PAGE>


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

         Millennium America has entered into an indemnity agreement with
Equistar pursuant to which Millennium America may be required to contribute to
Equistar an amount equal to up to the lesser of $750 or the sum of the principal
amount outstanding under the term loan portion of Equistar's credit facility
(not to exceed $275) and Equistar's 10.125% Senior Notes due 2008 (not to exceed
$475), in each case together with interest. However, pursuant to the terms of
this indemnity agreement, Millennium is only required to pay this amount to
Equistar if the lenders under such credit facility or the holders of such Senior
Notes have not been able to obtain payment after pursuing and exhausting all
their remedies against Equistar, including the liquidation of Equistar's assets.
The indemnity expressly does not create any right in favor of such lenders or
such holders or any person other than Millennium America, Equistar and the
partners in Equistar. The indemnity may be amended or terminated at any time by
the agreement of the partners in Equistar without the consent of the lenders
under such credit facility or the holders of such Senior Notes. The indemnity
agreement replaced a prior guarantee by Millennium America of up to $750 of
Equistar's debt.

         The indemnity will remain in effect indefinitely but at any time after
December 31, 2004 Millennium America may, without the consent of the other
partners in Equistar, elect to terminate the indemnity if certain conditions are
met including financial ratios and covenants relating to Equistar. In addition,
Millennium America may, without the consent of the other partners in Equistar,
elect to terminate the indemnity in the event the Company sells its interests in
the subsidiaries that directly hold the partnership interests of Equistar or if
those subsidiaries sell their interests in Equistar, provided a financial
condition relating to Equistar is met.

         The Company had outstanding Notes payable of $4 and $39 as of December
31, 2001 and 2000, respectively, bearing interest at an average rate of
approximately 5.3% and 6% in 2001 and 2000, respectively, with maturity of 30
days or less. At December 31, 2001, the Company had outstanding standby letters
of credit amounting to $28 and had unused availability under short-term
uncommitted lines of credit and the Credit Agreement of $167.

                                       55







<PAGE>


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


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

<TABLE>
<S>                                                                          <C>
       2002...............................................................    $   11
       2003...............................................................        11
       2004...............................................................         9
       2005...............................................................        59
       2006...............................................................       566
       Thereafter.........................................................       527
                                                                              ------
                                                                              $1,183
                                                                              ======
</TABLE>


Note 8 -- 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.

         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, none
of which is greater than eighteen months at December 31, 2001.

         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 gains included in earnings, which offset a similar amount
of losses from foreign currency denominated trade receivables and payables, 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
2001, net losses on forward exchange contracts designated as cash flow hedges of
$4 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 2001. No forward exchange contract cash flow hedges were
discontinued during 2001. The Company estimates that approximately $2 of net
derivative gains on foreign currency cash flow hedges included in OCI at
December 31, 2001 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 weather 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, none of which expires later than January 2004 at December 31,
2001. 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 2001, net losses on commodity swaps designated as cash
flow hedges of $5 were reclassified to


                                       56




<PAGE>


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


Cost of products sold to match the gain on the underlying transaction being
hedged. Hedge ineffectiveness had no significant impact on earnings for 2001. No
commodity swap cash flow hedges were discontinued in 2001. The Company estimates
that approximately $6 of net losses on commodity swaps included in OCI at
December 31, 2001 will be reclassified to earnings during the next twelve
months.

         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. 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, the fair value of such arrangements was recognized as a reduction
in Interest expense. The swap agreements were terminated in 2001 and realized
gains of $5 were included in Interest expense for 2001.

         The table below summarizes the notional amounts of the Company's
derivative instruments at December 31, 2000, with maturity dates ranging from
one month to twelve months. The notional amounts have been translated into US
dollars using applicable exchange rates at December 31, 2000.

<TABLE>
<CAPTION>
                                                                                 2000
                                                                       -----------------------
                                                                        Notional    Unrealized
                                                                         Amount        Gain
                                                                       ---------    ----------
<S>                                                                  <C>            <C>
       Forward Contracts.............................................       $116           $ 2
       Currency Swaps................................................       $  7           $--
</TABLE>


Note 9--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>
                                                                          2001               2000
                                                                    ----------------  -----------------
                                                                    Carrying   Fair   Carrying     Fair
                                                                      Value    Value    Value     Value
                                                                    --------   -----  --------    -----
<S>                                                                <C>       <C>      <C>       <C>
       Borrowings under revolving credit facilities...............      $ 10   $  10      $388     $386
       Term Loans.................................................       125     125        --       --
       Senior Notes and Debentures................................       749     663       749      605
       9.25% Senior Notes.........................................       275     283        --       --
</TABLE>


         In addition, the Company has various contractual obligations to
purchase raw materials used in the production of its products: titanium ores for
TiO[u]2, CST for fragrance and flavor chemicals, syngas for methanol, carbon
monoxide for acetic acid and ethylene for VAM. (See Note 13 -- Commitments and
Contingencies, below.) Commitments for such materials 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 10 -- 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, 2001 and 2000.

         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.


                                       57




<PAGE>


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


         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, 2001, and a statement of the funded status as of
December 31 for both years:

<TABLE>
<CAPTION>
                                                                                                   Other
                                                                                              Postretiremnt
                                                                        Pension Benefits         Benefits
                                                                       ------------------   -----------------
                                                                        2001       2000       2001      2000
                                                                       -------  ---------   -------    ------
<S>                                                                   <C>      <C>        <C>       <C>
Reconciliation of benefit obligation
   Projected benefit obligation at beginning of year................      $760     $  757     $  97     $ 110
   Service cost, including interest.................................        12         12        --        --
   Interest in PBO..................................................        53         54         6         8
   Benefit payments.................................................       (84)       (83)      (12)      (13)
   Curtailments.....................................................         1         --        --        --
   Net experience loss (gain).......................................        15         28        (7)       (7)
   Amendments.......................................................         4         --        (4)       (1)
   Translation adjustment...........................................        (3)        (8)       --        --
                                                                          ----     ------     -----     -----
     Projected benefit obligation at end of year....................      $758     $  760     $  80     $  97
                                                                          ----     ------     -----     -----
Reconciliation of fair value of plan assets
   Fair value of plan assets at beginning of year...................      $895     $1,013     $  --     $  --
   Return on plan assets............................................       (36)       (34)       --        --
   Employer contributions...........................................         8          6        12        13
   Benefit payments.................................................       (84)       (83)      (12)      (13)
   Asset transfer...................................................        --          5        --        --
   Translation adjustment...........................................        (5)       (12)       --        --
                                                                          ----     ------     -----     -----
     Fair value of plan assets at end of year.......................      $778     $  895     $  --     $  --
                                                                          ----     ------     -----     -----
Funded status
   Funded status at December 31.....................................      $ 20     $  135     $ (80)    $ (97)
   Unrecognized net asset...........................................        (4)       (11)       --        --
   Unrecognized prior-service cost..................................         8          8       (14)      (12)
   Unrecognized loss (gain).........................................       146         20       (32)      (28)
                                                                          ----     ------     -----     -----
     Prepaid benefit cost...........................................       170        152      (126)     (137)
     Additional minimum liability...................................       (11)        --        --        --
                                                                          ----     ------     -----     -----
     Net prepaid (accrued) benefit cost.............................      $159     $  152     $(126)    $(137)
                                                                          ----     ------     -----     -----
</TABLE>


         At December 31, 2001, Other assets include an intangible asset of $3
and other comprehensive loss includes $8 due to the additional minimum liability
associated with certain of the Company's pension plans.

         The projected benefit obligation, accumulated benefit obligation and
the fair value of plan assets for pension plans with accumulated benefit
obligations in excess of the plan assets were $48, $45, and $29, respectively,
at December 31, 2001 and $51, $47 and $32, respectively, at December 31, 2000.


                                       58




<PAGE>


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


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


<TABLE>
<CAPTION>
                                                                                            Other
                                                                                        Postretirement
                                                                Pension Benefits           Benefits
                                                               -------------------    -------------------
                                                                2001   2000   1999    2001   2000    1999
                                                               -----   ----   ----    ----   ----    ----
<S>                                                             <C>    <C>    <C>      <C>    <C>     <C>
       Net periodic benefit cost
          Service cost, including interest..................    $ 12   $ 12   $ 18     $--    $--     $--
          Interest on PBO...................................      53     54     47       6      8       8
          Return on plan assets.............................     (76)   (78)   (70)     --     --      --
          Amortization of unrecognized net loss.............      --      2     --      (2)    (2)     (1)
          Amortization of prior-service cost................       1      1      2      (1)    (1)     (1)
          Curtailment.......................................       2     --     --      (1)    --      --
                                                                ----   ----   ----     ---    ---     ---
          Net periodic benefit cost.........................      (8)    (9)    (3)      2      5       6
          Defined contribution plans........................       4      4      4      --     --      --
                                                                ----   ----   ----     ---    ---     ---
          Net periodic benefit cost.........................    $ (4)  $ (5)  $  1     $ 2    $ 5     $ 6
                                                                ====   ====   ====     ===    ===     ===
</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
                                        --------------------------    -------------------------
                                        2001       2000       1999    2001      2000       1999
                                        ----       ----       ----    ----      ----       ----
<S>                                     <C>        <C>        <C>     <C>       <C>        <C>
Weighted-average assumptions
   as of December 31
     Discount rate..............        7.27%      7.38%      7.38%   7.50%     7.50%      7.50%
     Expected return on plan
       assets...................        8.87%      8.86%      8.87%     --        --         --
     Rate of compensation
       increase.................        4.23%      4.30%      4.30%     --        --         --
</TABLE>


         The market-related value of plan assets utilized to determine the
Company's benefit obligations and net periodic benefit cost is a calculated
value that recognizes changes in the fair value of plan assets over a five-year
period.

         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, 2001 was 9.5% for 2002, 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 $1 in each of the years ended December 31, 2001 and
2000. The effect on the accumulated postretirement benefit obligation would be
$4 and $6 at December 31, 2001 and 2000, respectively.

Note 11 -- Stock-Based Compensation Plans

         Omnibus Incentive Compensation Plan: In January 2001, the Company
adopted the Omnibus Incentive Compensation Plan (the "Omnibus Incentive Plan")
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. A maximum of 3,200,000 shares of Common Stock is reserved for
delivery to participants under the Omnibus Incentive Plan.


                                       59




<PAGE>


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


         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.

         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 all 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.

         In January 2001, a limited number of executive officers and key
employees of the Company received performance unit awards under the Omnibus
Incentive Plan for the three-year performance period ending December 31, 2003.
In addition, these individuals were awarded an aggregate of 655,000
non-qualified stock options in May 2001. These 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 awards were granted under the
Omnibus Incentive Plan at December 31, 2001. The compensation expense for this
plan was not significant in 2001.

         The Company has authorization under the Omnibus Incentive Plan to grant
awards for up to an additional 2,545,000 shares at December 31, 2001.

         Stock Incentive Plan: The Company has a Stock Incentive Plan for the
purpose of enhancing the profitability and value of the Company for the benefit
of its shareholders. A maximum of 3,909,000 shares of Common Stock may be issued
or used for reference purposes pursuant to the Stock Incentive Plan.

         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. 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.

         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. Additionally, all options granted prior to January 1, 2002
to employees of the Company's operating subsidiaries fully vest when a
change-in-control of the relevant subsidiary (as defined by the plan) occurs.

         At December 31, 2001 the Company had the authorization under the Stock
Incentive Plan to grant awards for up to an additional 838,651 shares.

         Unearned restricted shares, based on the market value of the shares at
each balance sheet date, are included as a separate component of Shareholders'
equity and amortized over the restricted period. Income of $2 and $6 and
compensation expense of $8 was recognized for the years ended December 31, 2001,
2000 and 1999, respectively.


                                       60




<PAGE>


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


A summary of changes in the awards of restricted stock and options under all
plans (other than awards to non-employee directors) 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, 1998........      2,457,309        $23.81     505,000           $21.15
   Vested and issued................       (218,201)        23.89     (18,000)           19.00
   Cancelled........................        (26,884)        29.27     (31,000)           21.23
   Granted..........................             --            --      82,000            24.52
                                         ----------                 ---------
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
                                         ==========                 =========
</TABLE>


         For stock options outstanding at December 31, 2001, the range of
exercise prices was $15.45 to $34.875 per share, and the estimated
weighted-average remaining contractual life was 5 years. The weighted-average
fair value of stock options at grant date approximated $3 per share, $9 per
share and $10 per share for 2001, 2000 and 1999, respectively, using a
Black-Scholes model with the following assumptions: expected dividend yield of
4.4%, 2.4% and 2.4% for 2001, 2000 and 1999, respectively; risk-free interest
rate of 5% in 2001 and 6% in each of 2000 and 1999; an expected life of 5 years;
and, an expected volatility of 39%, 60% and 50% for 2001, 2000 and 1999,
respectively. At December 31, 2001, 377,000 options were exercisable at an
average price of $21.42 per share option.

         Salary and Bonus Deferral Plan: The Company has a deferred compensation
plan that permits officers and certain management employees to defer 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' equity. At
December 31, 2001, 462,288 shares have been purchased at a total cost of $10 and
are held in the Trust.

         Long Term Incentive Plan: The Company has a Long Term Incentive Plan
for certain management employees. The plan provides for awards of Common Stock
to be granted if annual EVA 'r' targets are achieved. Such earned shares are
held in a trust until vested, which is three years from the date of grant.
Unvested shares will be forfeited. At December 31, 2001, 68,353 shares have been
purchased at a total cost of $1 and are held in trust. Compensation expense was
not significant in 2001, 2000 and 1999.

         Executive Long Term Incentive Plan: In 2000, the Company established an
Executive Long Term Incentive Plan for its senior executives. One half of the
award granted to each executive provides for Common Stock to be granted if
annual EVA'r' targets are achieved. Such earned shares are held in a trust until
vested, which is three years from the date of grant. Unvested shares will be
forfeited. At December 31, 2001, 240,696 shares have been purchased at a total
cost of $4 and are held in trust. The remaining half of the award is based on
the Company's performance against its peer group (companies in the Standard &
Poor's Chemical Composite Index) over a three-year period. This award will be
paid in cash. Compensation expense was $3 in each of 2001 and 2000.

         SFAS No. 123: The Company adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The
impact on net income and earnings per share would have been $1 and $0.01 per
share, respectively, in each of 2001, 2000 and 1999 had compensation expense for
the Company's stock-based compensation plans been determined based on the fair
value of such grants on the grant date in accordance with the provisions of SFAS
No. 123.


                                       61




<PAGE>


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


Note 12 -- 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 $53, $90 and $54 in 2001, 2000 and 1999,
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, 2001, 2000 and 1999, sales to Equistar were $14, $16 and $12,
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
office space, and health, safety and environmental services. The subsidiary
incurred charges of $17, $23 and $19 in 2001, 2000 and 1999, respectively, for
such services. In addition, the subsidiary charged Equistar $18, $13 and $13 in
2001, 2000 and 1999, respectively, for electricity.

Note 13 -- Commitments and Contingencies

         Legal and Environmental: Certain subsidiaries of the Company have been
named as defendants, PRPs or both in a number of environmental proceedings,
including the Kalamazoo River site for which a study group of which the
Company's subsidiary is a member estimates collective remediation liability of
approximately $73. In addition, the Company and various of its subsidiaries are
defendants in a number of other 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 lead 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. The Company believes
that the reasonably probable and estimable range of potential liability for such
contingencies collectively, which primarily relates to environmental remediation
activities and other environmental proceedings, is between $80 and $90 and has
accrued $83 as of December 31, 2001. 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.

         Together with other alleged past manufacturers of lead-based paint and
lead pigments for use in paint, 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, 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 nuisance. These legal proceedings are in various pre-trial stages. The
Company is vigorously defending all lead-related legal proceedings.


                                       62





<PAGE>


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


         Certain Company subsidiaries have been named as defendants, PRPs, or
both, in a number of environmental proceedings associated with waste disposal
sites and facilities currently or previously owned, operated or used by the
Company's subsidiaries or their predecessors, some of which are on the Superfund
National Priorities List of the United States Environmental Protection Agency
("EPA") or similar state lists. The Company has estimated its individual
exposure at these to be between twenty-five thousand US dollars and $29. One
potentially significant Site at which a Company subsidiary is a PRP concerns
alleged polychlorinated biphenyl contamination of a section of the Kalamazoo
River in Michigan. In October 2000, the Kalamazoo River Study Group, of which
the Company's subsidiary is a member, submitted to the State of Michigan a Draft
Remedial Investigation and Draft Feasibility 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. The Company has accrued for its estimated
share of costs for this matter. The EPA has now taken over from the State as
lead agency at the Site. Neither the EPA nor the State of Michigan has commented
on the draft study.

         Celanese filed suit against Millennium Petrochemicals on September 30,
1999 in the United States District Court for the Southern District of Texas
alleging infringement of a Celanese patent relating to acetic acid production
technology. In the suit, Celanese seeks monetary damages and injunctive relief,
including royalties. The Company has substantial defenses to this lawsuit and is
vigorously defending it.

         On January 16, 2002, Slidell filed a lawsuit against Millennium
Inorganic Chemicals 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. The Company believes it has substantial defenses to these
allegations and has filed a counterclaim against Slidell.

         Purchase Commitments: The Company has various agreements for the
purchase of ore used in the production of TiO2 and certain other agreements to
purchase raw materials and utilities with various terms extending through 2020.
The fixed and determinable portion of obligations under purchase commitments
with terms greater than one year at December 31, 2001 (at current exchange
rates, where applicable) is as follows:


<TABLE>
<CAPTION>
                                                                  Ore      Other      Total
                                                                 ----     ------     ------
     <S>                                                      <C>      <C>        <C>
       2002...............................................       $ 73     $  103     $  176
       2003...............................................         74        110        184
       2004...............................................         54         87        141
       2005...............................................         21         88        109
       2006...............................................         --         85         85
       2007 through 2020..................................         --        831        831
                                                                 ----     ------     ------
            Total.........................................       $222     $1,304     $1,526
                                                                 ====     ======     ======
</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 $296.

         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.


                                       63






<PAGE>

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





       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.

Note 14 -- Operations by Business Segment and Geographic Area

       Using the guidelines set forth in SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," the Company's principal
operations are managed and grouped as three separate business segments: Titanium
Dioxide and Related Products; Acetyls; and, Specialty Chemicals. 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
of a general corporate nature and equity in earnings (loss) of Equistar.

       Export sales from the United States for the years ended December 31,
2001, 2000 and 1999 were approximately $245, $201 and $144, respectively.




                                       64





<PAGE>

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



<TABLE>
<CAPTION>

                                                   2001          2000      1999
                                                  ------        ------    ------
<S>                                               <C>           <C>       <C>
Net sales
   Titanium Dioxide and Related Products .....    $1,145        $1,355    $1,250
   Acetyls ...................................       355           337       227
   Specialty Chemicals .......................        90           101       112
                                                  ------        ------    ------
     Total ...................................    $1,590        $1,793    $1,589
                                                  ======        ======    ======

Operating income (loss)
   Titanium Dioxide and Related Products .....    $   49        $  144    $  112
   Acetyls ...................................       (14)           49        27
   Specialty Chemicals .......................        11            20        29
                                                  ------        ------    ------
     Total ...................................    $   46(2)     $  213    $  168
                                                  ======        ======    ======

Depreciation and amortization
   Titanium Dioxide and Related Products .....    $   81        $   85    $   79
   Acetyls ...................................        21            20        18
   Specialty Chemicals .......................         8             8         8
                                                  ------        ------    ------
     Total ...................................    $  110        $  113    $  105
                                                  ======        ======    ======

Capital expenditures
   Titanium Dioxide and Related Products .....    $   82        $   96    $   91
   Acetyls ...................................         6             7        11
   Specialty Chemicals .......................         3             7         7
   Corporate .................................         6            --        --
                                                  ------        ------    ------
     Total ...................................    $   97        $  110    $  109
                                                  ======        ======    ======

Identifiable assets
   Titanium Dioxide and Related Products .....    $1,358        $1,469
   Acetyls ...................................       670           706
   Specialty Chemicals .......................        96           103
   Corporate (1) .............................       880           942
                                                  ------        ------
     Total ...................................    $3,004        $3,220
                                                  =======       ======
</TABLE>


--------------
  (1)  Corporate assets consist primarily of cash and cash equivalents, the
       Company's interest in Equistar and other assets.
  (2)  Includes non-recurring restructuring and plant closure charges of $36.


                                       65





<PAGE>


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


<TABLE>
<CAPTION>

                                                   2001          2000      1999
                                                  ------        ------    ------
<S>                                               <C>           <C>       <C>
Net sales
   United States..........................        $  983        $1,077    $  921
                                                  ------        ------    ------
   Non-United States
     United Kingdom.......................           364           428       325
     France...............................           179           205       213
     Asia/Pacific.........................           160           183       157
     Brazil...............................           113           148       144
                                                  ------        ------    ------
                                                     816           964       839
                                                  ------        ------    ------
   Inter-area elimination.................          (209)         (248)     (171)
                                                  ------        ------    ------
     Total................................        $1,590        $1,793    $1,589
                                                  ======        ======    ======

Operating income (loss)
   United States..........................        $  (18)       $  140    $  173
                                                  ------        ------    ------
   Non-United States
       United Kingdom.....................            (7)           10       (17)
       France.............................            (8)           15         4
       Asia/Pacific.......................            51            55        34
       Brazil.............................            30            21        27
                                                  ------        ------    ------
                                                      66           101        48
                                                  ------        ------    ------
   Inter-area elimination.................            (2)          (28)      (53)
                                                  ------        ------    ------
     Total................................        $   46(1)     $  213    $  168
                                                  ======        ======    ======

Identifiable assets
     United States........................        $2,168        $2,299
                                                  ------        ------
     Non-United States
     United Kingdom.......................           363           392
     France...............................           216           199
     Asia/Pacific.........................           114           119
     Brazil...............................           134           160
     All Other............................             9            51
                                                  ------        ------
                                                     836           921
                                                  ------        ------
     Total................................        $3,004        $3,220
                                                  ======        ======

</TABLE>


--------------
  (1) Includes non-recurring restructuring and plant closure charges of $36.


                                       66






<PAGE>


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




Note 15 -- Quarterly Financial Data (unaudited)

<TABLE>
<CAPTION>

                                                            1st Qtr.      2nd Qtr.       3rd Qtr.     4th Qtr.
                                                            --------      --------       --------     --------
<S>                                                            <C>            <C>           <C>           <C>
2001
----
Net sales...............................................       $  444         $  419        $  393        $ 334
Operating income (loss).................................           25(1)          (2)(3)        23           --
Net (loss) income.......................................          (16)(2)        (23)(4)       (12)           8(5)
Basic (loss) earnings per share.........................        (0.24)         (0.37)        (0.20)        0.13
Diluted (loss) earnings per share.......................        (0.24)         (0.37)        (0.20)        0.13

2000
----
Net sales...............................................       $  423         $  463        $  473        $ 434
Operating income........................................           46             53            54           60
Net income..............................................           25             48            35           14
Basic earnings per share................................         0.38           0.75          0.56         0.22
Diluted earnings per share..............................         0.37           0.74          0.55         0.22
</TABLE>

--------------
  (1)  Includes non-recurring restructuring and plant closure charges of $5.
  (2)  Includes after-tax non-recurring restructuring and plant closure charges
       of $4, and an additional $4 representing the Company's after-tax share of
       costs related to the shutdown of Equistar's Port Arthur, Texas plant.
  (3)  Includes non-recurring restructuring and plant closure charges of $31.
  (4)  Includes after-tax non-recurring restructuring and plant closure
       charges of $20.
  (5)  Includes benefit of $42 from reduction of income tax accruals due to
       favorable developments related to matters reserved for in prior years.


                                       67





<PAGE>



                                     PART IV

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

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

1. Supplemental Financial Information.

       The Supplemental Financial Information relating to the Company,
       Millennium America and Equistar consist of the following:

<TABLE>
<CAPTION>
                                                                                            Page of
                                                                                          This Report
                                                                                          -----------
<S>                                                                                           <C>
       Supplemental Financial Information of the Company:
          Supplemental Financial Information............................................      F-1
          Condensed Consolidating Balance Sheets-- December 31, 2001 and 2000...........      F-2
          Condensed Consolidating Statements of Operations - Years Ended December 31,
            2001, 2000 and 1999.........................................................      F-3
          Condensed Consolidating Statements of Cash Flows - Years Ended December 31,
            2001, 2000 and 1999.........................................................      F-4
       Financial Statements of Equistar:
          Report of PricewaterhouseCoopers LLP..........................................      F-6
          Consolidated Statements of Income-- Years Ended December 31, 2001, 2000 and
            1999........................................................................      F-7
          Consolidated Balance Sheets-- December 31, 2001 and 2000......................      F-8
          Consolidated Statements of Cash Flows-- Years Ended December 31, 2001, 2000
            and 1999....................................................................      F-9
          Consolidated Statements of Partners' Capital-- Years Ended December 31, 2001,
            2000 and 1999...............................................................     F-10
          Notes to Consolidated Financial Statements....................................  F-11 to F-27
</TABLE>


2. 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.

3. Exhibits.

<TABLE>
<CAPTION>
    Exhibit
     Number                         Description of Document
    -------                         -----------------------
     <S>        <C>
       3.1       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"))*

       3.2       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"))*
</TABLE>

                                       68




<PAGE>


<TABLE>
<CAPTION>
    Exhibit
     Number      Description
     ------      -----------
       <S>       <C>
       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"))*

      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)*

      10.7       Form of Agreement, dated as of July 24, 1998, between
                 Millennium America Holdings Inc. and William M. Landuyt, Robert
                 E. Lee, C. William Carmean, Richard A. Lamond, and John E.
                 Lushefski (Filed as Exhibit 10.1 to the Company's Quarterly
                 Report on Form 10-Q for the quarter ended September 30, 1998
                 (the "September 30, 1998, Form 10-Q"))*'D'

      10.8       Form of Agreement, dated as of July 24, 1998, between each of
                 the Company's operating subsidiaries and certain officers of
                 such subsidiaries. (Filed as Exhibit 10.2 to the September 30,
                 1998, Form 10-Q)*'D'

      10.9       Form of Agreement, dated as of July 24, 1998, between
                 Millennium Petrochemicals Inc. and each of Peter P. Hanik and
                 Charles F. Daly (Filed as Exhibit 10.17 to the Company's Annual
                 Report on Form 10-K for the year ended December 31, 1998 (the
                 "1998 Form 10-K"))*'D'

      10.10      Form of Change-in-Control Agreement, dated as of July 24, 1998,
                 between Millennium America Holdings Inc. and each of A.
                 Mickelson Foster, James A. Lofredo, Corey A. Siegel and
                 Christine F. Wubbolding (Filed as Exhibit 10.2 to the September
                 30, 1998 Form 10-Q)*'D'

      10.11      Form of Change-in-Control Agreement between each of the
                 Company's operating subsidiaries and certain officers of such
                 subsidiaries who are not executive officers of the Company
                 (Filed as Exhibit 10.19 to the 1998 Form 10-K)*'D'

</TABLE>

                                       69




<PAGE>


<TABLE>
<CAPTION>
     Exhibit
      Number     Description
     -------     ------------
      <S>        <C>
      10.12(a)   Millennium Chemicals Inc. Annual Performance Incentive Plan
                 (Filed as Exhibit 10.23 to the Form 10)*'D'

      10.12(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'

      10.12(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'

      10.12(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'

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

      10.13(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'

      10.13(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'

      10.13(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'

      10.14      Millennium Chemicals Inc. Supplemental Executive Retirement
                 Plan (Filed as Exhibit 10.15(a) to the Company's Annual Report
                 on Form 10-K for the year ended December 31, 2000 (the "2000
                 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'

      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'

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

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

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

      10.23      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'

      10.24(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(G) to the 2001 Form
                 10-K)*'D'
</TABLE>

                                       70




<PAGE>


<TABLE>
<CAPTION>
     Exhibit
      Number     Description
     --------    -----------
      <S>        <C>
      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 as amended through August 24, 2001 (Filed as
                 Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for
                 the quarter ended September 30, 2001 (the "September 30, 2001
                 Form 10-Q))*

      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 (Filed as Exhibit 10.27(c) to the
                 2001 10-K)*

      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)*

      10.29(a)   Amended and Restated Parent Agreement among Lyondell, the
                 Company, Occidental, Oxy CH Corporation, Occidental Chemical
                 Corporation, and Equistar, dated as of May 15, 1998, (Filed as
                 Exhibit 10.37 to the 1998 Form 10-K)*

      10.29(b)   First Amendment to Amended and Restated Parent Agreement, dated
                 as of June 30, 1998 (Filed as Exhibit 10.25(b) to the 1999 form
                 10-K)*

      10.30(a)   Letter Agreement dated as of August 24, 2001 between Millennium
                 America Inc. and Equistar (Filed as Exhibit 10.3 to the
                 September 30, 2001 Form 10-Q)*

      10.30(b)   Indemnity Agreement dated as of August 24, 2001 between
                 Millennium America Inc. and Equistar (Filed as Exhibit 10.4 to
                 the September 30, 2001 Form 10-Q)*

      10.30(c)   Indemnity Agreement dated as of August 24, 2001 between
                 Millennium America Inc. and Equistar (Filed as Exhibit 10.5 to
                 the September 30, 2001 Form 10-Q)*

      11.1       Statement re: computation of per share earnings (filed as
                 Exhibit 11.1 to the 2001 Form 10-K)*

      21.1       Subsidiaries of the Company (filed as Exhibit 21.1 to the 2001
                 Form 10-K)*

      23.1       Consent of PricewaterhouseCoopers LLP (filed as Exhibit 23.1 to
                 the 2001 Form 10-K)*

      23.2       Consent of PricewaterhouseCoopers LLP (filed as Exhibit 23.2 to
                 the 2001 Form 10-K)*


      23.3       Consent of PricewaterhouseCoopers LLP (Filed as Exhibit 23.3 to
                 the Company's Form 10-K/A for the year ended December 31, 2001
                 filed on August 14, 2002 (the "2001 Form 10-K/A"))*

      23.4       Consent of PricewaterhouseCoopers LLP (Filed as Exhibit 23.4 to
                 the 2001 Form 10-K/A)*

      23.5       Consent of PricewaterhouseCoopers LLP**

      23.6       Consent of PricewaterhouseCoopers LLP**

      99.1       Information relevant to forward-looking statements (filed as
                 Exhibit 99.1 to the 2001 Form 10-K)*

      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 SEC, 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).

                                       71




<PAGE>


(b) Reports on Form 8-K.

Current Reports on Form 8-K dated October 3, 2001, October 30, 2001, December
19, 2001, February 1, 2002 and March 20, 2002 were filed during the quarter
ended December 31, 2001 and through the date hereof.

                                       72




<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                           MILLENNIUM CHEMICALS INC.

                                           By:      /s/ JOHN E. LUSHEFSKI
                                               ---------------------------------
                                                       John E. Lushefski
                                                   Senior Vice President and
                                                    Chief Financial Officer

November 26, 2002

                                 CERTIFICATIONS

I, William M. Landuyt, Chairman, Chief Executive Officer and President of
Millennium Chemicals Inc., certify that:

         1.    I have reviewed this amended annual report on Form 10-K of
               Millennium Chemicals Inc.;

         2.    Based on my knowledge, this report does not contain any untrue
               statement of a material fact or omit to state a material fact
               necessary to make the statements made, in light of the
               circumstances under which such statements were made, not
               misleading with respect to the period covered by this report; and

         3.    Based on my knowledge, the financial statements, and other
               financial information included in this report, fairly present in
               all material respects the financial condition, results of
               operations and cash flows of the registrant as of, and for, the
               periods presented in this report.

Date: November 26, 2002

                                             /s/ William M. Landuyt
                                 -----------------------------------------------
                                                 William M. Landuyt
                                 Chairman, Chief Executive Officer and President
                                          (Principal Executive Officer)

I, John E. Lushefski, Senior Vice President and Chief Financial Officer of
Millennium Chemicals Inc., certify that:

         1.    I have reviewed this amended annual report on Form 10-K of
               Millennium Chemicals Inc.;

         2.    Based on my knowledge, this report does not contain any untrue
               statement of a material fact or omit to state a material fact
               necessary to make the statements made, in light of the
               circumstances under which such statements were made, not
               misleading with respect to the period covered by this report; and

         3.    Based on my knowledge, the financial statements, and other
               financial information included in this report, fairly present in
               all material respects the financial condition, results of
               operations and cash flows of the registrant as of, and for, the
               periods presented in this report.

Date: November 26, 2002

                                             /s/ John E. Lushefski
                               -------------------------------------------------
                                               John E. Lushefski
                               Senior Vice President and Chief Financial Officer
                                         (Principal Financial Officer)

                                       73






<PAGE>


                            MILLENNIUM CHEMICALS INC.
                       SUPPLEMENTAL FINANCIAL INFORMAITON


       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 Company's
five-year Credit Agreement, which replaced the Company's previously existing
Revolving 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, 2001 and 2000, and the Condensed
Consolidating Statements of Operations and Cash Flows for each of the three
years in the period ended December 31, 2001, are provided for Millennium
Chemicals Inc. as supplemental financial information of the Company to disclose
the financial position, results of operations and cash flows of the Company,
Millennium America and all subsidiaries of the Company other than Millennium
America. The investment in subsidiaries is accounted for on the equity method.






                                      F-1





<PAGE>


                            MILLENNIUM CHEMICALS INC.
                     CONDENSED CONSOLIDATING BALANCE SHEETS
                        As of December 31, 2001 and 2000


<TABLE>
<CAPTION>

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

<S>                                          <C>           <C>             <C>           <C>              <C>
2001
----
               ASSETS

Inventories............................        $   --        $   --          $  370        $    --          $  370
Other current assets...................             6            --             384             --             390
Property, plant and equipment, net.....            --            --             880             --             880
Investment in Equistar.................            --            --             677             --             677
Investment in subsidiaries.............         1,061           968              --         (2,029)             --
Other assets...........................            13            --             296             --             309
Goodwill...............................            --            --             378             --             378
Due from parent and affiliates, net....           590            --              --           (590)             --
                                               ------        ------          ------        -------          ------
   Total assets........................        $1,670        $  968          $2,985        $(2,619)         $3,004
                                               =======       =======         =======       ========         =======
LIABILITIES AND SHAREHOLDERS' EQUITY

Current maturities of long-term debt...        $    3        $   --          $    8        $    --          $   11
Other current liabilities..............             8            --             364             --             372
Long-term debt.........................         1,156            --              16             --           1,172
Other liabilities......................            --             1             549             --             550
Due to parent and affiliates, net......            --            89             501           (590)             --
                                               ------        ------          ------        -------          ------
   Total liabilities...................         1,167            90           1,438           (590)          2,105
Minority interest......................            --            --              21             --              21
Shareholders' equity...................           503           878           1,526         (2,029)            878
                                               ------        ------          ------        -------          ------
   Total liabilities and
     shareholders' equity..............        $1,670        $  968          $2,985        $(2,619)         $3,004
                                               =======       =======         =======       ========         =======
2000
----
               ASSETS

Inventories............................        $   --        $   --          $  373        $    --          $  373
Other current assets...................             1            --             513             --             514
Property, plant and equipment, net.....            --            --             957             --             957
Investment in Equistar.................            --            --             760             --             760
Investment in subsidiaries.............         1,098         1,033              --         (2,131)             --
Other assets...........................             3            --             222             --             225
Goodwill...............................            --            --             391             --             391
Due from parent and affiliates, net....           592            --              --           (592)             --
                                               ------        ------          ------        -------          ------
   Total assets........................        $1,694        $1,033          $3,216        $(2,723)         $3,220
                                               =======       =======         =======       ========         =======
LIABILITIES AND SHAREHOLDERS' EQUITY

Current maturities of long-term debt...        $  360        $   --          $   31        $    --          $  391
Other current liabilities..............            24            --             368             --             392
Long-term debt.........................           749            --              18             --             767
Other liabilities......................            --             3             662             --             665
Due to parent and affiliates, net......            --            47             545           (592)             --
                                               ------        ------          ------        -------          ------
   Total liabilities...................         1,133            50           1,624           (592)          2,215
Minority interest......................            --            --              22             --              22
Shareholders' equity...................           561           983           1,570         (2,131)            983
                                               ------        ------          ------        -------          ------
   Total liabilities and
     shareholders' equity..............        $1,694        $1,033          $3,216        $(2,723)         $3,220
                                               =======       =======         =======       ========         =======

</TABLE>




                                      F-2





<PAGE>


                            MILLENNIUM CHEMICALS INC.
                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
              For the Years Ended December 31, 2001, 2000, and 1999

<TABLE>
<CAPTION>

                                                                                                          Millennium
                                                                                                           Chemicals
                                        Millennium      Millennium     Non-Guarantor                       Inc. and
                                       America Inc.   Chemicals Inc.   Subsidiaries     Eliminations     Subsidiaries
                                       -------------  --------------- ----------------  ------------    --------------
                                                                       (Millions)
<S>                                     <C>              <C>             <C>                <C>            <C>
2001
----
Net sales.......................         $  --            $  --           $1,590           $  --            $1,590
Cost of products sold...........            --               --            1,252              --             1,252
Depreciation and amortization...            --               --              110              --               110
Selling, development and
   administrative expense.......            --               --              146              --               146
Reorganization and plant
   closure......................            --               --               36              --                36
                                         -----            -----           ------           -----            ------
   Operating income.............            --               --               46              --                46
Interest expense, net...........           (81)              --               (1)             --               (82)
Intercompany interest income
   (expense)....................           108               (4)            (104)             --                --
Equity in loss of Equistar......            --               --              (90)             --               (90)
Equity in (loss) of
   subsidiaries.................           (62)             (40)              --             102                --
Other expense, net..............            (2)              (1)              --              --                (3)
Income taxes....................            (9)               2               93              --                86
                                         -----            -----           ------           -----            ------
   Net loss.....................         $ (46)           $ (43)          $  (56)          $ 102            $  (43)
                                         =====            =====           ======           =====            ======
2000
----
Net sales.......................         $  --            $  --           $1,793           $  --            $1,793
Cost of products sold...........            --               --            1,267              --             1,267
Depreciation and amortization...            --               --              113              --               113
Selling, development and
   administrative expense.......            --               --              200              --               200
                                         -----            -----           ------           -----            ------
   Operating income.............            --               --              213              --               213
Interest expense, net...........           (76)              --               (1)             --               (77)
Intercompany interest income
   (expense)....................           109               (4)            (105)             --                --
Equity in earnings of
   Equistar.....................            --               --               39              --                39
Equity in earnings of
   subsidiaries.................            59              125               --            (184)               --
Other income (expense), net.....            --               --                7              --                 7
Income taxes....................           (12)               1              (49)             --               (60)
                                         -----            -----           ------           -----            ------
   Net income...................         $  80            $ 122           $  104           $(184)           $  122
                                         =====            =====           ======           =====            ======
1999
----
Net sales.......................         $  --            $  --           $1,589           $  --            $1,589
Cost of products sold...........            --               --            1,112              --             1,112
Depreciation and amortization...            --               --              105              --               105
Selling, development and
   administrative expense.......            --               --              204              --               204
                                         -----            -----           ------           -----            ------
   Operating income.............            --               --              168              --               168
Interest expense, net...........           (65)              --               (4)             --               (69)
Intercompany interest income
   (expense)....................           111               --             (111)             --                --
Equity in loss of Equistar......            --               --              (19)             --               (19)
Equity in loss of subsidiaries..          (336)            (287)              --             623                --
Loss in value of Equistar
   investment...................            --               --             (639)             --              (639)
Other expense (income), net.....            --               (1)              25              --                24
Income from discontinued
   operations (net of tax)......            --               --               38              --                38
Income taxes....................           (16)              --              225              --               209
                                         -----            -----           ------           -----            ------
   Net loss.....................         $(306)           $(288)          $ (317)          $ 623            $ (288)
                                         =====            =====           ======           =====            ======

</TABLE>



                                      F-3





<PAGE>


                            MILLENNIUM CHEMICALS INC.
                CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
              For the Years Ended December 31, 2001, 2000, and 1999

<TABLE>
<CAPTION>

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

<S>                                    <C>              <C>             <C>                <C>            <C>
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
                                            ======          =====          ======          =====           ======
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>



                                      F-4





<PAGE>


                            MILLENNIUM CHEMICALS INC.
          CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS -- Continued
              For the Years Ended December 31, 2001, 2000, and 1999

<TABLE>
<CAPTION>

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

<S>                                      <C>             <C>             <C>                <C>            <C>
1999
----
Cash flows from operating
   activities.....................            $  31           $ (3)           $  (5)        $  --        $    23
Cash flows from investing
   activities
   Capital expenditures...........               --             --             (109)           --           (109)
   Distributions from Equistar....               --             --               75            --             75
   Proceeds from syngas
     transaction..................               --             --              123            --            123
   Proceeds from sale of Suburban
     Propane investment...........               --             --               75            --             75
   Proceeds from sales of
     property plant & equipment...               --             --               13            --             13
                                              ------          -----           ------        ------         ------
       Cash provided by investing
         activities...............               --             --              177            --            177
                                              ------          -----           ------        ------         ------
   Cash flows from financing
     activities ..................               --            (38)              --            --            (38)
   Dividends to shareholders......
   Repurchase of common stock.....               --             --             (200)           --           (200)
   Proceeds from long-term debt...              115             --                3            --            118
   Repayment of long-term debt....              (66)            --              (27)           --            (93)
   Intercompany...................             (106)            41               65            --             --
   Increase in notes payable......               26             --                1            --             27
                                              ------          -----           ------        ------         ------
     Cash (used in) provided by
       financing activities.......              (31)             3             (158)           --           (186)
                                              ------          -----           ------        ------         ------
Effect of exchange rate changes
   on cash........................               --             --               (7)           --             (7)
                                              ------          -----           ------        ------         ------
Increase in cash and cash
   equivalents....................               --             --                7            --              7
Cash and cash equivalents at
   beginning of year..............               --             --              103            --            103
                                              ------          -----           ------        ------         ------
Cash and cash equivalents at end
of year...........................            $  --           $ --            $ 110         $  --          $ 110
                                              ======          =====           ======        ======         ======

</TABLE>



                                      F-5




<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Partnership Governance Committee of
EQUISTAR CHEMICALS, LP

         In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of partners' capital and of cash
flows present fairly, in all material respects, the financial position of
Equistar Chemicals, LP (the "Partnership") and its subsidiaries at December 31,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
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.

/s/ PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP
Houston, Texas
March 8, 2002

                                      F-6





<PAGE>


                             EQUISTAR CHEMICALS, LP
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                      For the Year Ended December 31,
                                                               ---------------------------------------------
                                                                2001              2000                1999
                                                               ------            ------              -------
                                                                           (Millions of dollars)
<S>                                                            <C>                <C>                <C>
Sales and other operating revenues:
   Unrelated parties....................................       $4,583             $5,770             $4,506
   Related parties......................................        1,326              1,725              1,088
                                                               ------             ------             ------
                                                                5,909              7,495              5,594
                                                               ------             ------             ------
Operating costs and expenses:
   Cost of sales........................................        5,733              6,908              5,002
   Selling, general and administrative expenses.........          181                182                259
   Research and development expense.....................           39                 38                 42
   Amortization of goodwill.............................           33                 33                 33
   Unusual charges......................................           22                 --                 96
                                                               ------             ------             ------
                                                                6,008              7,161              5,432
                                                               ------             ------             ------
     Operating income (loss)............................          (99)               334                162
Interest expense........................................         (192)              (185)              (182)
Interest income.........................................            3                  4                  6
Other income, net.......................................            8                 --                 46
                                                               ------             ------             ------
   Income (loss) before extraordinary item..............         (280)               153                 32
Extraordinary loss on extinguishment of debt............           (3)                --                 --
                                                               ------             ------             ------
Net income (loss).......................................       $ (283)            $  153             $   32
                                                               ======             ======             ======

</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-7




<PAGE>


                             EQUISTAR CHEMICALS, LP
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                    -----------------------
                                                                                      2001            2000
                                                                                    --------        -------
                                                                                      (Millions of dollars)
<S>                                                                                  <C>            <C>
                                             ASSETS
Current assets:
   Cash and cash equivalents.....................................................    $  202         $   18
   Accounts receivable:
     Trade, net..................................................................       440            568
     Related parties.............................................................       100            190
   Inventories...................................................................       448            506
   Prepaid expenses and other current assets.....................................        36             50
                                                                                     ------         ------
     Total current assets........................................................     1,226          1,332
Property, plant and equipment, net...............................................     3,705          3,819
Investment in PD Glycol..........................................................        47             53
Goodwill, net....................................................................     1,053          1,086
Other assets, net................................................................       277            292
                                                                                     ------         ------
     Total assets................................................................    $6,308         $6,582
                                                                                     ======         ======

                         LIABILITIES AND PARTNERS' CAPITAL

Current liabilities:
   Accounts payable:
     Trade.......................................................................    $  331         $  426
     Related parties.............................................................        29             61
   Current maturities of long-term debt..........................................       104             90
   Accrued liabilities...........................................................       197            166
                                                                                     ------         ------
     Total current liabilities...................................................       661            743
Long-term debt...................................................................     2,233          2,158
Other liabilities................................................................       177            141
Commitments and contingencies....................................................        --             --
Partners' capital:
   Partners' accounts............................................................     3,257          3,540
   Accumulated other comprehensive income (loss).................................       (20)            --
                                                                                     ------         ------
     Total partners' capital.....................................................     3,237          3,540
                                                                                     ------         ------
     Total liabilities and partners' capital.....................................    $6,308         $6,582
                                                                                     ======         ======

</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-8




<PAGE>


                             EQUISTAR CHEMICALS, LP
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                         For the Year Ended
                                                                                             December 31,
                                                                                      --------------------------
                                                                                       2001      2000      1999
                                                                                      ------    -----     ------
                                                                                         (Millions of dollars)
<S>                                                                                   <C>       <C>       <C>
Cash flows from operating activities:
   Net income (loss)...........................................................       $(283)    $ 153     $  32
   Adjustments to reconcile net income (loss) to cash provided by operating
     activities:
     Depreciation and amortization.............................................         321       310       300
     Net (gain) loss on disposition of assets..................................          (3)        5        35
     Extraordinary loss on extinguishment of debt..............................           3        --        --
   Changes in assets and liabilities that provided (used) cash
     Accounts receivable.......................................................         220       (58)     (213)
     Inventories...............................................................          61        14        17
     Accounts payable..........................................................        (129)       28       119
     Accrued liabilities.......................................................          30       (65)       82
     Other assets and liabilities..............................................          10       (48)      (28)
                                                                                     ------     -----     -----
     Cash provided by operating activities.....................................         230       339       344
                                                                                     ------     -----     -----
Cash flows from investing activities:
   Expenditures for property, plant and equipment..............................        (110)     (131)     (157)
   Proceeds from sales of assets...............................................          10         4        75
   Purchase of business from AT Plastics, Inc..................................          (7)       --        --
                                                                                     ------     -----     -----
     Cash used in investing activities.........................................        (107)     (127)      (82)
                                                                                     ------     -----     -----
Cash flows from financing activities:
   Net borrowing (payments) under lines of credit..............................        (820)       20      (502)
   Proceeds from issuance of long-term debt....................................       1,000        --       898
   Repayment of other long-term debt...........................................         (91)      (42)     (150)
   Repayment of obligations under capital leases...............................          --        --      (205)
   Distributions to partners...................................................          --      (280)     (255)
   Other.......................................................................         (28)       --        (6)
                                                                                     ------     -----     -----
     Cash provided by (used in) financing activities...........................          61      (302)     (220)
                                                                                     ------     -----     -----
Increase (decrease) in cash and cash equivalents...............................         184       (90)       42
Cash and cash equivalents at beginning of period...............................          18       108        66
                                                                                     ------     -----     -----
Cash and cash equivalents at end of period.....................................      $  202     $  18     $ 108
                                                                                     ======     =====     =====
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                      F-9




<PAGE>


                             EQUISTAR CHEMICALS, LP
                  CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

<TABLE>
<CAPTION>
                                                                                       Accumulated
                                                   Partners' Accounts                    Other
                                     --------------------------------------------    Comprehensive   Comprehensive
                                     Lyondell   Millennium    Occidental    Total     Income (loss)   Income (loss)
                                     --------   ----------    ----------    -----    --------------  ---------------
                                                                 (Millions of dollars)
<S>                                   <C>        <C>           <C>         <C>           <C>             <C>
Balance at January 1,
   1999 ............................. $   613    $ 1,621       $ 1,651     $ 3,885        $    --         $   --

   Net income .......................      14          9             9          32             --             32
   Distributions to partners ........    (105)       (75)          (75)       (255)            --             --
                                      -------    -------       -------     -------        -------         ------
   Comprehensive income .............                                                                     $   32
                                                                                                          ======
Balance at December 31,
   1999 .............................     522      1,555         1,585       3,662             --             --
   Net income .......................      63         45            45         153             --            153
   Distributions to partners ........    (114)       (83)          (83)       (280)            --             --
   Other ............................       5         --            --           5             --             --
                                      -------    -------       -------     -------        -------         ------
   Comprehensive income .............                                                                     $  153
                                                                                                          ======

Balance at December 31,
   2000 .............................     476      1,517         1,547       3,540             --             --
   Net loss .........................    (115)       (84)          (84)       (283)            --           (283)
   Other comprehensive
     income:
     Unrealized loss on
       securities ...................      --         --            --          --             (1)            (1)
     Minimum pension
       liability ....................      --         --            --          --            (19)           (19)
                                      -------    -------       -------     -------        -------         ------
   Comprehensive loss ...............                                                                     $ (303)
                                                                                                          ======
Balance at December 31, .............
   2001                               $   361    $ 1,433       $ 1,463     $ 3,257        $   (20)
                                      =======    =======       =======     =======        =======

</TABLE>

                 See Notes to Consolidated Financial Statements

                                      F-10







<PAGE>


                             EQUISTAR CHEMICALS, LP
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.     Formation of the Partnership and Operations

       Lyondell Chemical Company ("Lyondell") and Millennium Chemicals Inc.
("Millennium") formed Equistar Chemicals, LP ("Equistar" or "the Partnership"),
a Delaware limited partnership, which commenced operations on December 1, 1997.
On May 15, 1998, Equistar was expanded with the contribution of certain assets
from Occidental Petroleum Corporation ("Occidental"). Equistar is currently
owned 41% by Lyondell, 29.5% by Millennium and 29.5% by Occidental, all through
wholly owned subsidiaries (see also Note 18).

       Equistar owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium and Occidental, which consist of 18
manufacturing facilities primarily on the U.S. Gulf Coast and in the U.S.
Midwest. The petrochemicals segment manufactures and markets olefins, oxygenated
products, aromatics and specialty products. Olefins include ethylene, propylene
and butadiene, and oxygenated products include ethylene oxide, ethylene glycol,
ethanol and methyl tertiary butyl ether ("MTBE"). The petrochemicals segment
also includes the production and sale of aromatics, including benzene and
toluene. The polymers segment manufactures and markets polyolefins, including
high-density polyethylene ("HDPE"), low-density polyethylene ("LDPE"), linear
low-density polyethylene ("LLDPE"), polypropylene, and performance polymers, all
of which are used in the production of a wide variety of consumer and industrial
products. The performance polymers include enhanced grades of polyethylene,
including wire and cable insulating resins, and polymeric powders.

       Equistar is governed by a Partnership Governance Committee consisting of
nine representatives, three appointed by each general partner. Most of the
significant decisions of the Partnership Governance Committee require unanimous
consent, including approval of the Partnership's strategic plan and annual
updates thereof. Distributions are made to the partners based upon their
percentage ownership of Equistar. Additional cash contributions required by the
Partnership are also based upon the partners' percentage ownership of Equistar.

2.     Summary of Significant Accounting Policies

       Basis of Presentation -- The consolidated financial statements include
the accounts of Equistar and its wholly owned subsidiaries.

       Revenue Recognition -- Revenue from product sales is recognized as risk
and title to the product transfer to the customer, which usually occurs when
shipment is made.

       Cash and Cash Equivalents -- Cash equivalents consist of highly liquid
debt instruments such as certificates of deposit, commercial paper and money
market accounts purchased with an original maturity date of three months or
less. Cash equivalents are stated at cost, which approximates fair value.
Equistar's policy is to invest cash in conservative, highly rated instruments
and limit the amount of credit exposure to any one institution. Equistar
performs periodic evaluations of the relative credit standing of these financial
institutions which are considered in Equistar's investment strategy.

       Equistar has no requirements for compensating balances in a specific
amount at a specific point in time. The Partnership does maintain compensating
balances for some of its banking services and products. Such balances are
maintained on an average basis and are solely at Equistar's discretion. As a
result, none of Equistar's cash is restricted.

       Inventories -- Inventories are stated at the lower of cost or market.
Cost is determined on the last-in, first-out ("LIFO") basis, except for
materials and supplies, which are valued at average cost. Inventory exchange
transactions, which involve homogeneous commodities in the same line of business
and do not involve the payment or receipt of cash, are not accounted for as
purchases and sales. Any resulting volumetric exchange balances are accounted
for as inventory in accordance with the normal LIFO valuation policy.

       Property, Plant and Equipment -- Property, plant and equipment are
recorded at cost. Depreciation of property, plant and equipment is computed
using the straight-line method over the estimated useful lives of the related
assets, generally 25 years for major manufacturing equipment, 30 years for
buildings, 10 to 15 years for light equipment and instrumentation, 15 years for
office furniture and 3 to 5 years for information systems equipment. Upon
retirement or sale, Equistar removes the cost of the assets and the related
accumulated depreciation from the accounts and reflects any resulting gains or
losses in the Consolidated Statement of Income. Equistar's policy is to
capitalize interest cost incurred on debt during the construction of major
projects exceeding one year.


                                      F-11





<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


       Long-Lived Asset Impairment -- Equistar evaluates long-lived assets,
including identifiable intangible assets, for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. When it is probable that undiscounted future cash flows will not
be sufficient to recover an asset's carrying amount, the asset is written down
to its fair value. Long-lived assets to be disposed of are reported at the lower
of carrying amount or fair value less cost to sell. Beginning in 2002, as
discussed below, goodwill will be reviewed for impairment under SFAS No. 142
based on fair values.

       Investment in PD Glycol -- Equistar holds a 50% interest in a joint
venture with E.I. DuPont de Nemours and Company that owns an ethylene glycol
facility in Beaumont, Texas. This investment was contributed by Occidental in
1998. The investment in PD Glycol is accounted for using the equity method of
accounting. At December 31, 2001 and 2000, Equistar's underlying equity in the
net assets of PD Glycol exceeded the cost of the investment by $7 million. The
excess is being accreted into income on a straight-line basis over a period of
25 years.

       Goodwill -- Goodwill includes goodwill contributed by Millennium and
goodwill recorded in connection with the contribution of Occidental's assets.
Goodwill is being amortized using the straight-line method over 40 years, the
estimated useful life. Amortization of goodwill will cease as of January 1, 2002
as described below under Recent Accounting Standards.

       Turnaround Maintenance and Repairs Costs -- Cost of maintenance and
repairs incurred in connection with turnarounds of major units at Equistar's
manufacturing facilities exceeding $5 million are deferred and amortized using
the straight-line method until the next planned turnaround, generally four to
six years. These costs are maintenance, repair and replacement costs that are
necessary to maintain, extend and improve the operating capacity and efficiency
rates of the production units.

       Deferred Software Costs -- Costs to purchase and to develop software for
internal use are deferred and amortized on a straight-line basis over a range of
3 to 10 years.

       Environmental Remediation Costs -- Anticipated expenditures related to
investigation and remediation of contaminated sites, which include operating
facilities and waste disposal sites, are accrued when it is probable a liability
has been incurred and the amount of the liability can be reasonably estimated.
The estimated liabilities have not been discounted to present value.

       Income Taxes -- The Partnership is not subject to federal income taxes as
income is reportable directly by the individual partners; therefore, there is no
provision for income taxes in the accompanying financial statements.

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

       Accounting Changes Adopted in 2001 -- As of January 1, 2001, Equistar
adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities.
Under SFAS No. 133, all derivative instruments are recorded on the balance sheet
at fair value. Gains or losses from changes in the fair value of derivatives
used as cash flow hedges are deferred in accumulated other comprehensive income,
to the extent the hedge is effective, and subsequently reclassified to earnings
to offset the impact of the related forecasted transaction. Implementation of
SFAS No. 133 and SFAS No. 138 did not have a material effect on the consolidated
financial statements of Equistar.

       Recent Accounting Standards -- In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. SFAS
No. 141 is effective for business combinations initiated after June 30, 2001 and
is not expected to have a material effect on intangible assets acquired in
business combinations effected prior to July 1, 2001. SFAS No. 142 prescribed
the discontinuance of amortization of goodwill as well as annual review of
goodwill for impairment. Equistar expects the implementation of SFAS No. 142 to
result in the impairment of the entire balance of goodwill, resulting in a $1.1
billion charge that will be reported as the cumulative effect of a change in
accounting principle as of January 1, 2002. Earnings in 2002 and subsequent
years will be favorably affected by $33 million annually because of the
elimination of goodwill amortization.



                                      F-12





<PAGE>

                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


       In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. In October 2001, the FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Adoption of SFAS
No. 143 and SFAS No. 144 in calendar years 2003 and 2002, respectively, is not
expected to have a material effect on the consolidated financial statements of
Equistar.

       Reclassifications -- Certain previously reported amounts have been
reclassified to conform to classifications adopted in 2001.

3.     Unusual Charges

       Equistar shut down its Port Arthur, Texas polyethylene facility in
February 2001. The asset values of the Port Arthur production units were
previously adjusted as part of a $96 million restructuring charge recognized in
1999, as discussed below. During the first quarter 2001, Equistar recorded an
additional $22 million charge, which included environmental remediation
liabilities of $7 million (see Note 15), severance benefits of $5 million,
pension benefits of $2 million, and other exit costs of $3 million. The
severance and pension benefits covered approximately 125 people employed at the
Port Arthur facility. The remaining $5 million of the charge related primarily
to the write down of certain assets. Payments of $4 million for severance, $3
million for exit costs and $1 million for environmental remediation were made
through December 31, 2001. The pension benefits of $2 million will be paid from
the assets of the pension plans. As of December 31, 2001, the remaining
liability included $6 million for environmental remediation costs and $1 million
for severance benefits.

       During 1999, Equistar recorded a charge of $96 million associated with
decisions to shut down certain polymer reactors and to consolidate certain
administrative functions between Lyondell and Equistar. Accordingly, Equistar
recorded a charge of $72 million to adjust the asset carrying values. The
remaining $24 million of the total charge represented severance and other
employee-related costs for approximately 500 employee positions that were
eliminated. The eliminated positions, primarily administrative functions,
resulted from opportunities to share such services between Lyondell and
Equistar. Through December 31, 2001, approximately $19 million of severance and
other employee-related costs had been paid and charged against the accrued
liability. As of December 31, 2001, all of the employee terminations had been
completed and the remaining liability of $5 million was eliminated.

4.     Extraordinary Item

       As part of the third quarter 2001 refinancing (see Note 11), Equistar
wrote off unamortized debt issuance costs and amendment fees of $3 million
related to the early repayment of the $1.25 billion bank credit facility and
reported the charge as an extraordinary loss on extinguishment of debt.

5.     Related Party Transactions

       Product Transactions with Lyondell -- Lyondell purchases ethylene,
propylene and benzene at market-related prices from Equistar under various
agreements expiring in 2013 and 2014. Under the agreements, Lyondell is required
to purchase 100% of its ethylene, propylene and benzene requirements for its
Channelview and Bayport, Texas facilities, with the exception of quantities of
one product that Lyondell is obligated to purchase under a supply agreement with
an unrelated third party entered into prior to 1999 and expiring in 2015. In
addition, a wholly owned subsidiary of Lyondell licenses MTBE technology to
Equistar. Lyondell also purchases a significant portion of the MTBE produced by
Equistar at one of its two Channelview units at market-related prices.

       Product Transactions with Occidental Chemical -- In connection with the
contribution of Occidental Chemical assets to Equistar, Equistar and Occidental
Chemical entered into a long-term agreement for Equistar to supply 100% of the
ethylene requirements for Occidental Chemical's U.S. manufacturing plants. The
pricing terms under the agreement between Equistar and Occidental Chemical are
similar to the pricing terms under the ethylene sales agreement between Equistar
and Lyondell. The ethylene raw material is exclusively for internal use in
production at these plants, less any quantities up to 250 million pounds per
year tolled in accordance with the provisions of the agreement. Upon three years
notice from either party to the other, sales may be "phased down" over a period
not less than five years. No phase down may commence before January 1, 2009.
Therefore, the annual required minimum cannot decline to zero prior to December
31, 2013, unless certain specified force majeure events occur. In addition to
ethylene, Equistar sells methanol, ethers, and glycols to Occidental Chemical.
Equistar also enters into over-the-counter derivatives, primarily price swap
contracts, for crude oil with Occidental Energy Marketing, Inc., a subsidiary of
Occidental Chemical, to help manage its exposure to commodity price risk with




                                      F-13





<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

respect to crude oil-related raw material purchases (see Note 13). Equistar also
purchases various products from Occidental Chemical at market-related prices.

       Product Transactions with Millennium Petrochemicals -- Equistar sells
ethylene to Millennium Petrochemicals at market-related prices pursuant to an
agreement entered into in connection with the formation of Equistar. Under this
agreement, Millennium Petrochemicals is required to purchase 100% of its
ethylene requirements for its LaPorte, Texas facility from Equistar. The
contract expires December 1, 2002 and, thereafter, renews annually. Either party
may terminate on one year's notice. The pricing terms of this agreement are
similar to the pricing terms of the ethylene sales agreements with Lyondell and
Occidental Chemical.

       Under an agreement entered into in connection with the formation of
Equistar, Equistar is required to purchase 100% of its vinyl acetate monomer
("VAM") raw material requirements at market-related prices from Millennium
Petrochemicals for its LaPorte, Texas, Clinton, Iowa and Morris, Illinois plants
for the production of ethylene vinyl acetate products at those locations. The
contract expires December 31, 2002 and, thereafter, renews annually.

       Product Transactions with Oxy Vinyls, LP -- Occidental Chemical owns 76%
of Oxy Vinyls, LP ("Oxy Vinyls"), a joint venture partnership. Equistar sells
ethylene to Oxy Vinyls for Oxy Vinyls' LaPorte, Texas facility at market-related
prices pursuant to an agreement which expires on December 31, 2003.

       Transactions with LYONDELL-CITGO Refining LP -- Lyondell's rights and
obligations under the terms of its product sales and raw material purchase
agreements with LYONDELL-CITGO Refining LP ("LCR"), a joint venture investment
of Lyondell, have been assigned to Equistar. Accordingly, certain olefins
by-products are sold by Equistar to LCR for processing into gasoline and certain
refinery products are sold by LCR to Equistar as raw materials. Equistar also
has assumed certain processing arrangements as well as storage obligations
between Lyondell and LCR and provides certain marketing services for LCR. All of
the agreements between LCR and Equistar are on terms generally representative of
prevailing market prices.

       Transactions with LMC -- Lyondell Methanol Company, L.P. ("LMC") sells
all of its products to Equistar at market-related prices. The natural gas for
LMC's plant is purchased by Equistar as agent for LMC under Equistar master
agreements with various third party suppliers. Equistar provides operating and
other services for LMC under the terms of existing agreements that were assumed
by Equistar from Lyondell, including the lease to LMC by Equistar of the real
property on which LMC's methanol plant is located. Pursuant to the terms of
those agreements, LMC pays Equistar a management fee and reimburses certain
expenses of Equistar at cost.

       Shared Services Agreement with Lyondell -- During 1999, Lyondell provided
certain administrative services to Equistar, including legal, risk management,
treasury, tax and employee benefit plan administrative services, while Equistar
provided services to Lyondell in the areas of health, safety and environment,
human resources, information technology and legal. Effective January 1, 2000,
Lyondell and Equistar implemented a revised agreement to utilize shared services
more broadly. Lyondell now provides services to Equistar including information
technology, human resources, raw material supply, supply chain, health, safety
and environmental, engineering, research and development, facility services,
legal, accounting, treasury, internal audit and tax. Lyondell charges Equistar
for its share of the cost of such services. Direct third party costs, if
incurred exclusively for Equistar, are charged directly to Equistar.

       Shared Services and Shared-Site Agreements with Millennium
Petrochemicals -- Equistar and Millennium Petrochemicals have agreements under
which Equistar provides utilities, fuel streams and office space to Millennium
Petrochemicals. In addition, Millennium Petrochemicals provides Equistar certain
operational services, including utilities as well as barge dock access and
related services.

       Transition Services Agreement with Occidental Chemical -- On June 1,
1998, Occidental Chemical and Equistar entered into a transition services
agreement. Under the terms of the agreement, Occidental Chemical provided
Equistar certain services in connection with the businesses contributed by
Occidental Chemical, including services related to accounting, payroll, office
administration, marketing, transportation, purchasing and procurement,
management, human resources, customer service, technical services and others.
Most of these services ceased in June 1999. Health, safety, and environmental
services were extended until December 31, 1999.



                                      F-14





<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


       Related party transactions are summarized as follows:

<TABLE>
<CAPTION>


                                                                            For the Year Ended December 31,
                                                                            ------------------------------
                                                                              2001       2000      1999
                                                                            ---------  --------- ---------
                                                                                (Millions of dollars)
<S>                                                                             <C>        <C>       <C>
       Equistar billed related parties for: Sales of products and processing
          services:
            Lyondell.....................................................       $405       $572      $246
            Occidental Chemical..........................................        441        558       435
            LCR..........................................................        377        438       260
            Millennium Petrochemicals....................................         55         90        54
            Oxy Vinyls...................................................         48         67        93
          Shared services and shared site agreements:
            LCR..........................................................          3          2         3
            LMC..........................................................          6          6         6
            Millennium Petrochemicals....................................         17         24        21
            Lyondell.....................................................         --         --         8
          Gas purchased for LMC..........................................         86         85        46
       Related parties billed Equistar for:
          Purchases of products:
            LCR..........................................................       $203       $264      $190
            LMC..........................................................        151        165        95
            Millennium Petrochemicals....................................         15         16        12
            Lyondell.....................................................          4          2         6
            Occidental Chemical..........................................          1          2         2
          Shared services and transition agreements:
            Lyondell.....................................................        147        133         9
            Millennium Petrochemicals....................................         19         22        24
            LCR..........................................................          2         --        --
            Occidental Chemical..........................................         --         --         2

</TABLE>






                                      F-15





<PAGE>



                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


6.     Purchase and Sale of Businesses

       Effective June 1, 2001, Equistar expanded its wire and cable business
through the acquisition of the low- and medium-voltage power cable materials
business of AT Plastics, Inc. Equistar accounted for the acquisition as a
purchase, allocating the $7 million purchase price to property, plant and
equipment and inventory.

       Effective April 30, 1999, Equistar completed the sale of its concentrates
and compounds business. The transaction included two manufacturing facilities,
located in Heath, Ohio and Crockett, Texas, and related inventories. Equistar's
proceeds from the sale were approximately $75 million.

7.     Accounts Receivable

       Equistar sells its products primarily to other chemical manufacturers in
the petrochemicals and polymers industries. Equistar performs ongoing credit
evaluations of its customers' financial condition and, in certain circumstances,
requires letters of credit from them. The Partnership's allowance for doubtful
accounts, which is reflected in the accompanying Consolidated Balance Sheets as
a reduction of accounts receivable, totaled $14 million and $9 million at
December 31, 2001 and 2000, respectively.

       During 2001, Equistar terminated an agreement with an independent issuer
of receivables-backed commercial paper. Previously, Equistar sold, on an ongoing
basis and without recourse, designated accounts receivable, maintaining the
balance of the accounts receivable sold by selling new receivables as existing
receivables were collected. At December 31, 2000 and 1999, the balance of
Equistar's accounts receivable sold was $130 million. Increases and decreases in
the amount sold were reported as operating cash flows in the Consolidated
Statement of Cash Flows. Costs related to the sales were included in "Selling,
general and administrative expenses" in the Consolidated Statement of Income.

8.     Inventories

       Inventories were as follows at December 31:

<TABLE>
<CAPTION>

                                                        2001       2000
                                                        ----       ----
                                                     (Millions of dollars)

<S>                                                <C>         <C>
       Finished goods............................       $243       $273
       Work-in-process...........................         12         16
       Raw materials.............................        104        123
       Materials and supplies....................         89         94
                                                        ----       ----
          Total inventories......................       $448       $506
                                                        ====       ====
</TABLE>

       Income in 2001 benefited from a reduction in the levels of raw material
and product inventories, which are carried under the LIFO method of accounting.
The charges to cost of sales associated with the inventory reductions were
valued based on relatively low LIFO inventory values. If these charges had been
valued based on average 2001 costs, cost of sales for 2001 would have been
higher by approximately $10 million. The excess of the current cost of
inventories over book value was approximately $28 million at December 31, 2001.




                                      F-16





<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



9.     Property, Plant and Equipment and Other Assets

       The components of property, plant and equipment, at cost, and the related
accumulated depreciation were as follows at December 31:

<TABLE>
<CAPTION>

                                                         2001       2000
                                                        ------     ------
                                                      (Millions of dollars)
<S>                                                    <C>        <C>
      Land ........................................     $   79     $   78
      Manufacturing facilities and equipment ......      5,929      5,769
      Construction in progress ....................         92        134
                                                        ------     ------
         Total property, plant and equipment ......      6,100      5,981
                                                        ------     ------
      Less accumulated depreciation ...............      2,395      2,162
                                                        ------     ------
         Property, plant and equipment, net .......     $3,705     $3,819
                                                        ======     ======

</TABLE>


       Equistar did not capitalize any interest during 2001, 2000 and 1999 with
respect to construction projects.

       Goodwill, at cost, and the related accumulated amortization were as
follows at December 31:

<TABLE>
<CAPTION>

                                                         2001       2000
                                                        ------     ------
                                                      (Millions of dollars)

<S>                                                     <C>        <C>
      Goodwill.....................................     $1,318     $1,318
      Less accumulated amortization................        265        232
                                                        ------     ------
         Goodwill, net.............................     $1,053     $1,086
                                                        ======     ======

</TABLE>

       The unamortized balances of deferred turnaround, software and debt
issuance costs included in "Other assets, net" were as follows at December 31:

<TABLE>
<CAPTION>

                                                         2001       2000
                                                        ------     ------
                                                      (Millions of dollars)

<S>                                                     <C>        <C>
       Turnaround costs............................     $   70     $   75
       Software costs..............................         97        104
       Debt issuance costs.........................         34          9
</TABLE>


       Depreciation and amortization is summarized as follows for the periods
presented:

<TABLE>
<CAPTION>

                                                       For the Year Ended
                                                          December 31,
                                                --------------------------------
                                                2001          2000          1999
                                                ----          ----          ----
                                                    (Millions of dollars)
<S>                                             <C>           <C>           <C>
Property, plant and equipment ........          $237          $229          $221
Goodwill .............................            33            33            33
Turnaround expense ...................            20            24            25
Software costs .......................            12            13            12
Other ................................            17            11             9
Debt issuance costs ..................             2           --            --
                                                ----          ----          ----
                                                $321          $310          $300
                                                ====          ====          ====

</TABLE>


                                      F-17





<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)




10.    Accrued Liabilities

       Accrued liabilities were as follows at December 31:

<TABLE>
<CAPTION>

                                                          2001       2000
                                                          ----       ----
                                                       (Millions of dollars)
<S>                                                       <C>        <C>
       Property taxes..............................       $ 68       $ 73
       Interest....................................         68         52
       Payroll and benefits........................         49         38
       Other.......................................         12          3
                                                          ----       ----
          Total accrued liabilities................       $197       $166
                                                          ====       ====
</TABLE>

11.    Long-Term Debt

       In August 2001, Equistar completed a $1.5 billion debt refinancing. The
refinancing included a bank credit facility consisting of a $500 million secured
revolving credit facility maturing in August 2006 and a $300 million secured
term loan, maturing in August 2007, with scheduled quarterly amortization
payments, beginning December 31, 2001. The revolving credit facility was undrawn
at December 31, 2001. Borrowing under the revolving credit facility generally
bears interest based on a margin over, at Equistar's option, LIBOR or a base
rate. The sum of the applicable margin plus a facility fee varies between 1.5%
and 2.5%, in the case of LIBOR loans, and 0.5% and 1.5%, in the case of base
rate loans, depending on Equistar's ratio of debt to EBITDA. The term loan
generally bears interest at a rate equal to LIBOR plus 3% or the base rate plus
2%, at Equistar's option. Borrowing under the term loan had a weighted average
interest rate of 6.26% during 2001. Certain financial ratio requirements were
modified in the refinancing to make them less restrictive. The bank credit
facility is secured by a lien on Equistar's accounts receivable, inventory,
other personal property and certain fixed assets. The refinancing also included
the issuance of $700 million of new unsecured 10.125% senior notes maturing in
August 2008. The 10.125% senior notes rank pari passu with existing Equistar
notes.

The August 2001 refinancing replaced a five-year, $1.25 billion credit facility
with a group of banks that would have expired November 2002. Borrowing under the
facility at December 31, 2000 was $820 million and had a weighted average
interest rate of 7.13% at December 31, 2000. Millennium America Inc., a
subsidiary of Millennium, provided limited guarantees with respect to the
payment of principal and interest on a total of $750 million principal amount of
indebtedness under the $1.25 billion revolving credit facility. As a result of
the refinancing, the related guarantees have been terminated.

       In March 2001, Equistar amended the previous $1.25 billion credit
facility making certain financial ratio requirements less restrictive. As a
result of the amendment, the interest rate on the previous credit facility was
increased from LIBOR plus 5/8 of 1% to LIBOR plus 8/10 of 1%.

       In February 1999, Equistar issued $900 million of debt securities. The
debt securities included $300 million of 8.50% Notes, which mature on February
15, 2004, and $600 million of 8.75% Notes, which mature on February 15, 2009.
Equistar used the net proceeds from this offering (i) to repay $205 million
outstanding under a capitalized lease obligation relating to Equistar's Corpus
Christi facility, (ii) to repay the outstanding balance under a $500 million
credit agreement, after which the $500 million credit agreement was terminated,
(iii) to repay $150 million of 10.00% Notes due in June 1999, and (iv) to the
extent of the remaining net proceeds, to reduce outstanding borrowing under the
revolving credit facility and for Partnership working capital purposes.

       The bank credit facility and the indenture governing Equistar's 10.125%
senior notes contain covenants that, subject to certain exceptions, restrict
sale and leaseback transactions, lien incurrence, debt incurrence, sales of
assets and mergers and consolidations. In addition, the bank credit facility
requires Equistar to maintain specified financial ratios. The breach of these
covenants could permit the lenders to declare the loans immediately payable and
could permit the lenders under Equistar's credit facility to terminate future
lending commitments.

       As a result of the continued poor current business environment, Equistar
is seeking an amendment to its credit facility that would increase its financial
flexibility by easing certain financial ratio requirements. Such an amendment
will require the payment of additional fees. Equistar anticipates that the
amendment will become effective prior to March 31, 2002.



                                      F-18





<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)


       Long-term debt consisted of the following at December 31:


<TABLE>
<CAPTION>

                                                            2001           2000
                                                           ------         ------
                                                            (Millions of dollars)
<S>                                                        <C>            <C>
       Bank credit facilities:
          Revolving credit facility due 2006 .....         $   --           $820
          Term loan due 2007 .....................            299             --
       Other debt obligations:
          Medium-term notes due 2002-2005 ........             31            121
          9.125% Notes due 2002 ..................            100            100
          8.50% Notes due 2004 ...................            300            300
          6.50% Notes due 2006 ...................            150            150
          10.125% Senior Notes due 2008 ..........            700           --
          8.75% Notes due 2009 ...................            598            598
          7.55% Debentures due 2026 ..............            150            150
          Other ..................................              9              9
                                                           ------         ------
            Total long-term debt .................          2,337          2,248
       Less current maturities ...................            104             90
                                                           ------         ------
            Total long-term debt, net ............         $2,233         $2,158
                                                           ======         ======

</TABLE>

       The 8.75% notes have a face amount of $600 million and are shown net of
unamortized discount. The medium-term notes had a weighted average interest rate
of 9.8% and 9.6% at December 31, 2001 and 2000, respectively.

       The medium-term notes, the 9.125% notes, the 6.5% notes and the 7.55%
debentures were assumed by Equistar from Lyondell when Equistar was formed in
1997. As between Equistar and Lyondell, Equistar is primarily liable for this
debt. Lyondell remains a co-obligor for the medium-term notes and certain events
involving only Lyondell could give rise to events of default under those notes,
permitting the obligations to be accelerated. Under certain limited
circumstances, the holders of the medium-term notes have the right to require
repurchase of the notes. Following amendments to the indentures for the 9.125%
notes and 6.5% notes and the 7.55% debentures in November 2000, Lyondell remains
a guarantor of that debt but not a co-obligor. The consolidated financial
statements of Lyondell are filed as an exhibit to Equistar's Annual Report on
Form 10-K for the year ended December 31, 2001.

       Aggregate maturities of long-term debt during the next five years are
$104 million in 2002, $32 million in 2003; $303 million in 2004; $8 million in
2005; $153 million in 2006 and $1.8 billion thereafter.

12.    Lease Commitments

       Equistar leases various facilities and equipment under noncancelable
lease arrangements for various periods.

       Operating leases include leases of railcars used in the distribution of
products in Equistar's business. Equistar leases the railcars from unaffiliated
entities established for the purpose of serving as lessors with respect to these
leases. The leases include options for Equistar to purchase the railcars during
a lease term. If Equistar does not exercise a purchase option, the affected
railcars will be sold upon termination of the lease. In the event the sales
proceeds are less than the related guaranteed residual value, Equistar will pay
the difference to the lessor. The total guaranteed residual value under these
leases was approximately $225 million at December 31, 2001.

       Certain of Equistar's railcar operating leases contain financial and
other covenants that are substantially the same as those contained in the credit
facility discussed in Note 11 above. A breach of these covenants would permit
the early termination of those leases. As a result of the continued poor current
business environment, Equistar is seeking an amendment to these railcar leases.
Such amendments will require the payment of additional fees. Equistar
anticipates that the amendments will become effective prior to March 31, 2002.


                                     F-19





<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)



       In addition, the credit rating downgrade in 2002 permits the early
termination of one of Equistar's railcar leases by the lessor, which would
accelerate the payment of $126 million of minimum lease payments. Equistar has
reached an agreement in principal with the lessor to renegotiate the lease.

       At December 31, 2001, future minimum lease payments and residual value
guarantees relating to noncancelable operating leases with lease terms in excess
of one year were as follows:

<TABLE>
<CAPTION>

                                                 Minimum                Residual
                                                  Lease                  Value
                                                Payments               Guarantees
                                                -----------           -------------
                                                       (Millions of dollars)
<S>                                             <C>                   <C>
 2002 ........................................     $ 95                   $ 39
 2003 ........................................       78                     --
 2004 ........................................       67                    186
 2005 ........................................       43                     --
 2006 ........................................       35                     --
 Thereafter ..................................      287                     --
                                                   ----                   ----
    Total minimum lease payments .............     $605                   $225
                                                   ====                   ====

</TABLE>

       Operating lease net rental expense was $110 million, $115 million and
$112 million for the years ending December 31, 2001, 2000 and 1999,
respectively.

13.    Financial Instruments and Derivatives

       Equistar enters into over-the-counter derivatives, primarily price swap
contracts, related to crude oil with Occidental Energy Marketing, Inc., a
subsidiary of Occidental Chemical, to help manage its exposure to commodity
price risk with respect to crude oil-related raw material purchases. At December
31, 2000, price swap contracts covering 5.1 million barrels of crude oil were
outstanding. The carrying value and fair market value of these derivative
instruments at December 31, 2000 represented a liability of $13 million, which
was based on quoted market prices. The resulting loss from these hedges of
anticipated raw material purchases was deferred on the consolidated balance
sheet. On January 1, 2001, in accordance with the transition provisions of SFAS
No. 133, Equistar reclassified the deferred loss of $13 million to accumulated
other comprehensive income as a transition adjustment, representing the
cumulative effect of a change in accounting principle. The transition adjustment
was reclassified to the Consolidated Statement of Income during the period
January through July 2001 as the related raw material purchases occurred.

       During 2001, Equistar entered into additional price swap contracts
covering 7.2 million barrels of crude oil and primarily maturing from July 2001
through December 2001. In the third quarter 2001, outstanding price swap
contracts, covering 4.1 million barrels of crude oil and primarily maturing from
October 2001 through December 2001, were effectively terminated. The termination
resulted in realization of a gain of nearly $9 million, which was recognized in
the fourth quarter 2001 as the related forecasted transactions occurred. There
were no outstanding price swap contracts at December 31, 2001.



                                      F-20





<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

         The following table summarizes activity included in accumulated other
comprehensive income ("AOCI") related to the fair value of derivative
instruments for the year ended December 31, 2001:

<TABLE>
<CAPTION>
                                                                                                   2001
                                                                                               ------------
                                                                                               (Millions of
                                                                                                  dollars)
<S>                                                                                               <C>
       Gain (loss):
          Balance at beginning of period..................................................         $ --
                                                                                                   -----
          January 1, 2001 transition adjustment -- reclassification of December 31, 2000             (13)
            deferred loss.................................................................
          Net gains on derivative instruments.............................................            35
          Reclassification of gains on derivative instruments to earnings.................           (22)
                                                                                                   -----
       Net change included in AOCI for the period.........................................            --
                                                                                                   -----
          Net gain on derivative instruments included in AOCI at December 31, 2001........         $  --
                                                                                                   =====

</TABLE>

         The fair value of all nonderivative financial instruments included in
current assets and current liabilities, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, approximated
their carrying value due to their short maturity. Based on the borrowing rates
currently available to Equistar for debt with terms and average maturities
similar to Equistar's debt portfolio, the fair value of Equistar's long-term
debt, including amounts due within one year, was approximately $2.3 billion and
$2.1 billion at December 31, 2001 and 2000, respectively.

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

         Equistar accounts for certain investments as "available-for-sale"
securities in accordance with the provisions of SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Accordingly, changes in the
fair value of the investments are recognized in the balance sheet and the
unrealized holding gains and losses are recognized in other comprehensive
income.

14. Pension and Other Postretirement Benefits

         All full-time regular employees of the Partnership are covered by
defined benefit pension plans sponsored by Equistar. In connection with the
formation of Equistar, no pension assets or obligations were contributed to
Equistar, with the exception of union represented plans contributed by
Occidental.

         Retirement benefits are based upon years of service and the employee's
highest three consecutive years of compensation during the last ten years of
service. Equistar accrues pension costs based upon an actuarial valuation and
funds the plans through periodic contributions to pension trust funds. Equistar
also has unfunded supplemental nonqualified retirement plans, which provide
pension benefits for certain employees in excess of the tax qualified plans'
limits. In addition, Equistar sponsors unfunded postretirement benefit plans
other than pensions, which provide medical and life insurance benefits. The
postretirement medical plans are contributory while the life insurance plans are
noncontributory.

                                      F-21




<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

       The following table provides a reconciliation of benefit obligations,
plan assets and the funded status of these plans:

<TABLE>
<CAPTION>
                                                                                               Other
                                                                                          Postretirement
                                                                     Pension Benefits        Benefits
                                                                     ----------------    ----------------
                                                                      2001      2000      2001      2000
                                                                     ------    ------    ------    ------
                                                                            (Millions of dollars)
       <S>                                                            <C>       <C>       <C>       <C>
       Change in benefit obligation:
          Benefit obligation, January 1........................       $120      $ 99      $ 92      $ 77
          Service cost.........................................         16        17         2         2
          Interest cost........................................         10         9         6         6
          Plan amendments......................................         --        --        29        --
          Actuarial loss (gain)................................         12         8       (14)       11
          Benefits paid........................................        (11)      (12)       (3)       (2)
          Net effect of curtailments, settlements and special
            termination benefits...............................         --        (1)       --         1
          Transfer to Lyondell.................................         --        --        --        (3)
                                                                      ----      ----      ----      ----
          Benefit obligation, December 31......................        147       120       112        92
                                                                      ----      ----      ----      ----
       Change in plan assets:
          Fair value of plan assets, January 1.................        117       101        --        --
          Actual return on plan assets.........................         (6)       (3)       --        --
          Partnership contributions............................          7        31         3         2
          Benefits paid........................................        (11)      (12)       (3)       (2)
                                                                      ----      ----      ----      ----
          Fair value of plan assets, December 31...............        107       117        --        --
                                                                      ----      ----      ----      ----
          Funded status........................................        (40)       (3)     (112)      (91)
          Unrecognized actuarial loss..........................         48        24         5        20
          Unrecognized prior service cost......................         --        --        29        --
                                                                      ----      ----      ----      ----
          Net amount recognized................................       $  8      $ 21      $(78)     $(71)
                                                                      ====      ====      ====      ====
       Amounts recognized in the Consolidated Balance Sheet
         consist of:
          Prepaid benefit cost.................................       $ 22      $ 35      $ --      $ --
          Accrued benefit liability............................        (33)      (14)      (78)      (71)
          Accumulated other comprehensive income...............         19        --        --        --
                                                                      ----      ----      ----      ----
          Net amount recognized................................       $  8      $ 21      $(78)     $(71)
                                                                      ====      ====      ====      ====

</TABLE>

         The increase in other postretirement benefit obligations in 2001
resulted from a medical plan amendment that increased Equistar's maximum
contribution level per employee by 25%.

                                      F-22




<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

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

<TABLE>
<CAPTION>
                                                                                            2001      2000
                                                                                            ----      ----
       <S>                                                                                  <C>       <C>
       Benefit obligation.............................................................      $129      $63
       Fair value of assets...........................................................        81       40

</TABLE>

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

<TABLE>
<CAPTION>
                                                                                            2001      2000
                                                                                            ----      ----
       <S>                                                                                  <C>        <C>
       Accumulated benefit obligation..................................................     $106       $9
       Fair value of assets............................................................       81        6
</TABLE>

         Net periodic pension and other postretirement benefit costs included
the following components:

<TABLE>
<CAPTION>

                                                                           Other
                                                                      Postretirement
                                                Pension Benefits          Benefits
                                             --------------------- ----------------------
                                              2001   2000    1999   2001     2000   1999
                                             ------ ------  -----  ------   ------ ------
                                                         (Millions of dollars)
<S>                                          <C>     <C>     <C>     <C>    <C>    <C>
Components of net periodic benefit cost
   Service cost ..........................   $ 16    $ 17    $ 22    $  2   $  2   $  4
   Interest cost .........................     10       9       7       6      6      6
   Amortization of actuarial loss ........      2      --       1      --      1      1
   Expected return on plan assets ........    (11)     (8)     (8)     --     --     --
   Net effect of curtailments, settlements
     and special termination benefits ....      3      (1)     --       2      1     --
                                             ----    ----    ----    ----   ----   ----
Net periodic benefit cost ................   $ 20    $ 17    $ 22    $ 10   $ 10   $ 11
                                             ====    ====    ====    ====   ====   ====

</TABLE>

         The assumptions used in determining the net pension cost and the net
pension liability were as follows at December 31:

<TABLE>
<CAPTION>
                                                                           Other
                                                                      Postretirement
                                                Pension Benefits          Benefits
                                             --------------------- ----------------------
                                              2001   2000    1999   2001     2000   1999
                                             ------ ------  -----  ------   ------ ------
<S>                                           <C>     <C>    <C>    <C>      <C>     <C>

Weighted-average assumptions as of
  December 31:
Discount rate..............................   7.00%   7.50%  8.00%  7.00%    7.50%   8.00%
Expected return on plan assets.............   9.50%   9.50%  9.50%    --       --      --
Rate of compensation increase..............   4.50%   4.50%  4.75%  4.50%    4.50%   4.75%
</TABLE>

         The assumed annual rate of increase in the per capita cost of covered
health care benefits as of December 31, 2001 was 7.0% for 2002 through 2004 and
5.0% thereafter. The health care cost trend rate assumption does not have a
significant effect on the amounts reported due to limits on Equistar's maximum
contribution level under the medical plan. To illustrate, increasing or
decreasing the assumed health care cost trend rates by one percentage point in
each year would change the accumulated postretirement benefit liability as of
December 31, 2001 by less than $1 million and would not have a material effect
on the aggregate service and interest cost components of the net periodic
postretirement benefit cost for the year then ended.

         Equistar also maintains voluntary defined contribution savings plans
for eligible employees. Contributions to the plans by Equistar were $16 million,
$17 million and $20 million for the years ended December 31, 2001, 2000 and
1999, respectively.

                                      F-23




<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

15. Commitments and Contingencies

         Commitments -- Equistar has various purchase commitments for materials,
supplies and services incident to the ordinary conduct of business. At December
31, 2001, Equistar had commitments for natural gas and natural gas liquids at
prices in excess of current market. Using December 31, 2001 spot market prices
for these products the estimated negative impact on first quarter 2002 operating
results would be approximately $30 million. Since December 31, 2001, natural gas
prices have further declined. These fixed-price contracts substantially
terminate by the end of the first quarter 2002. See also Note 5, describing
related party commitments.

         Equistar is party to various unconditional purchase obligation
contracts as a purchaser for products and services, principally for steam and
power. At December 31, 2001, future minimum payments under these contracts with
noncancelable contract terms in excess of one year were as follows:

<TABLE>
<CAPTION>
                                                                                   (Millions
                                                                                   of dollars)
       <S>                                                                           <C>
       2002......................................................................    $  109
       2003......................................................................       132
       2004......................................................................       135
       2005......................................................................       137
       2006......................................................................       138

       Thereafter................................................................     1,688
                                                                                     ------
       Total minimum contract payments...........................................    $2,339
                                                                                     ======

</TABLE>

         Equistar's total purchases under these agreements were $77 million, $51
million and $56 million for the years ending December 31, 2001, 2000 and 1999,
respectively. The increases in 2001, 2002 and 2003 are due to commitments for
steam and power from a new co-generation facility, which is expected to reach
full capacity in mid-2002.

         Indemnification Arrangements -- Lyondell, Millennium Petrochemicals and
certain subsidiaries of Occidental have each agreed to provide certain
indemnifications to Equistar with respect to the petrochemicals and polymers
businesses contributed by the partners. In addition, Equistar agreed to assume
third party claims that are related to certain pre-closing contingent
liabilities that are asserted prior to December 1, 2004 as to Lyondell and
Millennium Petrochemicals, and May 15, 2005 as to certain Occidental
subsidiaries, to the extent the aggregate thereof does not exceed $7 million to
each partner, subject to certain terms of the respective asset contribution
agreements. As of December 31, 2001, Equistar had incurred a total of $17
million for these uninsured claims and liabilities. Equistar also agreed to
assume third party claims that are related to certain pre-closing contingent
liabilities that are asserted for the first time after December 1, 2004 as to
Lyondell and Millennium Petrochemicals, and for the first time after May 15,
2005 as to certain Occidental subsidiaries. As of September 30, 2001, Equistar,
Lyondell, Millennium Petrochemicals and certain subsidiaries of Occidental
amended the asset contribution agreements governing these indemnification
obligations to clarify the treatment of, and procedures pertaining to the
management of, certain claims arising under the asset contribution agreements.
Equistar management believes that these amendments do not materially change the
asset contribution agreements.

         Environmental Remediation -- Equistar's accrued liability for
environmental matters as of December 31, 2001 was $6 million and related to the
Port Arthur facility, which was permanently shut down on February 28, 2001. In
the opinion of management, there is currently no material estimable range of
loss in excess of the amounts recorded for environmental remediation.

         Clean Air Act -- The eight-county Houston/Galveston region has been
designated a severe non-attainment area for ozone by the U.S. Environmental
Protection Agency ("EPA"). Emission reduction controls for nitrogen oxides
("NOx") must be installed at each of Equistar's six plants located in the
Houston/Galveston region during the next several years. Compliance with the plan
will result in increased capital investment, which could be between $200 million
and $260 million, before the 2007 deadline, as well as higher annual operating
costs for Equistar. The timing and amount of these expenditures are subject to
regulatory and other uncertainties, as well as obtaining the necessary permits
and approvals. In January 2001, Equistar and an organization composed of
industry participants filed a lawsuit against the Texas Natural Resource
Conservation Commission ("TNRCC") to encourage adoption of their alternative
plan to achieve the same air quality improvement with less negative economic
impact on the region. Adoption of the alternative plan, as sought by the
lawsuit, is expected to reduce Equistar's estimated capital

                                      F-24




<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

investments for NOx reductions required to comply with the standards. However,
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.

         The Clean Air Act Amendments of 1990 set minimum levels for oxygenates,
such as MTBE, in gasoline sold in areas not meeting specified air quality
standards. The presence of MTBE in some water supplies in California and other
states due to gasoline leaking from underground storage tanks and in surface
water from recreational water craft has led to public concern about the use of
MTBE. Certain federal and state governmental initiatives have sought either to
rescind the oxygenate requirement for reformulated gasoline or to restrict or
ban the use of MTBE. These initiatives or other governmental actions could
result in a significant reduction in Equistar's MTBE sales, which represented
approximately 4% of its total 2001 revenues. Equistar has developed technologies
to convert its process to produce alternate gasoline blending components should
it be necessary to reduce MTBE production in the future. However, implementation
of such technologies would require additional capital investment.

         General -- The Partnership is also subject to various lawsuits and
proceedings. Subject to the uncertainty inherent in all litigation, management
believes the resolution of these proceedings will not have a material adverse
effect on the financial position or liquidity of Equistar.

16. Supplemental Cash Flow Information

         Supplemental cash flow information is summarized as follows for the
periods presented:

<TABLE>
<CAPTION>
                                                                            For the Year Ended
                                                                                 December 31,
                                                                          -------------------------
                                                                          2001      2000      1999
                                                                          ----      ----      ----
                                                                           (Millions of dollars)
       <S>                                                                <C>       <C>       <C>
       Cash paid for interest..........................................   $171      $180      $146
                                                                          ====      ====      ====

</TABLE>

17. Segment Information and Related Information

         Equistar operates in two reportable segments, petrochemicals and
polymers. The accounting policies of the segments are the same as those
described in "Summary of Significant Accounting Policies" (see Note 2). No
third-party customer accounted for 10% or more of sales during the three-year
period ended December 31, 2001.

                                      F-25




<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

       Summarized financial information concerning Equistar's reportable
segments is shown in the following table. Intersegment sales between the
petrochemicals and polymers segments were based on current market prices.

<TABLE>
<CAPTION>
                                          Petrochemicals    Polymers     Unallocated   Eliminations  Consolidated
                                          ---------------  ------------  ------------  ------------  ------------
                                                                   (Millions of dollars)

<S>                                       <C>              <C>           <C>           <C>           <C>
For the year ended December 31, 2001:
Sales and other operating revenues:
   Customers...........................   $        3,929   $     1,980   $        --   $        --   $     5,909
   Intersegment........................            1,455            --            --        (1,455)           --
                                          ---------------  ------------  ------------  ------------  ------------
                                                   5,384         1,980            --        (1,455)        5,909
Unusual charges........................               --            --            22            --            22
Operating income (loss)................              275          (186)         (188)           --           (99)
Total assets...........................            3,458         1,365         1,485            --         6,308
Capital expenditures...................               84            24             2            --           110
Depreciation and amortization expense..              204            58            59            --           321
For the year ended December 31, 2000:
Sales and other operating revenues:
   Customers...........................   $        5,144   $     2,351   $        --   $        --   $     7,495
   Intersegment........................            1,887            --            --        (1,887)           --
                                          ---------------  ------------  ------------  ------------  ------------
                                                   7,031         2,351            --        (1,887)        7,495
Operating income (loss)................              694          (185)         (175)           --           334
Total assets...........................            3,693         1,534         1,355            --         6,582
Capital expenditures...................               79            46             6            --           131
Depreciation and amortization expense..              199            55            56            --           310
For the year ended December 31, 1999:
Sales and other operating revenues:
   Customers...........................   $        3,435   $     2,159   $        --   $        --   $     5,594
   Intersegment........................            1,324            --            --        (1,324)           --
                                          ---------------  ------------  ------------  ------------  ------------
                                                   4,759         2,159            --        (1,324)        5,594
Unusual charges........................               --            --            96            --            96
Operating income (loss)................              447            51          (336)           --           162
Total assets...........................            3,671         1,551         1,514            --         6,736
Capital expenditures...................               61            83            13            --           157
Depreciation and amortization expense..              194            53            53            --           300

</TABLE>

                                      F-26




<PAGE>


                             EQUISTAR CHEMICALS, LP
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

         The following table presents the details of "Operating income (loss)"
as presented above in the "Unallocated" column for the years ended December 31,
2001, 2000 and 1999.

<TABLE>
<CAPTION>
                                                                              2001        2000        1999
                                                                             ------      ------      ------
                                                                                  (Millions of dollars)
<S>                                                                          <C>         <C>          <C>
Expenses not allocated to petrochemicals and polymers:
   Principally general and administrative expenses.....................      $(166)      $(175)       $(240)
   Unusual charges.....................................................        (22)         --          (96)
                                                                             -----       -----        -----
     Total -- Unallocated..............................................      $(188)      $(175)       $(336)
                                                                             =====       =====        =====

</TABLE>

         The following table presents the details of "Total assets" as presented
above in the "Unallocated" column as of December 31, for the years indicated:

<TABLE>
<CAPTION>
                                                                                     2001       2000       1999
                                                                                    ------     ------     -------
                                                                                      (Millions of dollars)
<S>                                                                                 <C>        <C>        <C>
Cash...........................................................................     $  202     $   18     $  108
Accounts receivable -- trade and related parties...............................         17         16         18
Prepaids and other current assets..............................................         20         17         22
Property, plant and equipment, net.............................................         44         56         58
Goodwill, net..................................................................      1,053      1,086      1,119
Other assets...................................................................        149        162        189
                                                                                    ------     ------     ------
                                                                                    $1,485     $1,355     $1,514
                                                                                    ======     ======     ======

</TABLE>

18. Subsequent Event

         Early in 2002, Lyondell and Occidental agreed in principle for
Lyondell's acquisition of Occidental's 29.5% share of Equistar and Occidental's
purchase of an equity interest in Lyondell. Upon completion of these
transactions, Lyondell's ownership interest in Equistar would increase to 70.5%.
Millennium holds the remaining 29.5% interest in Equistar. There can be no
assurance that the proposed transactions will be completed.

                                      F-27




<PAGE>


                                                                     SCHEDULE II

                            MILLENNIUM CHEMICALS INC.
                        VALUATION AND QUALIFYING ACCOUNTS
                    For the Years Ended 1999, 2000 and 2001

<TABLE>
<CAPTION>
                                                         Balance        Charge to                    Balance at
                                                       at Beginning     Costs and                      End of
                                                         of Year         Express      Deduction         Year
                                                      --------------  ------------  -------------   ------------
                                                                              (Millions)
<S>                                                       <C>            <C>          <C>              <C>
Year ended December 31, 1999
     Deducted from asset accounts:
     Allowance for doubtful accounts................      $  3           $   --       $ (1)(b)         $  2
     Valuation allowance............................       126               --        (60)(a)           76
Year ended December 31, 2000
     Deducted from asset accounts:
     Allowance for doubtful accounts................         2                2         --                4
     Valuation allowance............................        76               --         (6)(a)           70
Year ended December 31, 2001
     Deducted from asset accounts:
     Allowance for doubtful accounts................         4                4         (1)               7
     Valuation allowance............................        70               --        (70)(c)           --

</TABLE>
--------------
 (a) Valuation allowance for capital loss carryover deferred tax asset.

 (b) Uncollected accounts written off, net of recoveries.

 (c) Underlying capital loss carryover expired

                                      F-28




                             STATEMENT OF DIFFERENCES
                             ------------------------

The registered trademark symbol shall be expressed as ..................... 'r'
The dagger symbol shall be expressed as ................................... 'D'
Characters normally expressed as subscript shall be preceded by............ [u]