<PAGE>
                                                                   EXHIBIT 13
RESTORING EARNINGS POWER . MANAGEMENT'S DISCUSSION AND ANALYSIS

MANAGEMENT'S DISCUSSION AND ANALYSIS
Three Years Ended December 31, 1996
(Dollars in millions, except per share data)


GENERAL

This discussion and analysis of Armco's financial results should be read 
together with the Consolidated Financial Statements and Notes on pages 23 
through 37.

Operating Results
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                                 1996       1995       1994
------------------------------------------------------------------------------
<S>                                            <C>        <C>        <C>
Net sales                                      $1,724.0   $1,559.9   $1,437.6
Special charges                                    (8.8)       --       (35.0)
Operating profit                                   74.7       69.0       39.2
Gain on sale of investments in joint ventures
   and related stock                                --        27.2       62.6
Credit (provision) for income taxes                (1.4)      (2.0)      28.7
Income from continuing operations                  26.0       23.5       65.8
Income from discontinued operations:
   Aerospace and Strategic Materials                6.5        --         --
   National-Oilwell                                 --         6.3       11.9
Net income                                         32.5       29.8       77.7
Net income per common share                        0.14       0.11       0.57
------------------------------------------------------------------------------
</TABLE>
1996 vs. 1995: Net sales in 1996 were 11% higher than in 1995, primarily due 
to higher shipments of automotive exhaust stainless, electrical and carbon 
steels in the Specialty Flat-Rolled Steels segment. Higher sales were also 
achieved by Douglas Dynamics, LLC, Armco's snowplow manufacturer, whose 
results are reported in the Fabricated Products business segment.

Operating profit increased 8% in 1996 due to a significant reduction in losses 
at Armco's Mansfield and Dover Operations in the Specialty Flat-Rolled Steels 
segment, an increase in profits from Douglas Dynamics and lower employee 
benefit costs. These improvements were offset, in part, by lower profits in 
the remainder of the Specialty Flat-Rolled Steels segment, due to higher 
imports and weak pricing in certain chrome nickel products plus higher sales 
of less profitable carbon steel. The decrease in Mansfield and Dover operating 
losses reflects improved operating practices and higher levels of production 
compared with 1995, which was a ramp-up period following a year-long idling of 
these facilities. Employee benefit expenses were lower in 1996 primarily as a 
result of increased funding of the pension plans during 1995 and 1996 and 
lower interest rates on Armco's liability for retiree health care and life 
insurance benefits.

Included in the 1996 operating profit were special charges totaling $8.8 for a 
loss on the sale of Armco's nonresidential construction business and a 
decision to exit a line of light truck equipment manufactured by Douglas 
Dynamics. Operating profit also included nonrecurring income totaling $8.6 
from claim settlements, including the partial settlement of a business 
interruption insurance claim. 

In 1995, Armco sold all of the shares of AK Steel Holding Corporation it had 
received in the initial public offering and recapitalization of Armco Steel 
Company, L.P., recognizing a gain of $27.2.

Included in income from continuing operations for 1996 was the above-mentioned 
special charges and claim settlements and a $6.3 gain, which resulted from the 
recognition of gains previously deferred in connection with asset sales at an 
industrial park owned by Armco. Armco elected to defer gains resulting from 
individual asset sales at this site because of uncertainty concerning 
realization of the carrying value of the remaining property. The gains were 
recognized following receipt, in March 1996, of an independent appraiser's 
report indicating that the remaining land, buildings and dock facilities in 
the park had a market value in excess of Armco's historical cost carrying 
value. 

Income from discontinued operations in 1996 consisted of a $6.5 increase in 
the gain on the sale of Armco's Aerospace and Strategic Materials business 
segment related to a federal income tax settlement. In 1995, Armco recognized, 
in income from discontinued operations, equity income of $6.3 from National-
Oilwell, a joint venture divested in January, 1996.

1995 vs. 1994: Net sales increased in 1995 over 1994 because of strong markets 
and higher prices for stainless and electrical steels, and the addition of 
sales from Armco's modernized facilities in Mansfield and Dover, Ohio, which 
resumed operations in April 1995. The Mansfield and Dover plants, idled in 
March of 1994, recorded sales which were $52.1 higher in 1995 than in 1994. 
However, Armco's net sales in 1994 included $52.8 from Eastern Stainless 
Corporation, which has since been divested. Excluding the results of 
Mansfield, Dover and Eastern Stainless, 1995 net sales were 9% higher than 
1994 sales. Increased sales for the year in the Specialty Flat-Rolled Steels 
segment and by Sawhill Tubular, were partially offset by a decline in sales at 
Douglas Dynamics.

During 1994, special charges totaling $35.0 were recorded for expenses 
associated with idling the Mansfield and Dover Operations and for employee 
benefit and other charges related to the sale of assets by Eastern Stainless. 

The results of the Butler, Coshocton and Zanesville Operations in the 
Specialty Flat-Rolled Steels segment exceeded 1994 operating profit by 22%. In 
addition, results improved at Sawhill Tubular. However, excluding special 
charges, operating profit in 1995 was down $5.2 from 1994, as higher losses 
generated by the ramp-up of the Mansfield Operations and lower profits from 
Douglas Dynamics more than offset the improvements. 

Income from continuing operations in 1994 reflected the completion of an 
initial public offering and recapitalization of Armco Steel Company, L.P., for 
which Armco recognized a pretax gain of $36.5, and a $30.0 tax benefit. Also 
in 1994, Armco sold 90% of its investment in North American Stainless for 
$73.0 in cash, recognizing a $26.1 gain. 

16
<PAGE>

Outlook:  With reasonably firm demand in most product lines, Armco's expanded 
capacity and improved productivity should allow its Specialty Flat-Rolled 
Steels segment to compete for more of the available market. Armco expects 1997 
sales in the Fabricated Products segment to approximate 1996 levels; however, 
an expected decrease in operating profit on snowplows will be only partially 
offset by improved profits anticipated in the tubular business.


BUSINESS SEGMENT RESULTS

Specialty Flat-Rolled Steels
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                      1996        1995        1994
------------------------------------------------------------------------------
<S>                                 <C>         <C>         <C>
Customer sales                      $1,421.2    $1,277.0    $1,114.4
Special charges                          --          --        (35.0)
Operating profit                        72.9        76.0        40.5
------------------------------------------------------------------------------
</TABLE>
Armco's Specialty Flat-Rolled Steels businesses produce and finish flat-rolled 
stainless, electrical and carbon steels at plants in Butler, Pennsylvania, and 
Coshocton, Dover, Mansfield and Zanesville, Ohio. The segment also includes 
the results of international trading companies that buy and sell steel and 
manufactured steel products. Through September 30, 1994, the segment included 
stainless steel plate products, which were produced by Eastern Stainless 
Corporation, Armco's former 84%-owned subsidiary in Baltimore, Maryland. Armco 
stopped consolidating its results on that date following a decision by Eastern 
Stainless to sell substantially all of its assets to a third party.

Customer sales and shipments by major product line and annual production were:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                 1996             1995             1994
                             -----------      -----------      -----------
(tons in thousands)          Sales  Tons      Sales  Tons      Sales  Tons
------------------------------------------------------------------------------
<S>                       <C>      <C>     <C>      <C>     <C>        <C>
Specialty flat-rolled*    $1,108.0   739   $1,013.3   647   $  875.3   604
Specialty semi-finished      133.9    97      130.5    78       80.2    64
Stainless plate                --     --        --     --       52.8    22
Galvanized and other carbon  144.2   304       94.1   214       62.1   125
Other                         35.1    --       39.1    --       44.0    --
------------------------------------------------------------------------------
Total                     $1,421.2 1,140   $1,277.0   939   $1,114.4   815
------------------------------------------------------------------------------
Cast production                    1,439            1,153              947
------------------------------------------------------------------------------
<FN>
*  The Specialty flat-rolled product line consists of automotive exhaust 
stainless, specialty strip and sheet, and electrical steels.
</TABLE>
1996 vs. 1995:  Customer sales in 1996 exceeded 1995 levels primarily due to 
higher sales of automotive exhaust stainless, electrical and galvanized 
steels. A 21% increase in shipped tons was made possible by progressively 
higher operating levels at Mansfield in the second half of 1996. The higher 
operating levels were achieved despite several planned outages necessary to 
complete equipment upgrades.

Average sales per ton in 1996 was lower than in the prior year, primarily due 
to higher import penetration in a number of product lines, increased sales of 
lower-priced carbon products, and the elimination of raw material price 
surcharges on certain stainless steels. Armco and other specialty steel 
producers add raw material surcharges to the price of their product to 
compensate for higher costs incurred when the price of key raw materials such 
as nickel, chromium or molybdenum rises above certain levels. In 1996, raw 
material prices fell below these levels.

Automotive exhaust stainless shipments reached record levels in 1996, as the 
Mansfield Operations shipped significantly more of this product line than in 
the prior year. Strong production of North American cars and light trucks, and 
increased use of stainless in exhaust systems stimulated current year demand.

Shipments of electrical steel products increased as a result of generally good 
market conditions and some easing of capacity constraints. Driven by housing 
starts, demand remained strong for grain oriented electrical steel used in 
utility distribution transformers. However, shipments of non-oriented 
electrical steel used in motors and generators suffered under pressure from 
imports, which increased substantially in the second half of the year.

Specialty strip and sheet shipments declined slightly in the year-to-year 
comparison due to softer market conditions and increased import penetration. 
Average sales per ton were lower in 1996 compared to 1995 as a result of the 
elimination of raw material surcharges and base price erosion, resulting from 
an increased level of imports.

Specialty semi-finished shipments increased in 1996, primarily due to export 
sales. A reduction in average sales per ton reflected worldwide market 
softness and the elimination of raw material surcharges. Sales of specialty 
semi-finished products have also been adversely affected by import 
competition.

Armco's carbon steel shipments increased in 1996 compared to 1995. In the 
first half of 1996, Armco exited the lower-priced carbon hot band market, 
shifting the carbon steel product mix to more galvanized steel thereby 
increasing average sales per ton in the year-to-year comparison. 

During 1996, operating profit for this segment was lower than in 1995 due to 
price erosion on specialty strip and sheet and specialty semi-finished 
products and several planned equipment outages, including outages necessary to 
upgrade Armco's finishing facilities as part of the strategic facilities plan. 
The outages and the subsequent process of restarting and returning these 
facilities to full capability contributed to higher costs and lower yields. To 
meet demand during this period, Armco used outside processors to finish some 
of its stainless steels, resulting in increased costs.

Specialty Flat-Rolled Steels' 1996 operating profit included $8.6 of income 
from various claims settlements, including the partial settlement of a 
business interruption insurance claim for a 1995 unplanned outage. The outage 
resulted in the use of alternative and more costly product routings, and lost 
sales.

Operating profit in 1996 also included a $39.5 loss from the Mansfield and 
Dover Operations, compared to a loss of $104.2 in 1995 while Mansfield was 
ramping up. The 1996 loss was due, in part, to a number of planned and 
unplanned equipment outages and to higher than expected operating costs.

                                                                          17
<PAGE>
RESTORING EARNINGS POWER

<TABLE>
[NINE BAR CHARTS APPEAR HERE]
                  SPECIALTY FLAT-ROLLED STEELS - SALES - BY MARKET
<CAPTION>
------------------------------------------------------------------------------
                                            1996        1995        1994
------------------------------------------------------------------------------
<S>                                          <C>         <C>         <C>
Automotive                                   44%         40%         39%
Industrial and Electrical Equipment          28%         32%         34%
Service Centers                              12%          9%         12%
Other                                        16%         19%         15%
------------------------------------------------------------------------------


               SPECIALTY FLAT-ROLLED STEELS - SALES - BY PRODUCT LINE
<CAPTION>
------------------------------------------------------------------------------
                                            1996        1995        1994
------------------------------------------------------------------------------
<S>                                          <C>         <C>         <C>
Specialty flat-rolled                        78%         79%         78%
Specialty semi-finished                       9%         10%          7%
Stainless plate                               0%          0%          5%
Galvanized and other carbon                  10%          7%          6%
Other                                         3%          4%          4%
------------------------------------------------------------------------------


                 SPECIALTY FLAT-ROLLED STEELS - TONS SHIPPED
<CAPTION>
------------------------------------------------------------------------------
                                            1995        1994        1993
------------------------------------------------------------------------------
<S>                                          <C>         <C>         <C>
Specialty flat-rolled                        65%         68%         74%
Specialty semi-finished                       8%          9%          8%
Stainless plate                               0%          0%          3%
Galvanized and other carbon                  27%         23%         15%
------------------------------------------------------------------------------
</TABLE>

1995 vs. 1994:  The Mansfield and Dover Operations were idled from March 1994 
through the first quarter of 1995, although Dover began limited operations 
early in the first quarter of 1995. By mid-year, the Dover plant was fully 
operational. With the completion of its new thin-slab caster and modernized 
hot strip mill, Mansfield restarted in April 1995. The restart was hampered by 
process control system difficulties and the failure of the refractory lining 
and a skid in the new walking beam furnace. The furnace problems necessitated 
an unscheduled 17-day outage. 

Customer sales in 1995 increased 15% over 1994 sales, as demand for most 
products remained strong throughout the year. Pricing also remained strong as 
a result of raw material surcharges on products containing nickel, chromium 
and molybdenum, January 1995 price increases for electrical steel and 
industry-wide price increases for chrome nickel products.

Armco's shipments of automotive exhaust stainless increased in 1995, 
principally as a result of continued strength in North American car and light 
truck production and increased use of stainless steel in exhaust systems.

Shipments of electrical steel remained at a high level, sustained by strong 
demand for both grain oriented and non-oriented electrical steels. Armco's 
orders for non-oriented electrical steel were further increased in 1995 by a 
54-day strike at a major domestic competitor; however, Armco's ability to ship 
this product was limited by capacity constraints.

The increase in Armco's shipments of specialty strip and sheet was primarily 
attributable to broad-based increases in the automotive, consumer and 
industrial markets, especially in the first half of 1995, as well as the 
strike mentioned above. In the second half, demand slowed due to normal 
seasonal factors as well as liquidation of customer inventories.

Specialty semi-finished shipments, which consist of hot bands and slabs, grew 
22% in 1995 on strong demand from North American customers.

Customer sales for the segment were also affected by the idling and restart of 
the Mansfield and Dover Operations and by the divestment of Eastern Stainless. 
Sales by Mansfield and Dover increased by $52.1 in 1995. Eastern Stainless 
sales of $52.8 were recognized in 1994, before Armco stopped consolidating the 
results of this business as a result of the divestment.

During 1994, Armco recognized a $20.0 special charge related to its decision 
to idle and restructure the Mansfield and Dover, Ohio plants, while installing 
a new thin-slab continuous caster. The special charge consisted of $11.2 for 
employee benefits, primarily group insurance and supplemental unemployment 
benefits, and $8.8 to write down inventories and fixed assets. 

In 1994, Eastern Stainless decided to sell substantially all of its assets for 
cash and the assumption of certain liabilities and Armco recognized a $15.0 
special charge related to that decision. On March 14, 1995, the transaction 
was completed. Net liabilities not assumed by the buyer or satisfied by the 
sale proceeds were assumed by Armco. On the date of sale, the net liabilities 
assumed by Armco, including amounts recorded at the establishment of the $15.0 
special charge, totaled $53.0. 

Specialty Flat-Rolled Steels operating profit in 1995 was almost double that 
of 1994. Included in the 1995 operating results was a $104.2 operating loss 
from the Mansfield and Dover Operations, primarily as a result of the startup 
problems described above. The 1994 Specialty Flat-Rolled Steels operating 
profit included losses of $86.0 from the Mansfield and Dover Operations, 
primarily as a result of the idling. The remaining operations in this segment 
realized a 22% increase in operating profit from 1994 to 1995.

Outlook:  The strategic facilities upgrades were completed during 1996 and 
Armco believes that it is now positioned to operate its plants without major 
disruptions throughout 1997. Armco plans to focus on improving productivity 
and quality at its specialty flat-rolled steels operations and anticipates 
further cost reductions as these improvements are made. 

Improved results for this segment are dependent, in part, on steady production 
from the Mansfield Operations. Based on fourth quarter 1996 results, Mansfield 
has demonstrated its ability to produce quality products at stable operating 
levels, providing this business segment with the capacity and flexibility 
required to meet expected market conditions. 

Automotive exhaust stainless sales are expected to remain strong supported by 
North American vehicle sales and an increase in the average amount of 
stainless steel used in each vehicle. Stable housing starts are expected to 
continue to stimulate demand for oriented electrical steels, while 

18
<PAGE>

high levels of lower-priced imports continue to adversely affect non-oriented 
product sales. In the near term, worldwide oversupply and higher levels of 
import penetration are expected to have a continued adverse effect on pricing 
for specialty strip and sheet and specialty semi-finished products. Prices and 
demand for Armco's galvanized steels, however, are expected to remain stable 
through the first half of 1997.

Low-priced foreign imports of specialty steels increased in 1996, adversely 
affecting volume and pricing experienced by domestic companies like Armco. As 
a result, industry trade groups have begun to gather data to determine whether 
there are grounds for trade cases against some foreign producers. However, no 
trade cases have been filed to date and there can be no assurance that 
sufficient grounds will be found to warrant future filing of trade cases or, 
in the event, trade cases are filed, that a favorable result will be obtained.

Fabricated Products
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                        1996        1995        1994
------------------------------------------------------------------------------
<S>                                    <C>         <C>         <C>
Customer sales                         $302.8      $282.9      $323.2
Special charges                          (8.8)        --          --
Operating profit                         22.8        22.0        30.9
------------------------------------------------------------------------------
</TABLE>
The Fabricated Products business segment includes the results of Sawhill 
Tubular, a manufacturer of steel pipe and tubing, and Douglas Dynamics, a 
manufacturer of snowplows and ice control products.

1996 vs. 1995: Customer sales in this segment were 7% above last year's level, 
largely due to higher sales at Douglas Dynamics. Snowplow shipments in 1996 
were the second highest achieved in Douglas Dynamics' history, due to near 
record snowfalls and strong light truck sales. Although Sawhill Tubular's 
shipment volumes increased in the year-to-year comparison, this was offset by 
lower prices caused by increased domestic competitive pressures and a high 
level of imports.

In 1996, Armco recorded a special charge of $5.9 for the estimated loss on the 
sale of its nonresidential construction business. In 1996, Armco negotiated an 
agreement to sell the business and the sale was effective January 1, 1997. The 
charge primarily relates to the writedown of assets and recognition of 
additional employee benefit liabilities.

Also in 1996, Armco recorded a $2.9 special charge primarily for the writedown 
of inventories and severance costs related to the decision to discontinue a 
line of light truck equipment manufactured by Douglas Dynamics.  Excluding 
this special charge, Douglas Dynamics' operating profit was substantially 
higher than 1995. Increased sales and cost reductions related to the 
elimination of production outsourcing were partially offset by higher fixed 
manufacturing, administrative and selling costs, primarily related to the 
introduction of new products. 

Sawhill Tubular recorded a decrease in operating profits primarily as a result 
of higher costs for steel hot bands compared to product selling prices. 

1995 vs. 1994: Customer sales decreased by 12% in 1995 compared to 1994 
primarily as a result of eliminating the sales of Bowman Metal Deck, a 
manufacturer of steel roof and floor decking, which was sold in December 1994, 
and lower sales by Douglas Dynamics. The severe winter weather in early 1994 
led to the best sales year in Douglas Dynamics' history; however, the mild 
winter preceding the 1995 selling season resulted in lower annual snowplow 
sales. Sawhill Tubular sales were 3% higher than 1994.

Lower operating profit in 1995 resulted from the reduced sales at Douglas 
Dynamics, which was partially offset by Sawhill Tubular's return to 
profitability. Douglas Dynamics cut operating costs by reducing manpower to 
match lower order backlog, decreasing the amount of production previously 
performed by outside parties and periodically ceasing production to control 
inventory levels. However, these actions could not fully offset the effects of 
the lower sales volume of snowplows and other equipment sales, and higher 
expenses related to new product development. Sawhill Tubular's return to 
profitability was driven by increased sales, complemented by operational 
improvements and cost reduction programs, which not only led to improved 
results, but also brought about reductions in inventories.

Outlook: Sales at Douglas Dynamics are expected to be lower in 1997 compared 
to 1996, as the snowplow industry continues to experience its normal cyclical 
change in volume. During this downturn, Armco expects to maintain market share 
and margins, but still anticipates a decrease in operating profits.

Sales at Sawhill Tubular in 1997 are anticipated to be above 1996 levels, 
reflecting increased volume and stable, though depressed, pricing. Higher 
sales and a reduction in manufacturing costs are expected to result in 
improved operating profit.


DISCONTINUED OPERATIONS

Aerospace and Strategic Materials

Oregon Metallurgical Corporation (Oremet), formerly 80% owned by Armco, was 
part of the Aerospace and Strategic Materials business segment that Armco sold 
in 1985. Prior to the sale, Armco filed a suit on behalf of Oremet in the U.S. 
Claims Court, claiming refunds and interest on federal and state taxes. 
Pursuant to the sales agreement, Armco retained the benefit of its share of 
any proceeds of this action, net of taxes imposed on Oremet and the buyer. In 
1988, as a result of a favorable settlement with the Internal Revenue Service 
(IRS), Armco recorded a $15.2 net of tax adjustment to the gain on the sale of 
this business segment. In 1996, Armco and Oremet reached agreement with the 
IRS that the 1988 refund of taxes and interest should not itself have been 
taxable to Oremet, further increasing the net proceeds, resulting in Armco 
recording an additional $6.5 gain on the sale.

National-Oilwell

National-Oilwell, which sells oil field tubular pipe, and produces and sells 
drilling and production equipment and process pumps used in the world's oil 
and gas services industry, was a joint venture equally owned by subsidiaries 
of Armco and USX Corporation.

Armco and USX reached a definitive agreement, dated September 22, 1995, to 
sell their respective partnership interests in National-Oilwell to an entity 
formed by Duff & Phelps/Inverness, First Reserve Funds and National-Oilwell 
management. The sale was completed on January 16, 1996. For its 50% interest, 
Armco received $77.0 in cash, and receivables with a face value of $13.0. The 
receivables were recorded at a discounted value of $10.6. After recording $2.1 
for recognition of deferred foreign translation losses and miscellaneous 
expenses, no gain or loss was recognized on the transaction. 

                                                                          19
<PAGE>
RESTORING EARNINGS POWER

Armco Financial Services Group (AFSG)

AFSG consists of insurance companies that have stopped writing new business 
and are being liquidated. These companies have not written any new business 
for retention except for an immaterial amount of guaranteed renewable accident 
and health business since 1986. The number of policyholders of this business 
has decreased from approximately 4,000 at December 31, 1986 to 1,007 at 
December 31, 1995 and 870 at December 31, 1996.

Liquidity and Financial Resources: Claims are paid by using AFSG's investment 
portfolio and the related investment income from such portfolio. The portfolio 
had a market value of $172.3 at December 31, 1996. AFSG believes the existing 
invested assets, related future income and other assets will provide 
sufficient funds to meet all future claims payments. 

AFSG's loss reserves net of reinsurance recoverables decreased to $102.2 at 
December 31, 1996 from $118.7 at December 31, 1995. AFSG estimates that 60% of 
the claims will be paid in the next five years and that substantially all of 
the claims will be paid by the year 2017. The ultimate amount of the claims as 
well as the timing of the claims payments are estimated based on an annual 
review of loss reserves performed by AFSG's independent and consulting 
actuaries.

Outlook: Armco management continues to believe, based on current facts and 
circumstances and the opinions of outside counsel and advisors, that future 
charges, if any, resulting from the runoff of AFSG will not be material to 
Armco's financial condition or liquidity. However, it is possible that due to 
fluctuations in Armco's results, future developments could have a material 
effect on the results of one or more future interim or annual periods.


OTHER INVESTMENTS

Armco Steel Company, L.P. (ASC)

On April 7, 1994, ASC, a limited partnership 50% owned by a subsidiary of 
Armco, completed an initial public offering and recapitalization. As part of 
this transaction, the business and assets of ASC were transferred to AK Steel 
Holding Corporation, a newly formed, publicly traded company. In exchange for 
its interest in ASC, Armco received 1,023,987 shares of AK Steel common stock, 
representing approximately four percent of the outstanding shares. The number 
of shares received and other terms of the restructuring and recapitalization 
were determined by arm's-length negotiations.

As a result of the transaction, in 1994 Armco recognized a nonrecurring pretax 
gain of $36.5, primarily as a result of its release from certain obligations 
to make future cash payments to the former joint venture and recognition of 
deferred pension curtailment gains established at ASC's formation. In light of 
this transaction, Armco also concluded that the realizable amount of its 
deferred tax asset had increased and so recorded a tax benefit of $30.0. 

In 1995, Armco sold all of the AK Steel common stock it had received as a 
result of the initial public offering and recapitalization for a total of 
$27.2, recognizing a gain of the same amount. 

Under a toll-rolling agreement that is in effect through the year 2002, AK 
Steel hot rolls stainless steel for Armco. 

North American Stainless (NAS)

Armco and Acerinox S.A. of Spain each owned a 50% partnership interest in NAS 
through their respective subsidiaries, First Stainless, Inc. and Stainless 
Steel Invest, Inc. NAS operates a state-of-the-art chrome nickel stainless 
steel finishing plant in Carrollton, Kentucky. In 1994, Armco's subsidiary 
sold 90% of its 50% equity interest in NAS to its partner for $73.0 in cash 
and Armco recorded a $26.1 gain on the sale. Armco decided to sell most of its 
investment in NAS because NAS needed cash infusions from its partners to 
expand its operations, while Armco chose to use its resources to support its 
core business operations. In connection with the transaction, Armco entered 
into an annual supply contract with NAS to provide the former joint venture 
with semi-finished stainless steel at market prices.


LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, Armco had $168.9 of cash and cash equivalents, compared 
to $136.8 at December 31, 1995. Cash and cash equivalents increased $32.1 
during 1996, primarily as a result of net proceeds of $77.0 from the sale of 
National-Oilwell, $15.7 of net proceeds from the sale of other assets and 
investments, and cash generated from operations. Partially offsetting these 
inflows were cash payments, which included $59.8 for capital expenditures, 
$41.2 for pension plan funding, $24.3 of principal payments on debt and $17.8 
for preferred stock dividends.

Inventories increased 14% during 1996, reflecting increased production levels 
in the Specialty Flat-Rolled Steels segment. Trade receivables and payables, 
primarily in the Specialty Flat-Rolled Steels segment, declined 16% and 8%, 
respectively. The decrease in receivables was the result of timelier customer 
payments and lower product prices. The decline in payables primarily reflects 
lower prices for purchased raw materials and reduced capital expenditures.

At December 31, 1996, Armco had in place two bank credit facilities, totaling 
$170.0. Under a receivables facility, Armco sells substantially all its trade 
receivables to a wholly owned subsidiary, Armco Funding Corporation (AFC). In 
January 1996, AFC entered into a five-year revolving credit agreement with a 
group of banks providing up to $120.0 for revolving credit loans and letters 
of credit secured by AFC's receivables. At December 31, 1996, there were no 
outstanding borrowings under this credit facility; however, $69.9 of the 
facility was used as support for letters of credit.

In January 1996, Armco entered into a three-year revolving credit agreement 
with a group of banks providing up to $50.0 for revolving credit loans secured 
by Armco's inventories. The credit agreement subjects Armco to certain 
restrictions and covenants related to, among other things, minimum working 
capital, minimum net income, current ratio and interest coverage ratio 
requirements. At December 31, 1996, there were no outstanding borrowings under 
this credit facility.

Armco has debt maturities of $27.2 and $27.4 in 1997 and 1998, respectively. 
In 1999 and 2000, $127.5 and $157.6, respectively, will come due, primarily as 
a result of the maturity of the $100.0, 11.375% Senior Notes due 1999 and the 
$125.0, 9.375% Senior Notes due 2000.

20
<PAGE>

Armco anticipates that its capital expenditures for 1997 will total 
approximately $70.0, of which approximately $18.5 relates to finishing 
facilities expansion projects. Armco expects that its 1997 cash requirements, 
including amounts for debt service, preferred stock dividends and capital 
expenditures, will be paid out of existing cash balances and cash generated 
from operations.

On January 24, 1997, Armco's Board of Directors declared the regular quarterly 
dividends of $.525 per share on the $2.10 cumulative convertible preferred 
stock, Class A, and $.90625 per share on the $3.625 cumulative convertible 
preferred stock, Class A, each payable March 31, 1997 to shareholders of 
record on February 28, 1997. The Board of Directors also declared the regular 
quarterly dividend of $1.125 per share on the $4.50 cumulative convertible 
preferred stock, Class B, payable April 1, 1997, to shareholders of record on 
February 28, 1997. Payment of dividends on Armco's common stock is currently 
prohibited under the terms of certain of Armco's debt instruments and under 
the terms of its inventory credit facility. Armco does not anticipate paying a 
common stock dividend in the foreseeable future.


ENVIRONMENTAL MATTERS

Armco, in common with other United States manufacturers, is subject to various 
federal, state and local requirements for environmental controls relating to 
its operations. Armco has devoted, and will continue to devote, significant 
resources to control air and water pollutants, to dispose of wastes and to 
remediate sites of past waste disposal. Armco estimates capital expenditures 
for pollution control in its manufacturing operations will be about $20.0 for 
the years 1997-2001, with the largest expenditures being made in the Specialty 
Flat-Rolled Steels segment. Approximately $7.5 is related to control of air 
pollution pursuant to regulations currently promulgated under the Clean Air 
Act, as amended, and corresponding state laws. These projections, which have 
been prepared internally and without independent engineering or other 
assistance, reflect Armco's analysis of both current and expected regulations. 
During the period 1991 through 1996, Armco's capital expenditures for 
pollution control projects amounted to approximately $35.8, including $7.7 in 
1996. Statutory and regulatory requirements in this area continue to evolve 
and, accordingly, the type and magnitude of expenditures may change. 

Armco has been named as a defendant, or identified as a potentially 
responsible party, in various governmental proceedings regarding cleanup of 
certain past waste disposal sites. Armco is also a defendant in various 
private lawsuits alleging property damage and personal injury from waste 
disposal sites. Joint and several liability could be imposed on Armco or other 
parties for some of these matters; thus, theoretically, one party could be 
held liable for all costs related to a site. While such governmental and 
private actions are being contested, the outcome of individual matters cannot 
be predicted with assurance. However, based on its experience with such cases 
and a review of current claims, Armco expects that in most cases any ultimate 
liability will be apportioned between Armco and other financially viable 
parties. 

From time to time, Armco has been and may be subject to penalties or other 
requirements as a result of administrative actions by regulatory agencies and 
to claims for indemnification for properties it has previously owned or 
leased. In addition, environmental exit costs may be incurred if Armco decides 
to dispose of additional properties. It is Armco's policy not to accrue such 
costs until a decision is made to dispose of a property.

Based on current facts and circumstances known to Armco, Armco's experience 
with site remediation, an understanding of current environmental laws and 
regulations, environmental assessments, the existence of other financially 
viable parties, expected remediation methods and the years in which Armco is 
expected to make payments toward each remediation (which range from the 
current year to 30 years or more in the future), Armco believes that the 
ultimate liability for environmental remediation matters identified to date, 
will not materially affect its consolidated financial condition or liquidity. 
However, it is possible that, due to fluctuations in Armco's operating 
results, future developments with respect to such matters could have a 
material effect on the results of operations of future interim or annual 
periods. 

Furthermore, the identification of additional sites, changes in known 
circumstances with respect to identified sites, the failure of other parties 
to contribute their share of remediation costs, decisions to dispose of 
additional properties and other changed circumstances may result in increased 
costs to Armco, which could have a material effect on its consolidated 
financial condition, liquidity and results of operations in future interim or 
annual periods. However, it is not possible to determine whether additional 
loss, due to changed circumstances, will occur or to reasonably estimate the 
amount or range of any potential additional loss.

Statutes and regulations relating to the protection of the environment have 
resulted in higher operating costs and capital investments by the industries 
in which Armco operates. Although it cannot predict precisely how changes in 
environmental requirements will affect its businesses, Armco does not believe 
such requirements would affect its competitive position.

On October 10, 1996, the Accounting Standards Executive Committee of the 
American Institute of Certified Public Accountants issued Statement of 
Position 96-1, Environmental Remediation Liabilities. The Statement provides 
authoritative guidance on specific accounting issues that are present in the 
recognition, measurement, display and disclosure of environmental remediation 
liabilities. Armco intends to adopt the Statement, when required in 1997, but 
does not expect the adoption to have a material effect on its Statements of 
Consolidated Financial Position or Consolidated Income.

                                                                          21
<PAGE>

RESTORING EARNINGS POWER . OPINION

Responsibility for Financial Reporting

Armco's management prepared the financial statements presented in this Annual 
Report in accordance with generally accepted accounting principles in the 
United States. These principles require choices among alternatives and 
numerous estimates of financial matters. Armco believes the accounting 
principles chosen are appropriate in the circumstances, and the estimates and 
judgements involved in Armco's financial reporting are reasonable and 
conservative.

Armco's management is responsible for the integrity and objectivity of the 
financial information presented in this Annual Report. Armco maintains a 
system of internal accounting control and a program of internal audits. They 
are designed to provide reasonable assurance that the financial reports are 
fairly presented and that Armco employees comply with stated policies and 
procedures, including policies on the ethical conduct of business. Armco 
continually reviews and updates its policies and system of internal accounting 
control as businesses and business conditions change.

Management and the Audit Review Committee of the Board of Directors 
recommended, and the Board of Directors approved, the hiring of Deloitte & 
Touche LLP as independent auditors for Armco. Deloitte & Touche LLP expresses 
an informed professional opinion on Armco's financial statements.

The Audit Review Committee, composed solely of independent outside directors, 
oversees Armco's public financial reporting. The Audit Review Committee meets 
periodically with management, Deloitte & Touche LLP and Armco's internal 
auditors, both individually and jointly, to discuss internal accounting 
control and financial reporting matters. Deloitte & Touche LLP and Armco's 
internal auditors have free access to the Audit Review Committee to discuss 
any matters.

We believe Armco's internal control system, combined with the activities of 
the internal and independent auditors and the Audit Review Committee, provides 
you reasonable assurance of the integrity of our financial reporting.


/s/  J. F Will                            /s/  Jerry W. Albright

James F. Will                             Jerry W. Albright
Chairman, President and                   Vice President and
Chief Executive Officer                   Chief Financial Officer



Independent Auditors' Report


Deloitte &
   Touche LLP                                   2500 One PPG Place
-------------                                   Pittsburgh, PA 15222
           [Deloitte & Touche LLP LOGO]


Armco, Its Shareholders and Directors:

We have audited the statement of consolidated financial position of Armco Inc. 
and subsidiaries as of December 31, 1996 and 1995, and the related 
consolidated statements of income and cash flows for each of the three years 
in the period ended December 31, 1996. These financial statements are the 
responsibility of the Company's management. Our responsibility is to express 
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and  perform the audit to 
obtain reasonable assurance about whether the financial statements are free of 
material misstatement.  An audit includes examining, on a test basis, evidence 
supporting the amounts and disclosures in the financial statements. An audit 
also includes assessing the accounting principles used and significant 
estimates made by management, as well as evaluating the overall financial 
statement presentation. We believe that our audits provide a reasonable basis 
for our opinion.

In our opinion, such consolidated financial statements present fairly, in all 
material respects, the financial position of Armco Inc. and subsidiaries at 
December 31, 1996 and 1995, and  the results of their operations and their 
cash flows for each of the three years in the period ended December 31, 1996, 
in conformity with generally accepted accounting principles.

/s/  Deloitte & Touche LLP

February 5, 1997

22
<PAGE>

RESTORING EARNINGS POWER . INCOME
<TABLE>
STATEMENT OF CONSOLIDATED INCOME
For the years ended December 31, 1996, 1995 and 1994
(Dollars in millions, except per share amounts)

<CAPTION>
----------------------------------------------------------------------------
                                                 1996      1995      1994 
----------------------------------------------------------------------------
<S>                                            <C>       <C>       <C>
Net sales                                      $1,724.0  $1,559.9  $1,437.6 
Cost of products sold                          (1,549.7) (1,392.7) (1,267.0)
Selling and administrative expenses               (90.8)    (98.2)    (96.4)
Special charges (Note 8)                           (8.8)      --      (35.0)
----------------------------------------------------------------------------
   Operating profit                                74.7      69.0      39.2

Interest income                                    10.1      11.8      10.5
Interest expense                                  (36.3)    (32.9)    (33.8)
Gain on sale of investments in joint ventures
   and related stock (Note 10)                      --       27.2      62.6
Sundry other-net (Note 2)                         (21.1)    (49.6)    (41.4)
----------------------------------------------------------------------------
   Income before income taxes                      27.4      25.5      37.1 

Credit (provision) for income taxes (Note 3)       (1.4)     (2.0)     28.7 
----------------------------------------------------------------------------
   Income from continuing operations               26.0      23.5      65.8 

Discontinued operations (Note 11) - 

   Aerospace and Strategic Materials 
      Gain on disposal of business                  6.5       --        --  

   National-Oilwell 
      Income from operations (net of income taxes 
        of $0.1 in 1995 and $1.0 in 1994)           --        6.3      11.9 
----------------------------------------------------------------------------
Net income                                    $    32.5  $   29.8  $   77.7 
----------------------------------------------------------------------------

Income per share-primary (Note 1)
  Income from continuing operations           $    0.08  $   0.05  $   0.46 
  Income from discontinued operations              0.06      0.06      0.11 
----------------------------------------------------------------------------
Net income                                    $    0.14  $   0.11  $   0.57 
----------------------------------------------------------------------------

Dividends on preferred stock (Note 5)
    $2.10 Class A                             $    2.10  $   2.10  $   2.10 
    $3.625 Class A                                 3.625     3.625     3.625
    $4.50 Class B                                  4.50      4.50      4.50 
----------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements on pages 26 through 37. 
</TABLE>
                                                                          23
<PAGE>

RESTORING EARNINGS POWER . FINANCIAL POSITION
<TABLE>
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
December 31, 1996 and 1995 
(Dollars in millions, except per share amounts)
<CAPTION>
------------------------------------------------------------------------------
                                                              1996      1995 
------------------------------------------------------------------------------
<S>                                                        <C>       <C>
Assets
  Current assets
    Cash and cash equivalents (Note 1)                     $  168.9  $  136.8 
    Accounts and notes receivable
      Trade (less allowance for doubtful accounts of 
        $3.8 in 1996 and $4.4 in 1995)                        137.4     162.8 
      Other                                                    12.2       6.6 
    Inventories (Note 1)                                      246.9     216.2 
    Investment in National-Oilwell (Note 11)                    --       85.5 
    Other                                                       6.4       5.9 
------------------------------------------------------------------------------
  Total current assets                                        571.8     613.8 
------------------------------------------------------------------------------

  Investments
    Investment in Armco Financial Services Group (Note 11)     85.6      85.6 
    Other (less allowance for impairment of $12.7 in
      1996 and $16.7 in 1995)  (Note 1)                        52.4      37.2 

  Property, plant and equipment (net of accumulated deprec-
     iation of $597.6 in 1996 and $539.8 in 1995) (Note 1)    670.1     668.5 
  Deferred tax asset - net (Note 3)                           325.8     326.1 
  Goodwill and other intangible assets (Note 1)               144.8     145.9 
  Other assets                                                 17.3      19.5 
------------------------------------------------------------------------------
Total assets                                               $1,867.8  $1,896.6 
------------------------------------------------------------------------------
                                                           
Liabilities
  Current liabilities
    Trade accounts payable                                 $  136.3  $  148.2 
    Employment-related liabilities (Note 2)                   115.1     172.4 
    Other accruals                                             79.6      72.6 
    Current portion of long-term debt (Note 4)                 27.2      25.8 
------------------------------------------------------------------------------
  Total current liabilities                                   358.2     419.0 
------------------------------------------------------------------------------

  Long-term debt (Note 4)                                     344.3     361.6 
  Long-term employee benefit obligations (Note 2)           1,200.2   1,165.9 
  Other liabilities                                           177.1     180.5 

  Commitments and contingencies (Notes 1, 4, 9 and 11)
------------------------------------------------------------------------------

Shareholders' deficit (Note 5) 
  Preferred stock
     Class A                                                  137.6     137.6 
     Class B                                                   48.3      48.3 
  Common stock (authorized 150,000,000 shares of 
    $.01 par value; issued and outstanding 
    106,457,166 in 1996 and 106,102,560 in 1995)                1.1       1.1 
  Additional paid-in capital                                  965.0     963.0 
  Accumulated deficit                                      (1,363.9) (1,378.5)
  Other                                                        (0.1)     (1.9)
------------------------------------------------------------------------------
  Total shareholders' deficit                                (212.0)   (230.4)
------------------------------------------------------------------------------
Total liabilities and shareholders' deficit                $1,867.8  $1,896.6 
------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements on pages 26 through 37. 
</TABLE>
24
<PAGE>

RESTORING EARNINGS POWER . CASH FLOWS
<TABLE>
STATEMENT OF CONSOLIDATED CASH FLOWS

For the years ended December 31, 1996, 1995 and 1994
<CAPTION>
------------------------------------------------------------------------------
(Dollars in millions)                                 1996     1995     1994
------------------------------------------------------------------------------
<S>                                                  <C>      <C>      <C>
Cash flows from operating activities:
  Net income                                         $ 32.5   $ 29.8   $ 77.7 
  Adjustments to reconcile net income to net 
    cash from operating activities:
    Depreciation                                       58.7     52.8     48.8 
    Undistributed earnings from discontinued operations  -      (6.3)   (11.9)
    Net gain on sales of investments and facilities    (8.9)   (28.4)   (64.3)
    Deferred income tax benefit                          -        -     (30.0)
    Special charges                                     8.8       -      35.0 
    Other                                               6.3     10.9     12.4 
  Change in assets and liabilities: 
    Trade accounts and notes receivable                22.8      6.1     (9.9)
    Inventory                                         (33.3)   (50.8)    12.4 
    Payables and accrued operating expenses           (13.2)    34.4     (1.8)
    Employee benefits obligations                     (17.4)   (26.4)    20.2 
    Other assets and liabilities - net                (13.7)    (6.6)   (30.1)
------------------------------------------------------------------------------
  Net cash provided by operating activities            42.6     15.5     58.5 
------------------------------------------------------------------------------
Cash flows from investing activities:
    Net proceeds from the sale of businesses 
      and assets                                       14.0     31.5     19.9 
    Proceeds from the sale and maturity of 
      liquid investments                                 -      29.7       -   
    Proceeds from the sale of investments              78.7     30.0     89.4 
    Purchase of liquid investments                     (0.3)    (6.0)   (24.5)
    Purchase of investments                            (0.1)    (1.2)    (8.8)
    Contributions to investees                         (3.0)    (2.0)    (7.7)
    Capital expenditures                              (59.8)  (143.3)   (86.9)
    Other                                              (2.6)     1.4      2.4 
------------------------------------------------------------------------------
  Net cash provided by (used in) investing activities  26.9    (59.9)   (16.2)
------------------------------------------------------------------------------
Cash flows from financing activities:
    Proceeds from issuance of debt                      5.5      5.0     15.0 
    Principal payments on debt                        (24.3)    (8.1)   (24.3)
    Proceeds from issuance of common stock               -       2.4      2.8 
    Dividends paid on preferred stock                 (17.8)   (20.9)   (14.8)
    Other                                              (0.8)      -      (1.7)
------------------------------------------------------------------------------
  Net cash used in financing activities               (37.4)   (21.6)   (23.0)
------------------------------------------------------------------------------
Net change in cash and cash equivalents                32.1    (66.0)    19.3 
  Cash and cash equivalents:  
    Beginning of year                                 136.8    202.8    183.5 
------------------------------------------------------------------------------
    End of year                                      $168.9   $136.8   $202.8 
------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
  Cash paid during the year for:
    Interest                                         $ 35.1   $ 31.2   $ 31.1 
    Income taxes                                        0.1      0.7      0.7 

Supplemental schedule of noncash investing and 
  financing activities:

  Debt incurred or assets exchanged directly 
    for property                                         -      16.2      9.5 
  Issuance of restricted stock                          2.1      4.7      2.5 
  Notes receivable and stock in partial payment 
    for asset sales                                    10.6       -       7.7 
------------------------------------------------------------------------------
<FN>
See Notes to Consolidated Financial Statements on pages 26 through 37.
</TABLE>
                                                                           25
<PAGE>


RESTORING EARNINGS POWER . NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)

1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General
The accompanying financial statements consolidate the accounts of Armco and 
all subsidiaries in which Armco has a controlling interest.

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 the disclosure 
of contingent assets and liabilities at the date of the financial statements 
and the reported amounts of revenues and expenses during the reporting period. 
Actual results could differ from those estimates.

Investments
Armco considers all highly liquid investments purchased with a maturity of 
three months or less to be cash equivalents. Cash equivalents which consist 
primarily of commercial paper, repurchase agreements, Eurodollar time deposits 
and money market mutual funds are stated at amortized cost plus accrued 
interest, which approximates fair value.

Under the definitions provided in Statement of Financial Accounting Standards 
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity 
Securities, Armco has securities which have been classified as held to 
maturity and are, therefore, recorded at amortized cost. At December 31, 1996 
and 1995, the securities were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                                      1996       1995
------------------------------------------------------------------------------
     <S>                                            <C>         <C>
     Cash equivalents                               $ 139.5     $ 130.1
     Restricted collateral deposits                    15.5        15.1
------------------------------------------------------------------------------
     Total securities                               $ 155.0     $ 145.2
------------------------------------------------------------------------------
</TABLE>
The restricted collateral deposits are primarily invested in certificates of 
deposit which mature within one year and are principally for equipment 
financing, self-insurance programs, and environmental and litigation bonds. 
These securities are primarily reported in Other investments. The 
classification as long-term is based on the expected term of the collateral 
requirement and not necessarily the maturity date of the underlying 
securities. 

Also included in Other investments at December 31, 1996 were receivables from 
the sale of National-Oilwell, recorded at a discounted value of $10.6, which 
approximates fair value. At December 31, 1996 and 1995, Other investments 
included $11.2 and $8.2, respectively, for Armco's limited partnership 
interest in North American Stainless (Note 10). It is not practicable to 
estimate the fair value of this closely held limited partnership, where 
Armco's ownership interest is approximately 5%. At December 31, 1996 and 1995, 
Armco had no material investments in derivative financial instruments. 

Inventories
Inventories are valued at the lower of cost or market. Cost of inventories at 
most domestic operations is measured on the LIFO -- Last In, First Out -- 
method. Other inventories are measured principally at average cost. Inventory 
balances as of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                                   1996      1995
------------------------------------------------------------------------------
<S>                                              <C>        <C>
Inventories on LIFO:
Finished and semi-finished                       $ 259.0    $ 226.8
Raw materials and supplies                          21.4       24.8
Adjustment to state inventories at LIFO value      (52.8)     (57.3)
------------------------------------------------------------------------------
Total                                              227.6      194.3
------------------------------------------------------------------------------
Inventories on average cost:
Finished and semi-finished                          11.9       15.5
Raw materials and supplies                           7.4        6.4
------------------------------------------------------------------------------
Total                                               19.3       21.9
------------------------------------------------------------------------------
Total inventories                                $ 246.9    $ 216.2
------------------------------------------------------------------------------
</TABLE>
Liquidation of LIFO inventory layers caused by certain inventory reductions 
(reduced)/increased net income by $(0.1) in 1996, $0.3 in 1995 and $3.6 or 
$.03 per share in 1994.

Research and Development Costs
Armco conducts a broad range of research and development activities. These 
activities are aimed at improving existing products and manufacturing 
processes and developing new products and processes. Research and development 
costs are recorded as expense when incurred. The amounts incurred in 1996, 
1995 and 1994 were $13.1, $14.0 and $12.0, respectively.

Property, Plant and Equipment
Depreciation is computed using the straight-line method based on the estimated 
useful lives of the related assets. Leasehold improvements are depreciated 
over the shorter of the life of the related asset or the life of the lease. 
Generally, Armco depreciates its property, plant and equipment at annual rates 
of 5% for land improvements, 3% - 5% for buildings and 5% - 33% for machinery 
and equipment.

Armco's property, plant and equipment balances as of December 31, 1996 and 
1995 were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                                1996        1995
------------------------------------------------------------------------------
<S>                                          <C>         <C>
Land                                         $   26.6    $   26.6
Buildings                                        90.8        88.4
Machinery and equipment                       1,117.5     1,039.4
Construction in progress                         32.8        53.9
------------------------------------------------------------------------------
Total property, plant and equipment           1,267.7     1,208.3
Accumulated depreciation                       (597.6)     (539.8)
------------------------------------------------------------------------------
Property, plant and equipment-net            $  670.1    $  668.5
------------------------------------------------------------------------------
</TABLE>
During 1996, 1995 and 1994, Armco expended $153.9, $124.7 and $109.9, 
respectively, for maintenance and repair of its property, plant and equipment. 
The increase in spending in 1996 and 1995 is largely attributable to expenses 
related to major facility upgrades and the restart in 1995 of the Mansfield 
Operations, which was idled in 1994.

26
<PAGE>
Armco has commitments to purchase property, plant and equipment (including 
unexpended amounts relating to projects substantially under way) amounting to 
approximately $16.7 at December 31, 1996. 

Goodwill and Other Intangible Assets
Goodwill and other intangible assets primarily include goodwill recorded in 
connection with the acquisition of Cyclops Industries, Inc. on April 24, 1992. 
This goodwill is being amortized using the straight-line method over 40 years. 
Also included are goodwill and intangible assets acquired in the purchase of 
Douglas Dynamics, LLC on July 2, 1991. These assets are being amortized over 
their estimated useful lives, the majority of which do not exceed 17 years. 
Annual amortization expense for 1996, 1995 and 1994 was $6.9. At December 31, 
1996 and 1995, accumulated amortization of goodwill and other intangible 
assets was $35.3 and $28.4, respectively.

Armco assesses whether its goodwill and other intangible assets are impaired 
when required by SFAS No. 121, Accounting for the Impairment of Long-Lived 
Assets and for Long-Lived Assets to be Disposed Of, based on an evaluation of 
undiscounted projected cash flows through the remaining amortization period. 
If an impairment exists, the amount of such impairment is calculated based on 
the estimated fair value of the asset. 

Earnings Per Share
Primary earnings per share is computed by deducting the amount of dividends on 
preferred stock from income. This amount is divided by the weighted average 
number of common shares outstanding during the year, plus common equivalent 
shares outstanding if the common equivalent shares are dilutive. Common 
equivalent shares include dilutive stock options as if the options were 
exercised and the proceeds used to acquire common shares. Dilutive stock 
options give the right to buy shares at a price which is less than current 
market price. The fully diluted per share amounts are not presented in 1996, 
1995 and 1994 because such amounts are antidilutive.

Environmental Liabilities
Armco has participated in or funded various cleanup efforts at sites where its 
facilities have disposed of wastes, including sites located on its own 
properties. Costs related to these efforts are accrued when it is probable 
that a liability has been incurred and the amount of that liability can be 
reasonably estimated. It is Armco's policy not to accrue environmental exit 
costs with respect to ongoing businesses until a decision is made to dispose 
of the property.

Concentrations of Credit Risk
Armco is primarily a producer of stainless, electrical and carbon steels and 
steel products, which are sold to a number of markets, including automotive, 
industrial machinery and equipment, construction, power generation and 
appliances. Armco sells domestically to customers primarily in the midwestern 
and eastern United States, while 10% of sales are to foreign customers 
primarily in Canada, Mexico and western Europe. Approximately 24% of trade 
receivables outstanding at December 31, 1996 are due from businesses that 
supply the U.S. automotive industry. Except in a few situations where the risk 
warrants it, Armco does not require collateral on trade receivables; and while 
it believes its trade receivables will be collected, Armco anticipates that in 
the event of default it would follow normal collection procedures. Overall, 
credit risk related to Armco's trade receivables is limited due to the large 
number of customers in differing industries and geographic areas.

Reclassifications
Certain amounts in prior year financial statements have been reclassified to 
conform to the 1996 presentation. 


2  PENSION AND OTHER EMPLOYEE BENEFITS

Pension Plans
Armco provides noncontributory pension benefits for most employees. The 
benefits for most hourly represented employees are based on a fixed dollar 
amount per year of service. Effective January 1, 1995, a cash balance program 
was established and the pension benefits under the previous formulas were 
locked and frozen for most nonrepresented employees. Under the cash balance 
program, future increases in earnings will not apply to prior service and lump 
sum distributions are available.

The qualified plans have been funded to meet the minimum funding requirements 
of the Employee Retirement Income Security Act of 1974. During 1996 and 1995, 
contributions of $41.2 and $54.8, respectively, which exceeded the minimum 
funding requirements, were made to the plans. As of December 31, 1996, funding 
credits of $53.8 were available to offset future minimum funding requirements. 

The components of net periodic pension cost, including amounts related to 
divested units and assumptions used to determine such expenses, were as 
follows: 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                             1996       1995       1994
------------------------------------------------------------------------------
<S>                                        <C>        <C>        <C>
Cost of benefits earned during the year    $  15.6    $  13.7    $  19.1 
Interest cost on the projected benefit 
  obligation                                 141.0      153.1      149.3
Actual loss (return) on plan assets         (252.1)    (354.0)      21.9
Net amortization and deferral                112.0      204.3     (163.7)
------------------------------------------------------------------------------
Net periodic pension cost                  $  16.5    $  17.1    $  26.6 
------------------------------------------------------------------------------

Weighted average discount rate                7.00%      8.50%      7.25% 
Weighted average expected long-term rate
  of return on assets                         8.00%      9.50%      8.25% 
Rate of future compensation increases         4.00%      4.00%      4.00%
------------------------------------------------------------------------------
</TABLE>
Net periodic pension cost decreased in 1995 primarily due to changes in the 
pension provisions for most nonrepresented employees and the higher discount 
rate. Net periodic pension expense in 1994 includes $1.5, which was charged to 
previously established accruals for divested units.

Net curtailment and settlement losses on pensions of $5.2 in 1994, mainly for 
reductions in the work force, were primarily recorded as special charges. A 
curtailment loss of $1.7 was recorded in 1995. Curtailment and settlement 
losses are not included in the net periodic pension cost above. Certain units 
that were previously identified for disposal had hourly employees 
participating in multi-employer pension and welfare plans. The total expense 
for contributions to those programs, of $1.1 in 1996, $1.7 in 1995, and $2.4 
in 1994, are not included in net periodic pension cost shown above. 

                                                                       27
<PAGE>
RESTORING EARNINGS POWER

The following table presents the funded status of pension plans using discount 
rates of 7.75% and 7% at December 31, 1996 and 1995, respectively. The assumed 
rate of future compensation increases was 4% in both years. Plan assets are 
primarily invested in U.S. and foreign equities and debt securities issued by 
the U.S. government, U.S. corporations and foreign entities. The funded status 
of the pension plans improved during 1996 as a result of favorable investment 
returns, the increase in the discount rate, and discretionary contributions to 
the plans by Armco. 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                      Plans for which Plans for which
                                       Assets Exceed    Accumulated
                                        Accumulated      Benefits     Total
  1996                                   Benefits      Exceed Assets All Plans
------------------------------------------------------------------------------
<S>                                      <C>            <C>          <C>
Actuarial present value of benefit 
  obligations:
Vested benefits                          $1,242.3       $  705.6     $1,947.9
Nonvested benefits                           33.2            8.2         41.4
------------------------------------------------------------------------------
Accumulated benefit obligation           $1,275.5       $  713.8     $1,989.3
------------------------------------------------------------------------------

Projected benefit obligation             $1,283.5       $  716.8     $2,000.3
Plan assets at fair value                 1,316.1          691.4      2,007.5
------------------------------------------------------------------------------
Projected benefit obligation greater 
  (less) than plan assets                   (32.6)          25.4         (7.2)

Reconciliation of funded status to 
  recorded amounts:
Unrecognized negative prior service (cost)    4.0           (8.5)        (4.5)
Unrecognized net gain                       148.6           82.3        230.9
Unrecognized transition obligation          (29.7)          (4.0)       (33.7)
Amount required to recognize minimum 
  liability                                   --             8.2          8.2
------------------------------------------------------------------------------
Accrued pension liability               $    90.3       $  103.4     $  193.7
------------------------------------------------------------------------------

  1995
------------------------------------------------------------------------------
Actuarial present value of benefit 
  obligations:
Vested benefits                         $     3.8       $2,015.8     $2,019.6
Nonvested benefits                            0.1           54.7         54.8
------------------------------------------------------------------------------
Accumulated benefit obligation          $     3.9       $2,070.5     $2,074.4
------------------------------------------------------------------------------

Projected benefit obligation            $     5.2       $2,097.5     $2,102.7
Plan assets at fair value                     4.9        1,908.6      1,913.5
------------------------------------------------------------------------------
Projected benefit obligation greater than 
  plan assets                                 0.3          188.9        189.2

Reconciliation of funded status to recorded 
  amounts:
Unrecognized negative prior service           --             7.6          7.6
Unrecognized net gain (loss)                 (0.8)          56.6         55.8
Unrecognized transition obligation            --           (40.0)       (40.0)
Amount required to recognize minimum 
  liability                                   --             2.9          2.9
------------------------------------------------------------------------------
Accrued pension liability (benefit)     $    (0.5)      $  216.0     $  215.5
------------------------------------------------------------------------------
</TABLE>
Retiree Health Care and Life Insurance Benefits
In addition to providing pension benefits, Armco provides various health care 
and life insurance benefits to most retirees. Most employees become eligible 
for these benefits when they retire. Retiree health and life insurance 
benefits are funded as claims are paid. 

The components of the net periodic postretirement benefit cost and assumptions 
used to determine such expenses were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                                     1996     1995     1994
------------------------------------------------------------------------------
<S>                                                 <C>      <C>      <C>
Cost of benefits earned during the year             $ 4.9    $ 5.6    $ 8.5
Interest cost on accumulated postretirement 
  benefit obligation                                 61.8     74.7     66.8
Amortization of plan changes                         (3.8)    (3.7)    (1.4)
------------------------------------------------------------------------------
Net periodic postretirement benefit cost            $62.9    $76.6    $73.9 
------------------------------------------------------------------------------

Weighted average discount rate                       7.00%    8.50%    7.25%
Current year health care trend rate - Pre-age 65     9.25%   10.25%   11.25%
Current year health care trend rate - Post-age 64    7.25%    8.25%    8.25%
Ultimate health care trend rate                      5.00%    6.50%    5.25%
Weighted average trend rate                          5.60%    7.30%    6.25%
------------------------------------------------------------------------------
</TABLE>
Net periodic postretirement benefit cost in 1996 decreased primarily due to 
the lower discount rate and additional plan amendments. 

Net curtailment gains (losses) on postretirement benefits of $10.2 in 1995 and 
$(0.8) in 1994 were not included in net periodic postretirement benefit cost. 

Total claims paid were approximately $55.2 in 1996, $64.0 in 1995 and $62.6 in 
1994.

The following table shows the funded status of the postretirement benefit 
plans and the amounts recognized in the Statement of Consolidated Financial 
Position as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                                   1996           1995
------------------------------------------------------------------------------
<S>                                              <C>            <C>
Accumulated postretirement benefit obligation:
Retirees                                         $ 672.0        $ 753.5
Fully eligible active plan participants             59.7           84.2
Other active plan participants                      51.5           77.4
------------------------------------------------------------------------------
Total                                              783.2          915.1
Plan assets at fair value                            --             --
------------------------------------------------------------------------------
Accumulated postretirement benefit obligation 
in excess of plan assets                           783.2          915.1

Reconciliation of obligation to recorded amounts:
Unrecognized negative prior service                 76.7           49.2 
Unrecognized net gains                             190.3           78.3 
------------------------------------------------------------------------------
Accrued postretirement benefit liability        $1,050.2       $1,042.6
------------------------------------------------------------------------------

Assumptions used to determine obligation:
Discount rate                                       7.75%          7.00% 
Current year health care trend rate - Pre-age 65    8.25%          9.25%
Current year health care trend rate - Post-age 64   6.25%          7.25% 
Ultimate health care trend rate                     5.75%          5.00%
Weighted average trend rate                         6.00%          5.60% 
------------------------------------------------------------------------------
</TABLE>
28
<PAGE>

The accumulated postretirement benefit obligation decreased in 1996 primarily 
due to favorable claims experience, use of Medicare risk HMO's beginning in 
1996, and certain changes in retiree benefit programs.

The current year health care trend rates are assumed to decrease one 
percentage point per year until they reach the ultimate rate. A one percentage 
point increase in the assumed health care trend rate would increase the 
accumulated postretirement benefit obligation as of December 31, 1996 by 
approximately $70.0, and increase the annual net periodic postretirement 
benefit cost by approximately $7.0. 

Employee Benefit Obligations of Former Business Units
Armco has recorded, in its employee benefit obligations, the present value of 
estimated pension and health care benefits for former employees associated 
with facilities that have been divested. Sundry other-net includes interest 
costs of $22.1, $38.5 and $35.8 in 1996, 1995 and 1994, respectively, related 
to these liabilities. The decrease in costs in 1996 was primarily due to 
increased funding of the pension plans during 1995 and 1996 and lower interest 
rates on Armco's accrued other postretirement benefit obligations. 


3  INCOME TAXES

Armco files a consolidated U. S. federal income tax return. This return 
includes all domestic companies 80% or more owned by Armco and the 
proportionate share of Armco's interest in partnership investments. State tax 
returns are filed on a consolidated, combined or separate basis depending on 
the applicable laws relating to Armco and its domestic subsidiaries.

The United States and foreign components of Income before income taxes consist 
of the following:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                       1996        1995        1994
------------------------------------------------------------------------------
<S>                                   <C>         <C>         <C>
United States                         $24.4       $22.8       $ 36.0
Foreign                                 3.0         2.7          1.1
------------------------------------------------------------------------------
Total                                 $27.4       $25.5       $ 37.1
------------------------------------------------------------------------------
</TABLE>
Provisions (credits) for income taxes for Armco and consolidated subsidiaries 
are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                       1996        1995        1994
------------------------------------------------------------------------------
<S>                                   <C>         <C>         <C>
Current:
U. S. state                           $ --        $ 0.8       $  0.8
Foreign                                 1.4         1.2          0.5
------------------------------------------------------------------------------
Total                                   1.4         2.0          1.3

Deferred:
U.S. federal                            --          --         (27.3)
U. S. state                             --          --          (2.7)
------------------------------------------------------------------------------
Total                                   --          --         (30.0)
------------------------------------------------------------------------------
Provision (credit) for income taxes   $ 1.4       $ 2.0       $(28.7)
------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation of the statutory federal income tax rate 
applied to pretax book income with the provision for income taxes in the 
Statement of Consolidated Income for the year 1996:
<TABLE>
------------------------------------------------------------------------------
   <S>                                                  <C>
   Federal taxes at statutory rate                      $  9.6
   State income taxes, net of federal benefit              1.6
   Reduction in deferred tax valuation allowance          (9.8)
------------------------------------------------------------------------------
   Provision for income taxes                           $  1.4
------------------------------------------------------------------------------
</TABLE>
During 1996, Armco's capital loss carryforward increased by $45.0 due to a tax 
loss associated with the sale of National-Oilwell (Note 11). Net operating 
loss carryforwards increased due to the $43.0 net operating loss for tax 
purposes incurred in 1996. The difference between the pretax book income of 
$27.4 and the 1996 tax loss of $43.0 is primarily due to costs associated with 
employee benefits, pensions and restructuring actions, which had been accrued 
for financial accounting purposes in prior years, but actually paid in 1996. 
Tax basis depreciation for the year, which exceeded depreciation expense 
recorded on the books, was another key factor contributing to the tax loss.

In 1994, the income tax benefit recognized of $28.7 was primarily the result 
of decreasing the beginning balance of the deferred tax asset valuation 
allowance by $30.0 due to the effects, including the elimination of Armco 
Steel Company's (ASC) (Note 10) estimated future taxable losses, that the 
initial public offering and recapitalization of ASC had on management's 
assessment of the amount of deferred tax asset that is more likely than not to 
be realized in the future.

At December 31, 1996, Armco had capital and net operating loss (NOL) 
carryforwards for federal tax purposes expiring as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                Year                  Capital
              expires                  losses              NOL
------------------------------------------------------------------------------
                <S>                    <C>              <C>
                1998                   $ 56.0           $   59.7
                1999                      --               106.7
                2000                    117.4                --
                2001                     45.0              123.3
                2004                      --                 9.1
                2005                      --               130.3
                2006                      --               239.3
                2007                      --               186.9
                2008                      --               133.3
                2009                      --                35.4
                2010                      --                53.5
                2011                      --                43.0
------------------------------------------------------------------------------
     Total loss carryforwards          $218.4           $1,120.5
------------------------------------------------------------------------------
</TABLE>
Armco has $797.0 in U.S. alternative minimum tax net operating losses. 
Additionally, Armco has $11.4 of alternative minimum tax credits that have no 
expiration. 

                                                                       29
<PAGE>
RESTORING EARNINGS POWER

Deferred income taxes reflect the net tax effects of (a) temporary differences 
between the carrying amounts of assets and liabilities for financial reporting 
purposes and the amounts used for income tax purposes and (b) operating loss 
and tax credit carryforwards. At December 31, 1996 and 1995, the net deferred 
tax asset, included in the Statement of Consolidated Financial Position, was 
as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                                   1996        1995
------------------------------------------------------------------------------
<S>                                               <C>         <C>
Other current assets                              $  2.7      $  2.4
Deferred tax asset                                 325.8       326.1
------------------------------------------------------------------------------
Net deferred tax asset                            $328.5      $328.5
------------------------------------------------------------------------------
</TABLE>
Major components of Armco's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                                      1996      1995
------------------------------------------------------------------------------
<S>                                                 <C>       <C>
Tax effects of:
Operating loss and tax credit carryforwards         $  539.5  $  480.6
Employee benefits                                      565.4     576.9
Other assets (incl. contingencies and accruals)        159.0     214.0
------------------------------------------------------------------------------
Gross deferred tax asset                             1,263.9   1,271.5

Valuation allowance                                   (644.4)   (669.1)
------------------------------------------------------------------------------
Deferred tax asset                                     619.5     602.4

Property, plant and equipment                         (138.4)   (132.0)
Other liabilities                                     (152.6)   (141.9)
------------------------------------------------------------------------------
Deferred tax liabilities                              (291.0)   (273.9)
------------------------------------------------------------------------------
Net deferred tax asset                              $  328.5  $  328.5
------------------------------------------------------------------------------
</TABLE>
Even though Armco has incurred tax losses for the past seven fiscal years, 
management believes that it is more likely than not that Armco will generate 
taxable income sufficient to realize a portion of the tax benefit associated 
with future deductible temporary differences and NOL carryforwards prior to 
their expiration. This belief is based upon, among other factors, changes in 
operations that have occurred during the last five years, as well as 
consideration of available tax planning strategies. Specifically, cost savings 
associated with new capital investments are being realized and are expected to 
continue to improve operating results. Armco has operated in a highly cyclical 
industry and, consequently, has had a history of generating and then utilizing 
significant amounts of NOL carryforwards. During the years 1987-1989, Armco 
utilized approximately $350.0 of NOL carryforwards. However, management 
believes that a valuation allowance is appropriate given the current estimates 
of future taxable income. If Armco is unable to generate sufficient taxable 
income in the future through operating results, increases in the valuation 
allowance will be required through a charge to income. However, if Armco 
achieves sufficient profitability to utilize a greater portion of the deferred 
tax asset, the valuation allowance will be reduced through a credit to income.

United States income tax returns of Armco for 1992 and prior years have been 
subject to examination by the Internal Revenue Service and are closed to 
assessments. However, the NOL carryforwards from some of these years remain 
open to adjustment. Armco has been in a cumulative net operating loss 
carryforward position since 1983 and believes that it has sufficient loss 
carryforwards in excess of any potential audit adjustments that might be made 
by the Internal Revenue Service for any open years.

4  LONG-TERM DEBT AND OTHER FINANCING

Long-Term Debt
At December 31, 1996 and 1995, Armco's long-term debt, less current 
maturities, was as follows: 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                                      1996        1995
------------------------------------------------------------------------------
<S>                                                  <C>         <C>
Sinking fund debentures:
   8.5% due 2001                                     $ 28.5      $ 35.0
   9.2% due 2000                                       20.0        25.0

Notes payable:
   9.375% due 2000                                    125.0       125.0
   11.375% due 1999                                   100.0       100.0
   Variable rate (LIBOR plus 2.75%) due 2001           31.2        38.6
   5.0% due 2000                                       15.3        20.4

Pollution control revenue bonds due 2005 - 8.125%      12.1        13.2
Variable rate economic development revenue bonds 
   due 2020 (1996 average 3.71%)                        8.5         --
Other                                                   3.7         4.4
------------------------------------------------------------------------------
Total                                                $344.3      $361.6
------------------------------------------------------------------------------
</TABLE>
Maturities of existing long-term debt during the five years ending December 
31, 2001, are as follows:  1997, $27.2; 1998, $27.4; 1999, $127.5; 2000, 
$157.6; and 2001, $15.7.

At December 31, 1996, the fair value of Armco's long-term debt, including 
current maturities, was approximately $369.0. This amount was determined by 
calculating a value based on cash flow yield to maturity and comparing that 
amount to market information where possible. The fair value estimate was based 
on pertinent information available to management as of December 31, 1996. 
Management is not aware of any significant factors that would materially alter 
this estimate since that date. The fair value of Armco's long-term debt, 
including current maturities, at December 31, 1995 was approximately $385.4.

At December 31, 1996 and 1995, $38.2 and $45.5, respectively, of long-term 
debt, including current maturities, represented financing utilized to 
construct the thin-slab caster at the Mansfield, Ohio facility. The caster is 
pledged as collateral on these loans. At December 31, 1996 and 1995, $26.7 and 
$29.6, respectively, of long-term debt, including current maturities, was 
financing utilized to construct a cold rolling mill at Armco's Butler, 
Pennsylvania facility. The cold rolling mill is pledged as collateral on this 
loan.

30
<PAGE>

Bank Credit Agreements
At December 31, 1996, Armco had in place two bank credit facilities, totaling 
$170.0. Under a receivables facility, Armco sells substantially all its trade 
receivables to a wholly owned subsidiary, Armco Funding Corporation (AFC). In 
January 1996, AFC entered into a five-year revolving credit agreement with a 
group of banks providing up to $120.0 for revolving credit loans and letters 
of credit secured by AFC's receivables. At December 31, 1996, there were no 
outstanding borrowings under this credit facility; however, $69.9 of the 
facility was used as support for letters of credit.

In January 1996, Armco entered into a three-year revolving credit agreement 
with a group of banks providing $50.0 for revolving credit loans secured by 
Armco's inventories. This credit agreement subjects Armco to certain 
restrictions and covenants related to, among other things, minimum working 
capital, minimum net income, current ratio and interest coverage ratio 
requirements. At December 31, 1996, there were no outstanding borrowings under 
this credit facility.

Capitalized Interest
Armco capitalized interest on projects during construction of $0.8, $5.1 and 
$4.5 in 1996, 1995 and 1994, respectively. Capitalized interest for 1995 and 
1994 primarily relates to the construction of the thin-slab caster in 
Mansfield, Ohio.

Long-Term Leases
Rental expense under operating leases was $7.7 in 1996, $7.7 in 1995 and $7.2 
in 1994. At December 31, 1996, commitments to make future minimum lease 
payments for operating leases are $7.6 in 1997, $5.2 in 1998, $3.4 in 1999, 
$2.1 in 2000, $1.4 in 2001 and $1.7 in the year 2002 and thereafter.


5  SHAREHOLDERS' DEFICIT

Preferred Stock
Armco has outstanding two classes of preferred stock. The two classes rank 
equally with respect to dividend payments, redemption and liquidation rights. 
The preferred stock ranks senior to Armco's common stock with respect to 
dividends and upon liquidation. At December 31, 1996 and 1995, there were 
authorized and issuable in series, 6,697,231 shares of Class A preferred stock 
with no par value and 5,000,000 shares of $1 par value Class B preferred 
stock.

Armco has two series of Class A preferred stock outstanding. The $2.10 Class A 
preferred stock pays cumulative dividends at the annual rate of $2.10 per 
share. Shareholders of the $2.10 Class A preferred stock have one vote per 
share and each share is convertible into 1.27 shares of Armco's common stock. 
This series of Class A preferred stock may be redeemed at Armco's option for 
$40 per share, plus accrued but unpaid dividends. The $2.10 Class A preferred 
stock had a total involuntary liquidation value of $25.5 at December 31, 1996 
and 1995.

The $3.625 Class A preferred stock pays cumulative dividends at the annual 
rate of $3.625 per share. Shareholders of this series of Class A preferred 
stock are entitled to one vote per share and each share is convertible into 
6.78 shares of Armco's common stock. The $3.625 Class A preferred stock may be 
redeemed at Armco's option at a current price of $52.175 per share, plus 
accrued but unpaid dividends. This price declines at 12-month intervals, to 
$50 per share on and after October 15, 2002. The $3.625 preferred Class A 
stock had a total involuntary liquidation value of $135.0 at December 31, 1996 
and 1995.

Armco's outstanding series of Class B preferred stock is nonvoting and pays 
cumulative dividends at the annual rate of $4.50 per share. Each share is 
convertible into 2.22 shares of Armco's common stock. The Class B preferred 
stock may be redeemed at Armco's option for $50 per share, plus accrued but 
unpaid dividends. The Class B preferred stock had a total involuntary 
liquidation value of $50.0 at December 31, 1996 and 1995.

At December 31, 1996, 1995 and 1994, the number of shares outstanding and book 
value of Class A preferred stock were 4,397,231 and $137.6. At December 31, 
1996, 1995 and 1994, Armco had outstanding 999,900 shares of Class B preferred 
stock with a book value of $48.3.

Common Stock
At December 31, 1996, 22,681,261 unissued shares of Armco's common stock were 
reserved for the conversion of preferred stock and 3,536,258 unissued shares 
of common stock were reserved for the exercise of stock options and other 
stock awards (Note 6).

Activity for the years 1994, 1995 and 1996 related to Armco's common stock was 
as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                                               Additional
                                                                 Paid-in
                                     Shares         Par Value    Capital
------------------------------------------------------------------------------
<S>                               <C>                <C>         <C>
Balance, December 31, 1993        104,122,974        $ 1.0       $ 951.1
Exercise of options                    29,378          --            0.2
Restricted stock issued - 
   net of cancellations               512,260          0.1           2.4
Issued for employee savings plan      424,534          --            2.6
------------------------------------------------------------------------------
Balance, December 31, 1994        105,089,146          1.1         956.3
Exercise of options                   108,962          --            0.5
Restricted stock issued - 
   net of cancellations               587,596          --            4.1
Issued for employee savings plan      314,544          --            2.1
Directors' stock purchase plan          2,312          --            --
------------------------------------------------------------------------------
Balance, December 31, 1995        106,102,560          1.1         963.0
Exercise of options                     3,100          --            -- 
Restricted stock issued - 
   net of cancellations               347,313          --            2.0 
Directors' stock purchase plan          4,193          --            --
------------------------------------------------------------------------------
Balance, December 31, 1996        106,457,166        $ 1.1       $ 965.0
------------------------------------------------------------------------------
</TABLE>
Shareholder Rights Plan
On February 23, 1996, Armco adopted a Shareholder Rights Plan designed to 
deter coercive takeover tactics and prevent an acquirer from gaining control 
of Armco without offering a fair price to all of Armco's shareholders. This 
plan replaces the plan adopted by Armco in 1986, which expired in 1996.

                                                                       31
<PAGE>
RESTORING EARNINGS POWER

Under the terms of the plan, preferred stock purchase rights were distributed 
as a dividend at the rate of one right for each share of common stock held as 
of the close of business on June 26, 1996. Until the rights become 
exercisable, common stock issued will also have one right attached. Each right 
will entitle shareholders to buy one two-hundredth of a share of a currently 
unissued series of Class A participating preferred stock of Armco at an 
exercise price of $20. Each right will thereafter entitle the holder to 
receive upon exercise, common stock or, in certain circumstances, preferred 
stock or other securities or assets of the company having a value of $40. The 
rights will be exercisable only if a person or group acquires beneficial 
ownership of 20% or more of Armco's common stock or announces a tender or 
exchange offer, after which such person or group would beneficially own 20% or 
more of the common stock or if the Board of Directors declares any person to 
be an "adverse person" as defined in the plan. A total of 750,000 shares of 
Class A participating preferred stock have been reserved for issuance upon 
exercise of the rights.

Armco, except as otherwise provided in the plan, will generally be able to 
redeem the rights at $0.0025 per right at any time during a ten-day period 
following public announcement that a 20% position in Armco has been acquired 
or after the effective date the Board of Directors declares any person to be 
an "adverse person." During this ten-day period, Armco may also extend the 
time during which it may redeem the rights. The rights are not exercisable 
until the expiration of the redemption period. The rights will expire on 
June 26, 2006. 

Dividends
Under the terms of the inventory credit facility (Note 4), Armco cannot pay 
cash dividends on its common stock. In addition, under the terms of indentures 
for Armco's 11.375% Senior Notes due 1999 and 9.375% Senior Notes due 2000, 
Armco can pay a dividend on its common stock only if it meets certain 
financial tests described in the indentures. Armco does not expect to satisfy 
these tests and, therefore, Armco does not expect to be able to pay a common 
stock dividend or repurchase its capital stock in the near future. The payment 
of preferred stock dividends is prohibited if Armco is in default under the 
credit facility. 

Under Ohio law, at December 31, 1996, the surplus from which Armco is 
permitted to pay dividends was $89.3. Under the terms of Ohio law, Armco is 
currently not permitted to purchase shares of its capital stock.

The Board of Directors at its January 1997 meeting declared the regular 
quarterly dividends payable on both series of Armco's Class A preferred stock 
and on its Class B preferred stock. 

Accumulated Deficit and Other Shareholders' Equity (Deficit)
Activity for the years 1994, 1995 and 1996 related to Armco's accumulated 
deficit and other shareholders' equity (deficit) was as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                                      Net Unrealized
                                        Accumulated     Gains on
                                          Deficit   Equity Securities   Other
------------------------------------------------------------------------------
<S>                                     <C>              <C>           <C>
Balance, December 31, 1993              $(1,450.3)       $  --         $ (0.8)
Net income                                   77.7           --            --
Preferred stock dividends declared          (17.8)          --            --
Adjustment to net unrealized gains            --           31.6           --
Foreign currency translation adjustment       --            --            0.5
Deferred compensation on restricted 
  stock issued                                --            --           (2.7)
------------------------------------------------------------------------------
Balance, December 31, 1994               (1,390.4)         31.6          (3.0)
Net income                                   29.8           --            --
Preferred stock dividends declared          (17.9)          --            --
Sale of equity securities                     --          (31.6)          --
Foreign currency translation adjustment       --            --            1.1
Amortization and cancellation of 
   deferred compensation                      --            --            2.1
Deferred compensation on restricted 
  stock issued                                --            --           (2.1)
------------------------------------------------------------------------------
Balance, December 31, 1995               (1,378.5)          --           (1.9)
Net income                                   32.5           --            --
Preferred stock dividends declared          (17.9)          --            --
National-Oilwell foreign currency 
  translation (Note 11)                       --            --            1.4
Foreign currency translation adjustment       --            --           (0.4)
Amortization and cancellation of 
   deferred compensation                      --            --            2.0
Deferred compensation on restricted 
  stock issued                                --            --           (1.2)
------------------------------------------------------------------------------
Balance, December 31, 1996              $(1,363.9 )      $  --        $ (0.1 )
------------------------------------------------------------------------------
</TABLE>

6  COMMON STOCK OPTIONS

Armco shareholders adopted Common Stock Option Plans in 1983 and 1988. In 
addition, stock options may be granted under the 1993 and 1996 long-term 
incentive plans. These plans provide for granting options to purchase common 
stock for not less than 100% of the market price on the date the option is 
granted. The 1983 and 1988 Plans have expired as to new grants. For 
outstanding options containing stock appreciation rights, the excess of the 
market price of the stock over the option price is accrued. The vesting period 
for stock options granted under the long-term incentive plans is two years 
from the date of grant and, although they may terminate earlier under certain 
conditions, all stock options generally expire 10 years after the grant date. 
The long-term incentive plans also provide for issuing stock, subject to 
restrictions as to sale and forfeiture over a three to five-year period. As of 
December 31, 1996, 2,686,640 shares of common stock were available for 
granting of awards under the long-term incentive plans.

32
<PAGE>

During 1994, 1995 and 1996, stock option activity was as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                                            Weighted Average
1994                                              Shares     Exercise Price
------------------------------------------------------------------------------
<S>                                             <C>               <C>
Outstanding at January 1,                       3,015,774         $  8.98
Granted                                           464,000            4.75
Exercised                                         (42,389)           4.98
Forfeited                                         (23,750)           7.38
Expired                                          (316,139)          12.57
------------------------------------------------------------------------------
Outstanding at December 31,                     3,097,496            8.05
------------------------------------------------------------------------------
Exercisable at December 31,                     2,241,996            8.85
------------------------------------------------------------------------------

1995
------------------------------------------------------------------------------
Outstanding at January 1,                       3,097,496         $  8.05
Granted                                         1,019,333            6.58
Exercised                                        (347,646)           5.06
Forfeited                                         (56,566)           6.23
Expired                                          (519,100)          10.20
------------------------------------------------------------------------------
Outstanding at December 31,                     3,193,517            7.58
------------------------------------------------------------------------------
Exercisable at December 31,                     1,524,536            9.10
------------------------------------------------------------------------------

1996
------------------------------------------------------------------------------
Outstanding at January 1,                       3,193,517         $  7.58
Granted                                           947,158            5.24
Exercised                                          (3,100)           4.94
Forfeited                                        (159,645)           6.15
Expired                                          (441,672)           9.38
------------------------------------------------------------------------------
Outstanding at December 31,                     3,536,258            6.80
------------------------------------------------------------------------------
Exercisable at December 31,                     1,741,811            7.66
------------------------------------------------------------------------------
</TABLE>
The following relates to the options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                                     Exercise Price Ranges
                                               $4.56 - $7.56  $10.13 - $13.69
------------------------------------------------------------------------------
<S>                                               <C>             <C>
Options outstanding:
Number of shares                                  2,984,758        551,500
Weighted average exercise price                       $5.90         $11.65
Average remaining contractual life                  7 years        2 years
Options exercisable:
Number of shares                                  1,190,311        551,500
Weighted average exercise price                       $5.82         $11.65
------------------------------------------------------------------------------
</TABLE>
In 1996, Armco adopted SFAS No. 123, Accounting for Stock-Based Compensation. 
SFAS No. 123 provides that companies may choose to change their method of 
accounting for stock options to a fair value method using an option pricing 
model. Armco uses the intrinsic value approach specified in Accounting 
Principle Board Opinion No. 25 in accounting for stock options and did not 
change from this method upon adoption of the new standard. Had Armco changed 
its accounting method, its net income for 1996 would have been reduced by $1.7 
to $30.8, or $.12 per share. Net income for 1995 would have been reduced by 
$1.3 to $28.5, or $.10 per share. These pro forma adjustments were calculated 
using the Black-Scholes option pricing model to value all stock options 
granted since January 1, 1995, under the following assumptions in each year:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                          1996              1995
------------------------------------------------------------------------------
   <S>                                 <C>               <C>
   Risk free interest rate                5.5%             7.75%
   Expected volatility                     30%               35%
   Expected life of options            5 years           5 years
   Expected dividends                     none              none
------------------------------------------------------------------------------
</TABLE>
Based on the option pricing model, options granted during 1996, 1995 and 1994 
had fair values of $1.90, $2.91 and $1.93 per share, respectively. 

During 1996, 1995 and 1994, Armco issued to certain employees 570,158, 660,762 
and 534,060 shares of common stock, subject to restrictions, with weighted-
average grant-date fair values of $5.69, $6.63 and $4.75 per share, 
respectively. Total compensation cost recognized in income for stock-based 
employee compensation awards was $1.1 in 1996, $2.2 in 1995 and $1.3 in 1994.

                                                                       33
<PAGE>
RESTORING EARNINGS POWER

7  SEGMENT INFORMATION

The following are Armco's business segments: (1) Specialty Flat-Rolled Steels, 
consisting of plants in Butler, Pennsylvania and Coshocton, Dover, Mansfield 
and Zanesville, Ohio that produce flat-rolled stainless, electrical and carbon 
steels for the automotive, industrial machinery and equipment, construction 
and service center markets; international trading companies, that buy and sell 
steel and manufactured steel products; and, until September 30, 1994, a 
stainless steel plate producer; and (2) Fabricated Products, consisting of 
operations in Sharon and Wheatland, Pennsylvania and Warren, Ohio that produce 
steel tubular products for the industrial machinery, construction and 
appliance markets, as well as plants in Milwaukee, Wisconsin, Rockland, Maine 
and Johnson City, Tennessee, that manufacture snowplows and ice control 
equipment for light trucks, including four-wheel drive pickup trucks and 
utility vehicles.

Armco's industry segment information is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                             1996        1995        1994
------------------------------------------------------------------------------
<S>                                       <C>         <C>         <C>
Customer sales:
Specialty Flat-Rolled Steels              $1,421.2    $1,277.0    $1,114.4
Fabricated Products                          302.8       282.9       323.2
------------------------------------------------------------------------------
Total                                     $1,724.0    $1,559.9    $1,437.6
------------------------------------------------------------------------------

Operating profit: (1)
Specialty Flat-Rolled Steels                 $72.9       $76.0       $40.5
Fabricated Products                           22.8        22.0        30.9
Corporate general                            (21.0)      (29.0)      (32.2)
------------------------------------------------------------------------------
Total                                     $   74.7    $   69.0    $   39.2
------------------------------------------------------------------------------

Capital expenditures:
Specialty Flat-Rolled Steels              $   55.9    $  153.6    $   89.4
Fabricated Products                            3.1         5.3         6.2
Corporate general                              0.8         0.6         0.8
------------------------------------------------------------------------------
Total                                     $   59.8    $  159.5    $   96.4
------------------------------------------------------------------------------

Depreciation:
Specialty Flat-Rolled Steels              $   50.4    $   43.4    $   40.2
Fabricated Products                            6.7         7.6         6.6
Corporate general                              1.6         1.8         2.0
------------------------------------------------------------------------------
Total                                     $   58.7    $   52.8    $   48.8
------------------------------------------------------------------------------

Identifiable assets:
Specialty Flat-Rolled Steels              $1,052.1    $1,034.8    $  871.0
Fabricated Products                          163.2       173.0       190.9
Corporate general (2)                        566.9       517.7       696.4
Discontinued operations                       85.6       171.1       176.6
------------------------------------------------------------------------------
Total                                     $1,867.8    $1,896.6    $1,934.9
------------------------------------------------------------------------------
<FN>
(1) In 1996, operating profit for the Fabricated Products segment includes 
special charges totaling $8.8. In 1994, operating profit for the Specialty 
Flat-Rolled Steels segment includes special charges totaling $35.0. (See Note 
8).

(2) Corporate general identifiable assets at December 31, 1996 includes $163.0 
of cash and cash equivalents and deferred tax assets of $328.5 (See Note 3). 
</TABLE>
During 1996 and 1995, operations in the Specialty Flat-Rolled Steels segment 
sold $2.5 and $5.6, respectively, of its products to the Fabricated Products 
segment. Sales from the Fabricated Products segment to the Specialty Flat-
Rolled Steels segment were not material. Sales between foreign and domestic 
companies are also not material. Intersegment sales are eliminated in 
consolidation and prices generally approximate cost.


8  SPECIAL CHARGES

In the fourth quarter of 1996, Armco recognized a special charge of $5.9 to 
record a change in the estimated loss on the sale of its nonresidential 
construction business. In 1993, Armco decided to exit this business, along 
with several other operations. Armco continued to operate the construction 
business while attempting to complete a sale. In 1996, Armco negotiated a sale 
agreement and the business was sold effective January 1, 1997. Based on the 
agreement, the 1996 charge primarily relates to  the writedown of certain 
assets and recognition of additional employee benefit liabilities.

Also in the fourth quarter of 1996, Armco recorded a $2.9 special charge 
primarily for the writedown of inventory and severance costs related to its 
decision to discontinue a line of light truck equipment manufactured by 
Armco's snowplow and ice control equipment business.

In 1994, Armco recorded a special charge of $20.0 for expenses associated with 
the temporary idling and restructuring of its steelmaking facilities in 
Mansfield and Dover, Ohio. The decision to idle the facilities came after the 
failure of a key piece of equipment at the Mansfield plant crippled 
production, and management undertook a study to determine if losses could be 
reduced by idling the facilities. These facilities were idled commencing in 
March 1994. The Dover plant started limited production in early 1995 and by 
mid-year was fully operational. The Mansfield plant remained idle until 
construction of a new thin-slab continuous caster and renovation of its hot 
strip mill were completed late in the first quarter of 1995. The special 
charge consisted of $11.2 for employee benefits, primarily group insurance and 
supplemental unemployment benefits; and $8.8 to write down inventories and 
fixed assets. Reserves established for these charges have been used for their 
intended purpose.

Also in 1994, Armco recognized a charge of $15.0 related to a decision by 
Eastern Stainless Corporation to sell substantially all of its assets to 
Avesta Sheffield Holding Company, a stainless steel plate manufacturer, for 
cash and the assumption of certain liabilities. The sale closed on March 14, 
1995. Approximately $8.6 of the charge was to cover increases in pension and 
other employee benefit obligations, $1.8 was for the writedown of assets and 
$4.6 was for operating losses, transaction fees and expenses. At December 31, 
1996, the nonemployee benefit reserves had been used for their intended 
purposes, while the pension and other employee benefit liabilities will be 
paid out over many years.

34
<PAGE>

9  LITIGATION AND ENVIRONMENTAL MATTERS

There are various claims pending involving Armco and its subsidiaries 
regarding product liability, patent, employee benefits, antitrust, 
environmental matters, reinsurance and insurance arrangements, and other 
matters arising out of the conduct of Armco's business. The actual liability 
for legal claims against Armco at December 31, 1996 cannot be determined; but 
in Armco's opinion, based on current facts and circumstances, the ultimate 
liability resulting from such claims will not materially affect its 
consolidated financial position or liquidity. However, it is possible that due 
to fluctuations in Armco's operating results, future developments with respect 
to such matters could have a material effect on the results of operations in 
future interim or annual periods. 

Like other manufacturers, Armco is subject to various environmental laws. 
These laws necessitate expenditures to meet environmental compliance 
requirements at Armco's facilities and to remediate sites where contamination 
has occurred. Compliance costs are either expensed as they are incurred or, 
when appropriate, are recorded as capital expenditures. Environmental exit 
costs are accrued when a decision is made to dispose of a property.

Armco is a defendant or a potentially responsible party in proceedings 
alleging liability for remediation, property damage or personal injury related 
to certain past waste disposal sites. Armco has also received claims for 
indemnification for some properties it has previously owned or leased. In most 
cases involving waste disposal sites, Armco is one of many potentially 
responsible parties. In these cases, joint and several liability could be 
imposed on Armco or other parties; thus, theoretically, one party could be 
held liable for all costs related to a site. However, based on its experience 
and a review of current claims, Armco believes that any ultimate liability 
will be apportioned between Armco and other financially viable parties, 
generally on the basis of volume and/or toxicity of wastes disposed at the 
specific sites. While such actions are being contested, the outcome of 
individual matters cannot be predicted with assurance. Armco accrues its 
estimate of remediation and other costs for sites where it is probable that a 
liability has been incurred and the amount can be reasonably estimated.

In establishing reserves, Armco assesses the range of possible liability and 
determines the most likely outcome for its liabilities within the range of 
reasonably estimated outcomes. Costs are estimated based on experience with 
site remediation, an understanding of current environmental laws and 
regulations, environmental assessments, the existence of other financially 
viable parties, expected remediation methods and the years in which Armco is 
expected to make payments toward each remediation (which range from the 
current year to 30 years or more in the future). Liabilities are not 
discounted. These estimates are reviewed quarterly to assess changed 
conditions, including current interpretation of environmental laws and 
regulations. Adjustments are made if changed conditions have a significant 
effect on cost estimates. Reserves have not been adjusted for expected 
recoveries from insurers or other parties. 

The recorded amounts are currently believed by management to be sufficient. 
However, such estimates could significantly change in future periods to 
reflect new laws or regulations, advances in technologies, additional sites 
requiring remediation, new requirements at existing sites and Armco's share of 
liability at multi-party sites. It is not possible to determine whether 
additional loss, due to such changed circumstances, will occur or to 
reasonably estimate the amount or range of any potential additional loss.

Armco believes, based on current facts and circumstances known to Armco, that 
the ultimate liability for pending claims, contingent liabilities and 
environmental matters identified to date will not materially affect its 
consolidated financial condition or liquidity. However, it is possible that, 
due to fluctuations in Armco's operating results, future developments with 
respect to such matters could have a material effect on the results of 
operations in future interim or annual periods. 

At December 31, 1996, Armco had recorded, in its Statement of Consolidated 
Financial Position, $17.5 in Other accruals and $67.0 in Other liabilities for 
estimated probable costs relating to legal and environmental matters.


10  OTHER INVESTMENTS

Armco Steel Company, L.P. (ASC)
On April 7, 1994, ASC, a limited partnership 50% owned by a subsidiary of 
Armco, completed an initial public offering and recapitalization. As part of 
this transaction, the business and assets of ASC were transferred to AK Steel 
Holding Corporation, a newly formed, publicly traded company. In exchange for 
its interest in ASC, Armco received 1,023,987 shares of AK Steel common stock, 
representing approximately four percent of the outstanding shares. The number 
of shares received and other terms of the restructuring and recapitalization 
were determined by arm's-length negotiations.

As a result of the transaction, in 1994 Armco recognized a nonrecurring pretax 
gain of $36.5, primarily as a result of its release from certain obligations 
to make future cash payments to the former joint venture and recognition of 
deferred pension curtailment gains established at ASC's formation. At the same 
time, Armco reevaluated its deferred tax asset position in light of this 
transaction and concluded that the amount of deferred tax asset, for which 
realization of a future benefit was more likely than not, had increased by 
$30.0. This amount was recorded as a tax benefit.

In 1995, Armco sold all of the shares in AK Steel it had received as a result 
of the initial public offering and recapitalization for a total of $27.2, 
recognizing a gain of the same amount. 

Under a toll-rolling agreement that is in effect through the year 2002, AK 
Steel hot rolls stainless steel for Armco. 
                                                                       35
<PAGE>
RESTORING EARNINGS POWER

North American Stainless (NAS)
Armco and Acerinox S.A. of Spain each owned a 50% partnership interest in NAS 
through their respective subsidiaries, First Stainless, Inc. and Stainless 
Steel Invest, Inc. In 1994, First Stainless, Inc. sold 90% of its 50% equity 
interest in NAS to its partner for $73.0 in cash, recording a $26.1 gain on 
the sale. In connection with the transaction, Armco entered into an annual 
supply contract with NAS to provide the former joint venture with semi-
finished stainless steel at market prices.


11  DISCONTINUED OPERATIONS 

Aerospace and Strategic Materials
Oregon Metallurgical Corporation (Oremet), formerly 80% owned by Armco, was 
part of the Aerospace and Strategic Materials business segment that Armco sold 
in 1985. Prior to the sale, Armco filed a suit on behalf of Oremet in the U.S. 
Claims Court, claiming refunds and interest on federal and state taxes. 
Pursuant to the sales agreement, Armco retained the benefit of its share of 
any proceeds of this action, net of taxes imposed on Oremet and the buyer. In 
1988, as a result of a settlement with the Internal Revenue Service (IRS), 
Armco recorded a $15.2 net of tax adjustment to its gain on the sale of this 
business segment. In 1996, Armco and Oremet reached agreement with the IRS 
that the 1988 refund of taxes and interest should not itself have been taxable 
to Oremet, further increasing the net proceeds, and resulting in Armco 
recording an additional $6.5 gain on the sale.

National-Oilwell
National-Oilwell, which sells oil field tubular pipe, and produces and sells 
drilling and production equipment and process pumps used in the world's oil 
and gas services industry, was a joint venture equally owned by subsidiaries 
of Armco and USX Corporation. 

Armco and USX reached a definitive agreement, dated September 22, 1995, to 
sell their respective partnership interests in National-Oilwell to an entity 
formed by Duff & Phelps/Inverness, First Reserve Funds and National-Oilwell 
management. The sale was completed on January 16, 1996. For its 50% interest, 
Armco received $77.0 in cash, and receivables with a face value of $13.0. The 
receivables were recorded at a discounted value of $10.6. After recording $2.1 
for recognition of deferred foreign translation losses and miscellaneous 
expenses, no gain or loss was recognized on the transaction. 

Armco recognized equity income from National-Oilwell until September 22, 1995, 
when the definitive agreement was signed. After that date, Armco's investment 
in National-Oilwell was equal to its estimated net realizable value and no 
additional equity income was recorded. The results of National-Oilwell are 
reported as discontinued operations in the Statement of Consolidated Income. 

Armco Financial Services Group (AFSG)
AFSG consists of insurance companies that have stopped writing new business 
and are being liquidated. These companies are accounted for as discontinued 
operations under the liquidation basis of accounting, whereby all future cash 
inflows and outflows are considered. Armco believes, based on current facts 
and circumstances, including the opinion of outside actuaries, that future 
changes in estimates of net losses relating to the ultimate liquidation of 
AFSG will not be material to Armco's financial position or liquidity. The 
following sets forth AFSG's summarized financial information at December 31, 
1996:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
<S>                                                    <C>
Assets:
Invested assets                                        $172.3
Reinsurance recoverable                                 107.4
Other                                                    18.2
------------------------------------------------------------------------------
Total assets                                            297.9
------------------------------------------------------------------------------

Liabilities:
Losses and loss reserves (net of future investment 
   income of $45.3)                                     184.9
Other                                                    27.4
------------------------------------------------------------------------------
Total liabilities                                       212.3
------------------------------------------------------------------------------
Net assets                                             $ 85.6
------------------------------------------------------------------------------
</TABLE>
Currently, insurance regulators having supervisory authority over the AFSG 
companies retain substantial control over certain transactions, including the 
payment of dividends to Armco. 

There are various pending matters relating to litigation, arbitration and 
regulatory affairs, including matters related to Northwestern National 
Insurance Company, an AFSG company currently involved in, among other matters, 
litigation with respect to certain reinsurance programs. The ultimate 
liability from such matters at December 31, 1996 cannot be determined; but, in 
Armco's opinion, based on current facts and circumstances and the views of 
outside counsel and advisors, any liability resulting will not materially 
affect Armco's financial position or liquidity. However, it is possible that 
due to fluctuations in Armco's results, future developments with respect to 
changes in the ultimate liability could have a material effect on future 
interim or annual results of operations.

36
<PAGE>

12  QUARTERLY INFORMATION (Unaudited)

<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                          4th       3rd       2nd       1st
1996:                           Year      Qtr.      Qtr.      Qtr.      Qtr.
------------------------------------------------------------------------------
<S>                         <C>         <C>       <C>       <C>       <C>
Net sales                   $ 1,724.0   $ 413.6   $ 429.2   $ 450.8   $ 430.4
Cost of products sold        (1,549.7)   (360.0)   (381.2)   (415.6)   (392.9)
Special charges (1)              (8.8)     (8.8)      --        --        --
Income from discontinued
  operation (2)                   6.5       --        6.5       --        --
Net income (loss)                32.5      13.2      16.4      (4.0)      6.9

Per share:
  Income from discontinued 
    operation                    0.06       --       0.06       --        --
  Net income (loss)              0.14      0.08      0.11     (0.08)     0.02
------------------------------------------------------------------------------

1995:
------------------------------------------------------------------------------
Net sales                   $ 1,559.9   $ 396.8   $ 404.1   $ 390.6   $ 368.4
Cost of products sold        (1,392.7)   (358.9)   (364.1)   (342.0)   (327.7)
Gain on sale of 
  stock (3)                      27.2       --        --       25.9       1.3
Income from discontinued
  operation (2)                   6.3       --        2.0       2.8       1.5
Net income (loss)                29.8      (8.4)     (0.1)     35.9       2.4

Per share:
  Income from discontinued 
    operation                    0.06      --        0.02      0.03      0.01
  Net income (loss)              0.11     (0.12)    (0.04)     0.30     (0.02)
------------------------------------------------------------------------------
<FN>
(1)  See Note 8.
(2)  See Note 11.
(3)  See Note 10. 
</TABLE>

<TABLE>
PRICE RANGE AND DIVIDENDS OF ARMCO STOCK (Unaudited)
<CAPTION>
------------------------------------------------------------------------------
                                        1st        2nd        3rd        4th
                                        Qtr.       Qtr.       Qtr.       Qtr
------------------------------------------------------------------------------
<S>                                  <C>        <C>        <C>        <C>
Common Stock        
1996 price per share:  High          $ 6 1/2    $ 6        $ 5 1/8    $ 4 5/8
                       Low             5 1/4      4 3/4      4 1/8      3 5/8

1995 price per share:  High            7 1/4      7 1/2      7 3/4      6 1/2
                       Low             6 1/8      6          5 7/8      5 3/8
------------------------------------------------------------------------------

Preferred Stock Class A $2.10
Quarterly dividend per share: .525
1996 price per share:  High           24 1/2     24 1/4     23 5/8     24
                       Low            23 1/2     22 3/4     22         22 1/8

1995 price per share:  High           23 3/8     24 1/8     26 1/4     25 3/8
                       Low            20         22 1/4     22 7/8     23 3/8
------------------------------------------------------------------------------

Preferred Stock Class A $3.625
Quarterly dividend per share: .90625
1996 price per share:  High           52         51 1/4     47 3/8     45 1/4
                       Low            49 5/8     47         44 1/4     42 3/8

1995 price per share:  High           54 1/4     56 1/4     57 3/4     51 7/8
                       Low            48 3/8     48         49 3/8     47 5/8
------------------------------------------------------------------------------

Preferred Stock Class B $4.50
Quarterly dividend per share: 1.125
1996 price per share:  High           49 3/8     49 3/4     47 5/8     47 1/2
                       Low            47 1/2     46 3/4     45 3/4     45 3/8

1995 price per share:  High           46 3/4     49 1/4     50 3/8     49 1/4
                       Low            41 1/2     45 5/8     48 5/8     47
------------------------------------------------------------------------------
</TABLE>
                                                                           37