SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

|X|   ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
      ACT OF 1934 - For the fiscal year ended December 31, 1999

                                       OR

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

                          Commission file number 1-640

                               NL INDUSTRIES, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

          New Jersey                                            13-5267260
-------------------------------                             -------------------
(State or other jurisdiction of                                (IRS Employer
 incorporation or organization)                             Identification No.)

16825 Northchase Drive, Suite 1200, Houston, Texas               77060-2544
--------------------------------------------------          -------------------
    (Address of principal executive offices)                    (Zip Code)

Registrant's telephone number, including area code:           (281) 423-3300
                                                            -------------------

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

                                                Name of each exchange on
      Title of each class                           which registered
      -------------------                       ------------------------
Common stock ($.125 par value)                  New York Stock Exchange
                                                Pacific Exchange

Securities registered pursuant to Section 12(g) of the Act:  None.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months,  and (2) has been subject to such filing  requirements
for the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant at March 16, 2000 approximated $167 million.

There were 50,629,740 shares of common stock outstanding at March 16, 2000.

                      Documents incorporated by reference:

The  information  required by Part III is  incorporated  by  reference  from the
Registrant's  definitive  proxy  statement to be filed with the  Securities  and
Exchange Commission pursuant to Regulation 14A not later than 120 days after the
end of the fiscal year covered by this report.


<PAGE>



Forward-Looking Information.

      The  statements  contained  in this  Annual  Report on Form 10-K  ("Annual
Report")  which  are  not  historical  facts,  including,  but not  limited  to,
statements found (i) under the captions  "Industry,"  "Products and operations,"
"Manufacturing   process  and  raw  materials,"   "Competition,"   "Patents  and
Trademarks," "Foreign  Operations," and "Regulatory and Environmental  Matters,"
all  contained  in Item 1.  Business;  (ii)  under the  captions  "Lead  pigment
litigation" and  "Environmental  matters and litigation," both contained in Item
3. Legal  Proceedings;  (iii) under the  captions  "Results of  Operations"  and
"Liquidity  and  Capital  Resources,"  both  contained  in Item 7.  Management's
Discussion and Analysis of Financial  Condition and Results of  Operations;  and
(iv) under the captions "Currency  exchange rates,"  "Marketable equity security
prices," and "Other," all  contained in Item 7A.  Quantitative  and  Qualitative
Disclosures  About Market Risk, are  forward-looking  statements  that represent
management's  beliefs and assumptions based on currently available  information.
Forward-looking  statements  can be  identified  by the  use of  words  such  as
"believes,"  "intends,"  "may," "will," "should,"  "anticipates,"  "expects," or
comparable  terminology or by  discussions  of strategy or trends.  Although the
Company  believes  that  the  expectations  reflected  in  such  forward-looking
statements are reasonable, it cannot give any assurances that these expectations
will prove to be correct.  Such  statements  by their nature  involve  risks and
uncertainties  that could  significantly  affect  expected  results,  and actual
future   results  could  differ   materially   from  those   described  in  such
forward-looking  statements.  Among the factors that could cause  actual  future
results to differ materially are the risks and  uncertainties  discussed in this
Annual  Report  and those  described  from time to time in the  Company's  other
filings with the Securities and Exchange Commission. While it is not possible to
identify all factors, the Company continues to face many risks and uncertainties
including, but not limited to, the cyclicality of the titanium dioxide industry,
global economic  conditions,  global  productive  capacity,  customer  inventory
levels, changes in product pricing, competitive technology positions,  operating
interruptions  (including,   but  not  limited  to,  leaks,  fires,  explosions,
unscheduled downtime and transportation interruptions),  the ultimate resolution
of  pending  or  possible   future  lead  pigment   litigation  and  legislative
developments  related  to the  lead  paint  litigation,  the  outcome  of  other
litigation,  and other risks and uncertainties included in the Company's filings
with the Securities and Exchange  Commission.  Should one or more of these risks
materialize (or the  consequences of such a development  worsen),  or should the
underlying  assumptions prove incorrect,  actual results could differ materially
from those  forecasted  or expected.  The Company  assumes no duty to update any
forward-looking statements.



<PAGE>



                                     PART I

ITEM 1.     BUSINESS

General

      NL  Industries,  Inc.,  organized  as a New  Jersey  corporation  in 1891,
conducts  its  continuing   operations   through  its  principal   wholly  owned
subsidiary, Kronos, Inc. Kronos is currently the world's fourth largest producer
of titanium dioxide  pigments  ("TiO2") with an estimated 12% share of worldwide
TiO2 sales volume in 1999.  Approximately  one-half of Kronos' 1999 sales volume
was in Europe, where Kronos is the second largest producer of TiO2.

      NL and its consolidated subsidiaries are sometimes referred to herein
collectively as the "Company."

      The Company's primary  objective is to maximize total shareholder  return.
The  Company  has  taken a number  of steps  towards  achieving  its  objective,
including (i) increasing its regular quarterly  dividend to $.15 per share, (ii)
controlling  costs,  (iii)  investing in certain cost effective  debottlenecking
projects to increase TiO2 production capacity and efficiency, and (iv) improving
its  capital   structure.   The  Company   periodically   considers  mergers  or
acquisitions  within the chemical  industry and  acquisitions of additional TiO2
production capacity to meet its objective.

Industry

      Titanium  dioxide  pigments  are  chemical  products  used  for  imparting
whiteness, brightness and opacity to a wide range of products, including paints,
plastics,  paper,  fibers and ceramics.  TiO2 is considered a  "quality-of-life"
product with demand affected by gross domestic product in various regions of the
world.

      Pricing  within the global  TiO2  industry  is  cyclical,  and  changes in
industry economic conditions can significantly impact the Company's earnings and
operating  cash flows.  The Company's  average TiO2 selling  prices on a billing
currency  basis  decreased  during  the first  three  quarters  of 1999,  before
increasing  1% in the fourth  quarter of 1999  compared to the third  quarter of
1999.  Industry-wide  demand for TiO2 increased in 1999, with  second-half  1999
demand  higher than  first-half  1999 demand as a result of, among other things,
customers buying in advance of anticipated  price increases.  Kronos' 1999 sales
volume increased 5% from its 1998 sales volume with growth in all major regions.
Kronos expects  industry demand in 2000 will be relatively  unchanged from 1999,
depending  primarily upon global economic  conditions.  Prices at the end of the
fourth  quarter of 1999 were 1% higher  than the average for the quarter and the
Company  expects to continue to phase in previously  announced  price  increases
during the first quarter of 2000.  The Company's  expectations  as to the future
prospects  of the TiO2  industry  and  prices are based upon a number of factors
beyond the Company's  control,  including  continued  worldwide  growth of gross
domestic   product,   competition   in   the   market   place,   unexpected   or
earlier-than-

                                    -1-

<PAGE>

expected capacity additions and technological  advances.  If actual developments
differ from the Company's  expectations,  industry and Company performance could
be unfavorably affected.

      Kronos has an  estimated  18% share of European  TiO2 sales  volume and an
estimated 12% share of North American TiO2 sales volume.  Per capita consumption
of TiO2 in the United States and Western  Europe far exceeds that in other areas
of the world and these  regions  are  expected  to  continue  to be the  largest
consumers  of TiO2.  Significant  regions for TiO2  consumption  could emerge in
Eastern Europe,  the Far East or China if the economies in these regions develop
to the point  that  quality-of-life  products,  including  TiO2,  are in greater
demand.  Kronos believes that, due to its strong presence in Western Europe,  it
is well  positioned to  participate  in growth in consumption of TiO2 in Eastern
Europe.   Geographic  segment   information  is  contained  in  Note  3  to  the
Consolidated Financial Statements.

Products and operations

      The Company  believes  that there are no effective  substitutes  for TiO2.
However,  extenders  such as  kaolin  clays,  calcium  carbonate  and  polymeric
opacifiers  are used in a number of Kronos'  markets.  Generally,  extenders are
used to reduce to some extent the  utilization of  higher-cost  TiO2. The use of
extenders has not  significantly  changed TiO2  consumption over the past decade
because,  to date,  extenders  generally  have  failed to match the  performance
characteristics  of TiO2.  As a result,  the  Company  believes  that the use of
extenders  will not  materially  alter the  growth of the TiO2  business  in the
foreseeable future.

      Kronos  currently  produces over 40 different TiO2 grades,  sold under the
Kronos and Titanox trademarks, which provide a variety of performance properties
to meet  customers'  specific  requirements.  Kronos'  major  customers  include
domestic and international paint, plastics and paper manufacturers.

      Kronos is one of the world's  leading  producers  and  marketers  of TiO2.
Kronos and its distributors and agents sell and provide  technical  services for
its  products to over 4,000  customers  with the majority of sales in Europe and
North America.  Kronos'  international  operations are conducted  through Kronos
International,  Inc., a  Germany-based  holding company formed in 1989 to manage
and  coordinate  the  Company's  manufacturing  operations  in Germany,  Canada,
Belgium and Norway, and its sales and marketing activities in over 100 countries
worldwide.  Kronos and its predecessors have produced and marketed TiO2 in North
America  and  Europe  for 80 years.  As a result,  Kronos  believes  that it has
developed  considerable  expertise  and  efficiency  in the  manufacture,  sale,
shipment and service of its products in domestic and international  markets.  By
volume,  approximately  one-half of Kronos' 1999 TiO2 sales were to Europe, with
37% to North America and the balance to export markets.

      Kronos is also  engaged  in the  mining  and sale of  ilmenite  ore (a raw
material used in the sulfate pigment production process described below) and has
estimated ilmenite reserves that are expected to last at least 20 years.  Kronos
is also engaged in the manufacture and sale of iron-based water treatment

                                    -2-

<PAGE>



chemicals (derived from co-products of the pigment production processes).  Water
treatment chemicals are used as treatment and conditioning agents for industrial
effluents and municipal wastewater, and in the manufacture of iron pigments.

Manufacturing process and raw materials

      TiO2 is  manufactured  by Kronos using both the  chloride  process and the
sulfate process. Approximately two-thirds of Kronos' current production capacity
is based on its chloride  process  which  generates  less waste than the sulfate
process.  Although most end-use applications can use pigments produced by either
process,  chloride-process  pigments are generally preferred in certain coatings
and plastics applications,  and sulfate-process pigments are generally preferred
for  certain  paper,  fibers and  ceramics  applications.  Due to  environmental
factors and customer  considerations,  the  proportion  of TiO2  industry  sales
represented   by   chloride-process   pigments   has   increased   relative   to
sulfate-process  pigments and, in 1999,  chloride-process  production facilities
represented almost 60% of industry capacity.

      Kronos produced 411,000 metric tons of TiO2 in 1999,  compared to a record
434,000  metric tons produced in 1998 and 408,000  metric tons in 1997.  Kronos'
average  production  capacity  utilization  rate in 1999 was 93%, down from full
capacity in 1998,  primarily due to the Company's  decision to manage  inventory
levels by curtailing  production volume during the first quarter of 1999. Kronos
believes its current  annual  attainable  production  capacity is  approximately
440,000 metric tons,  including its one-half interest in the joint venture-owned
Louisiana plant (see "TiO2 manufacturing joint venture").

      The primary raw materials used in the TiO2 chloride production process are
chlorine,  coke  and  titanium-containing  feedstock  derived  from  beach  sand
ilmenite and natural  rutile ore.  Chlorine and coke are available from a number
of  suppliers.  Titanium-containing  feedstock  suitable for use in the chloride
process  is  available  from a limited  number of  suppliers  around  the world,
principally  in Australia,  South Africa,  Canada,  India and the United States.
Kronos  purchases  slag refined from beach sand  ilmenite from Richards Bay Iron
and Titanium  (Proprietary)  Limited  (South  Africa)  under a long-term  supply
contract that expires at the end of 2003.  Natural rutile ore,  another chloride
feedstock,  is purchased  primarily  from Iluka  Resources,  Inc.  (formerly RGC
Mineral Sands Limited)(Australia), a wholly owned subsidiary of Westralian Sands
Limited  (Australia),  under a long-term supply contract that expires at the end
of 2000.  The  Company  does not  expect  to  encounter  difficulties  obtaining
long-term extensions to existing supply contracts prior to the expiration of the
contracts.  Raw materials purchased under these contracts and extensions thereof
are  expected to meet  Kronos'  chloride  feedstock  requirements  over the next
several years.

      The primary raw materials used in the TiO2 sulfate  production process are
sulfuric acid and titanium-containing  feedstock derived primarily from rock and
beach sand  ilmenite.  Sulfuric  acid is available  from a number of  suppliers.
Titanium-containing  feedstock  suitable  for  use in  the  sulfate  process  is
available from a limited number of suppliers  around the world.  Currently,  the
principal  active sources are located in Norway,  Canada,  Australia,  India and
South   Africa.   As  one  of  the  few   vertically-integrated   producers   of
sulfate-

                                    -3-

<PAGE>

process pigments, Kronos operates a rock ilmenite mine in Norway, which provided
all of Kronos'  feedstock  for its European  sulfate-process  pigment  plants in
1999. For its Canadian plant,  Kronos also purchases sulfate grade slag from Rio
Tinto Iron and  Titanium,  Inc.  (formerly  Q.I.T.-Fer  et Titane  Inc.) under a
long-term supply contract which expires in 2002.

      Kronos believes the availability of titanium-containing feedstock for both
the  chloride and sulfate  processes  is adequate  for the next  several  years.
Kronos  does not expect to  experience  any  interruptions  of its raw  material
supplies  because of its  long-term  supply  contracts.  However,  political and
economic  instability in certain  countries from which the Company purchases its
raw material supplies could adversely affect the availability of such feedstock.

TiO2 manufacturing joint venture

      Subsidiaries of Kronos and Huntsman ICI Holdings  ("HICI") each own a 50%-
interest in a manufacturing  joint venture,  Louisiana  Pigment Company ("LPC").
LPC owns and operates a  chloride-process  TiO2 plant  located in Lake  Charles,
Louisiana.  Production  from the plant is shared equally by Kronos and HICI (the
"Partners") pursuant to separate offtake agreements.

      A  supervisory  committee,  composed  of four  members,  two of  whom  are
appointed by each  Partner,  directs the  business and affairs of LPC  including
production  and output  decisions.  Two  general  managers,  one  appointed  and
compensated  by each Partner,  manage the operations of the joint venture acting
under the direction of the supervisory committee.

      The  manufacturing  joint  venture  operates  on a  break-even  basis and,
accordingly,  Kronos'  transfer price for its share of TiO2 produced is equal to
its share of the joint venture's  production costs and interest expense, if any.
Kronos'  share of the  production  costs  are  reported  as cost of sales as the
related TiO2 acquired from the joint venture is sold, and its share of the joint
venture's  interest  expense,  if any, is  reported  as a component  of interest
expense.

Competition

      The TiO2 industry is highly competitive. During the early 1990s, supply of
TiO2 exceeded  demand,  primarily due to new  chloride-process  capacity  coming
on-stream,  which  suppressed  selling prices.  Prices improved in the mid-1990s
with a peak in the first half of 1995.  Prices  declined until the first quarter
of 1997,  when selling prices of TiO2 began to increase as a result of increased
demand,  peaking in the fourth quarter of 1998. Kronos' average selling price in
1999 was 1% lower than 1998.  Pigment  prices  declined  during the first  three
quarters  of 1999,  but  increased  in the  fourth  quarter as a result of price
increases  announced by all major producers effective during the fourth quarter.
Such price increases began to be phased in during the fourth quarter of 1999 and
continue  to be  implemented  in the  first  quarter  of 2000.  Kronos  recently
announced a price  increase in Europe  effective  April 1, 2000.  The successful
implementation  of the price increase will depend on market  conditions.  Should
demand in 2000 remain  strong,  additional  price  increases  could be announced
later

                                    -4-

<PAGE>



in 2000.  No assurance  can be given that demand or price trends will conform to
the Company's  expectations.  See  "Industry" for a description of certain risks
and uncertainties affecting the TiO2 industry.

      Kronos'  worldwide  sales  volume in the first half of 1999 was lower than
the first  half of the  previous  year.  Demand in the  second  half of 1999 was
stronger than comparable periods in both 1998 and 1997 although a portion of the
increased  demand may be attributed to customers  buying in advance of announced
price  increases.  Kronos' total 1999 worldwide  sales volume was 5% higher than
1998.  Kronos expects industry demand in 2000 will be relatively  unchanged from
the strong overall  performance of 1999, but this will depend upon,  among other
things, global economic conditions.

      Kronos  competes  primarily  on the basis of price,  product  quality  and
technical  service,  and the  availability of high  performance  pigment grades.
Although certain TiO2 grades are considered specialty pigments,  the majority of
Kronos'  grades and  substantially  all of  Kronos'  production  are  considered
commodity  pigments with price generally being the most significant  competitive
factor.  During 1999 Kronos had an estimated  12% share of worldwide  TiO2 sales
volume, and Kronos believes that it is the leading seller of TiO2 in a number of
countries, including Germany and Canada.

      Kronos'  principal   competitors  are  E.I.  du  Pont  de  Nemours  &  Co.
("DuPont"); Millennium Chemicals, Inc.; HICI; Kerr-McGee Corporation; Kemira Oy;
and Ishihara Sangyo Kaisha,  Ltd. Kronos' six largest competitors have estimated
individual  shares of TiO2  production  capacity  ranging from 23% to 5%, and an
estimated  aggregate 74% share of worldwide TiO2 production  volume.  DuPont has
about one-half of total U.S. TiO2 production  capacity and is Kronos'  principal
North American competitor.

      Effective June 30, 1999,  Imperial  Chemicals  Industries plc ("ICI") sold
its titanium dioxide business,  including its 50% ownership  interest in LPC, to
HICI, a newly formed  company  that is  70%-owned  by Huntsman  Corporation  and
30%-owned by ICI. In February 2000 Kerr-McGee  announced an agreement to acquire
Kemira's TiO2 business in The  Netherlands  and the U.S. If this  acquisition is
completed, Kronos would become the world's fifth largest producer of TiO2.

      Capacity  additions  that are the  result of  construction  of  greenfield
plants in the worldwide TiO2 market require  significant capital and substantial
lead  time,  typically  three to five  years  in the  Company's  experience.  No
greenfield plants have been announced,  but industry capacity can be expected to
increase as Kronos and its competitors  debottleneck  existing plants.  Based on
the factors  described under the caption  "Industry"  above, the Company expects
that  the  average   annual   increase  in  industry   capacity  from  announced
debottlenecking  projects will be less than the average annual demand growth for
TiO2 during the next three to five years.


                                    -5-

<PAGE>



Discontinued operations - Rheox

      On January  30,  1998,  the  Company  sold its Rheox  specialty  chemicals
business to Elementis plc for $465 million,  including $20 million  attributable
to a  five-year  agreement  by the  Company  not to compete  in the  rheological
products  business.  As a result of the sale, the Company has reported its Rheox
operation as discontinued operations. The majority of the $380 million after-tax
proceeds has been used to reduce the Company's outstanding indebtedness.

Research and Development

      The  Company's  expenditures  for  research  and  development  and certain
technical support programs,  excluding  discontinued  operations,  have averaged
approximately  $7 million  annually  during the past three  years.  Research and
development  activities  are conducted  principally at the  Leverkusen,  Germany
facility.  Such  activities  are directed  primarily  toward  improving both the
chloride  and  sulfate  production  processes,  improving  product  quality  and
strengthening   Kronos'   competitive   position  by   developing   new  pigment
applications.

Patents and Trademarks

      Patents  held for  products and  production  processes  are believed to be
important to the Company and to the  continuing  business  activities of Kronos.
The Company continually seeks patent protection for its technical  developments,
principally  in the  United  States,  Canada and  Europe,  and from time to time
enters into licensing arrangements with third parties.

      The  Company's  major  trademarks,   including  Kronos  and  Titanox,  are
protected by  registration  in the United States and  elsewhere  with respect to
those products it manufactures and sells.

Foreign Operations

      The Company's chemical businesses have operated in non-U.S.  markets since
the 1920s. Most of Kronos' current production  capacity is located in Europe and
Canada.  Kronos' European operations include facilities in Germany,  Belgium and
Norway.  Approximately  three-quarters of the Company's 1999 consolidated  sales
were to  non-U.S.  customers,  including  11% to  customers  in areas other than
Europe and  Canada.  Foreign  operations  are subject  to,  among other  things,
currency exchange rate fluctuations and the Company's results of operations have
in the past been both  favorably and  unfavorably  affected by  fluctuations  in
currency  exchange rates.  Effects of fluctuations in currency exchange rates on
the  Company's  results of  operations  are  discussed in Item 7.  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
Item 7A. "Quantitative and Qualitative Disclosures about Market Risk."

      Political and economic  uncertainties in certain of the countries in which
the Company operates may expose it to risk of loss. The Company does not believe
that there is currently any likelihood of material loss through political or

                                    -6-

<PAGE>



economic  instability,  seizure,  nationalization  or similar event. The Company
cannot predict,  however, whether events of this type in the future could have a
material  effect on its  operations.  The  Company's  manufacturing  and  mining
operations are also subject to extensive and diverse environmental regulation in
each of the  foreign  countries  in which  they  operate.  See  "Regulatory  and
Environmental Matters."

Customer Base and Seasonality

      The Company  believes that neither its aggregate sales nor those of any of
its principal  product groups are  concentrated in or materially  dependent upon
any single customer or small group of customers.  Neither the Company's business
as a whole nor that of any of its  principal  product  groups is seasonal to any
significant  extent.  Due in part to the  increase  in paint  production  in the
spring to meet the spring  and summer  painting  season  demand,  TiO2 sales are
generally higher in the second and third calendar quarters than in the first and
fourth calendar quarters.

Employees

      As of December 31, 1999, the Company employed approximately 2,500 persons,
excluding the joint venture  employees,  with approximately 100 employees in the
United States and approximately 2,400 at sites outside the United States. Hourly
employees in production facilities  worldwide,  including the TiO2 manufacturing
joint  venture,  are  represented  by a  variety  of labor  unions,  with  labor
agreements  having  various  expiration  dates.  The Company  believes its labor
relations are good.

Regulatory and Environmental Matters

      Certain  of the  Company's  businesses  are and have been  engaged  in the
handling,  manufacture  or use of substances or compounds that may be considered
toxic or hazardous within the meaning of applicable  environmental laws. As with
other  companies  engaged  in  similar  businesses,  certain  past  and  current
operations and products of the Company have the potential to cause environmental
or other damage.  The Company has implemented and continues to implement various
policies  and programs in an effort to minimize  these risks.  The policy of the
Company  is to  maintain  compliance  with  applicable  environmental  laws  and
regulations  at all its  facilities  and to strive to improve its  environmental
performance.  It  is  possible  that  future  developments,   such  as  stricter
requirements of environmental laws and enforcement  policies  thereunder,  could
adversely   affect   the   Company's   production,   handling,   use,   storage,
transportation,  sale or disposal of such  substances  as well as the  Company's
consolidated financial position, results of operations or liquidity.

      The  Company's  U.S.  manufacturing  operations  are  governed  by federal
environmental and worker health and safety laws and regulations, principally the
Resource  Conservation and Recovery Act ("RCRA"),  the  Occupational  Safety and
Health Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act,
the Toxic Substances Control Act and the Comprehensive  Environmental  Response,
Compensation and Liability Act, as amended by the Superfund Amendments and

                                    -7-

<PAGE>



Reauthorization  Act  ("CERCLA"),  as well as the  state  counterparts  of these
statutes.  The Company  believes the  Louisiana  plant owned and operated by the
joint  venture and a slurry  facility  owned by the  Company are in  substantial
compliance  with  applicable  requirements  of these laws or  compliance  orders
issued thereunder.  The Company has no other U.S. plants. From time to time, the
Company's  facilities  may be subject to  environmental  regulatory  enforcement
under  such  statutes.   Resolution  of  such  matters  typically  involves  the
establishment of compliance programs. Occasionally, resolution may result in the
payment of  penalties,  but to date such  penalties  have not  involved  amounts
having  a  material  adverse  effect  on the  Company's  consolidated  financial
position, results of operations or liquidity.

      The Company's  European and Canadian  production  facilities operate in an
environmental  regulatory framework in which governmental  authorities typically
are granted  broad  discretionary  powers  which  allow them to issue  operating
permits  required for the plants to operate.  The Company  believes that all its
plants are in substantial compliance with applicable environmental laws.

      While the laws  regulating  operations of industrial  facilities in Europe
vary from country to country, a common regulatory denominator is provided by the
European Union (the "EU").  Germany and Belgium are members of the EU and follow
its  initiatives.   Norway,  although  not  a  member,  generally  patterns  its
environmental  regulatory actions after the EU. The Company believes that Kronos
is in substantial  compliance with agreements  reached with European  regulatory
authorities  and with an EU directive to control the effluents  produced by TiO2
production facilities.

      The  Company  has a contract  with a third  party to treat  certain of its
Leverkusen and Nordenham,  Germany sulfate-process  effluents.  Either party may
terminate the contract after giving four years advance notice with regard to the
Nordenham plant. Under certain circumstances,  Kronos may terminate the contract
after giving six months  notice with respect to treatment of effluents  from the
Leverkusen plant.

      The Company expects to complete in 2000 an $8 million  landfill  expansion
for its Belgian  plant which will provide the plant with twenty years of storage
space for neutralized chloride process solids. In order to reduce sulfur dioxide
emissions  into  the  atmosphere   consistent  with   applicable   environmental
regulations,  Kronos  completed  the  installation  of  off-gas  desulfurization
systems in 1997 at its Norwegian and German plants at a cost of $30 million.

      The Company's capital  expenditures  related to its ongoing  environmental
protection and improvement  programs are currently  expected to be approximately
$7 million in 2000 and $11 million in 2001.

      The Company has been named as a defendant,  potentially  responsible party
("PRP"),  or both, pursuant to CERCLA and similar state laws in approximately 75
governmental  and private actions  associated with waste disposal sites,  mining
locations and facilities currently or previously owned,  operated or used by the
Company, or its subsidiaries, or their predecessors, certain of which are on the

                                    -8-

<PAGE>



U.S.   Environmental   Protection   Agency's  ("U.S.  EPA")  Superfund  National
Priorities List or similar state lists. See Item 3. "Legal Proceedings."

Principal Shareholders

      At December 31, 1999, Valhi, Inc. and Tremont Corporation, each affiliates
of Contran Corporation,  held approximately 59% and 20%,  respectively,  of NL's
outstanding  common stock.  At December 31, 1999,  Contran and its  subsidiaries
held approximately 93% of Valhi's  outstanding common stock, and Valhi and other
entities  related  to Harold C.  Simmons  held  approximately  55% of  Tremont's
outstanding  common stock.  Substantially  all of Contran's  outstanding  voting
stock is held either by trusts  established for the benefit of certain  children
and grandchildren of Mr. Simmons,  of which Mr. Simmons is the sole trustee,  or
by Mr. Simmons  directly.  Mr. Simmons,  the Chairman of the Board of NL and the
Chairman  of the Board and Chief  Executive  Officer of Contran  and Valhi and a
director of Tremont, may be deemed to control each of such companies.

ITEM 2.     PROPERTIES

      Kronos currently  operates four TiO2 facilities in Europe  (Leverkusen and
Nordenham, Germany;  Langerbrugge,  Belgium; and Fredrikstad,  Norway). In North
America,  Kronos has a facility in  Varennes,  Quebec,  Canada and,  through the
manufacturing  joint venture  described above, a one-half interest in a plant in
Lake Charles,  Louisiana.  The Company also owns a slurry plant in Lake Charles,
Louisiana.  The Company's Fredrikstad TiO2 plant has a lien on it that secures a
claim  by  Norwegian  tax  authorities,   pending   resolution  of  certain  tax
litigation. See Notes 10 and 13 to the Consolidated Financial Statements.

      Kronos'  principal German operating  subsidiary  leases the land under its
Leverkusen  TiO2 production  facility  pursuant to a lease expiring in 2050. The
Leverkusen  facility,  with about  one-third of Kronos'  current TiO2 production
capacity,  is located within an extensive  manufacturing  complex owned by Bayer
AG. Kronos is the only unrelated  party so situated.  Under a separate  supplies
and services  agreement  expiring in 2011,  Bayer  provides some raw  materials,
auxiliary and operating  materials and utilities  services  necessary to operate
the Leverkusen facility.  Both the lease and the supplies and services agreement
restrict  Kronos'  ability  to  transfer  ownership  or use  of  the  Leverkusen
facility.

      All of Kronos' principal production  facilities described above are owned,
except for the land under the  Leverkusen  facility.  Kronos has a  governmental
concession with an unlimited term to operate its ilmenite mine in Norway.

      The Company has under lease various corporate and  administrative  offices
located in the U.S.  and  various  sales  offices  located in the U.S.,  France,
Holland, Denmark and the U.K.


                                    -9-

<PAGE>



ITEM 3.     LEGAL PROCEEDINGS

Lead pigment litigation

      The Company was formerly  involved in the manufacture of lead pigments for
use in paint and lead-based  paint. The Company has been named as a defendant or
third party defendant in various legal proceedings alleging that the Company and
other  manufacturers  are responsible for personal  injury,  property damage and
governmental  expenditures  allegedly  associated with the use of lead pigments.
The Company is vigorously  defending such litigation.  Considering the Company's
previous involvement in the lead pigment and lead-based paint businesses,  there
can be no assurance that additional litigation, similar to that described below,
will  not  be  filed.  In  addition,   various  legislation  and  administrative
regulations  have,  from time to time, been enacted or proposed that seek to (a)
impose various  obligations on present and former  manufacturers of lead pigment
and lead-based  paint with respect to asserted health  concerns  associated with
the use of such products and (b)  effectively  overturn court decisions in which
the Company and other pigment  manufacturers  have been successful.  Examples of
such proposed  legislation  include bills which would permit civil liability for
damages on the basis of market share, rather than requiring  plaintiffs to prove
that the  defendant's  product  caused the alleged  damage and bills which would
revive  actions  barred by the statute of  limitations.  While no legislation or
regulations  have been  enacted  to date which are  expected  to have a material
adverse  effect on the Company's  consolidated  financial  position,  results of
operations  or  liquidity,  the  imposition  of market share  liability or other
legislation  could have such an effect.  The Company has not accrued any amounts
for the  pending  lead  pigment and  lead-based  paint  litigation.  There is no
assurance  that the Company will not incur  future  liability in respect of this
pending litigation in view of the inherent  uncertainties  involved in court and
jury  rulings in pending and possible  future  cases.  However,  based on, among
other things,  the results of such litigation to date, the Company believes that
the pending lead  pigment and  lead-based  paint  litigation  is without  merit.
Liability that may result, if any, cannot reasonably be estimated.

      In 1989 and 1990 the  Housing  Authority  of New  Orleans  ("HANO")  filed
third-party  complaints for indemnity and/or  contribution  against the Company,
other alleged  manufacturers  of lead pigment  (together  with the Company,  the
"pigment  manufacturers") and the Lead Industries  Association (the "LIA") in 14
actions  commenced by residents of HANO units seeking  compensatory and punitive
damages for injuries allegedly caused by lead pigment.  The actions,  which were
pending  in the  Civil  District  Court  for the  Parish  of  Orleans,  State of
Louisiana,  were  dismissed by the district  court in 1990.  Subsequently,  HANO
agreed to  consolidate  all the cases and appealed.  In March 1992 the Louisiana
Court of Appeals,  Fourth  Circuit,  dismissed  HANO's  appeal as untimely  with
respect to three of these cases. With respect to the other cases included in the
appeal,  the court of appeals  reversed the lower court decision  dismissing the
cases. These cases were remanded to the District Court for further  proceedings.
In November  1994 the  District  Court  granted  defendants'  motion for summary
judgment  in one of the  remaining  cases  and in June 1995 the  District  Court
granted  defendants'  motion for summary  judgment  in several of the  remaining
cases.  After such grant,  only two cases remain  pending and have been inactive
since 1992, Hall

                                    -10-

<PAGE>



v. HANO,  et al. (No.  89-3552)  and Allen V. HANO,  et al. (No.  89-427)  Civil
District Court for the Parish of Orleans, State of Louisiana.

      In June 1989 a complaint  was filed in the  Supreme  Court of the State of
New York,  County of New York,  against the pigment  manufacturers  and the LIA.
Plaintiffs seek damages, contribution and/or indemnity in an amount in excess of
$50 million for monitoring and abating  alleged lead paint hazards in public and
private  residential  buildings,  diagnosing  and  treating  children  allegedly
exposed to lead paint in city  buildings,  the costs of educating city residents
to the hazards of lead paint,  and liability in personal  injury actions against
the City and the  Housing  Authority  based on alleged  lead  poisoning  of city
residents (The City of New York, the New York City Housing Authority and the New
York City Health and Hospitals  Corp. v. Lead Industries  Association,  Inc., et
al., No. 89-4617).  In December 1991 the court granted the defendants' motion to
dismiss claims alleging negligence and strict liability and denied the remainder
of the motion.  In January 1992 defendants  appealed the denial. In May 1993 the
Appellate  Division of the Supreme  Court  affirmed  the denial of the motion to
dismiss plaintiffs' fraud,  restitution and indemnification  claims. In May 1994
the trial  court  granted  the  defendants'  motion to dismiss  the  plaintiffs'
restitution and indemnification  claims, and plaintiffs  appealed.  In June 1996
the  Appellate  Division  reversed the trial  court's  dismissal of  plaintiffs'
restitution and  indemnification  claims,  reinstating those claims. In December
1998  plaintiffs  moved for partial  summary  judgment on their claims of market
share,  alternative liability,  enterprise liability,  and concert of action. In
February 1999 claims for  plaintiffs  New York City and New York City Health and
Hospital  Corporation  dismissed  with  prejudice  all their  claims and were no
longer  parties to the case.  Also in  February  1999 the New York City  Housing
Authority  dismissed  with  prejudice  all of its  claims  except for claims for
damages  relating to two housing  projects.  In  September  1999 the trial court
denied  the  plaintiffs'  motions  for  summary  judgment  on  market  share and
conspiracy issues and denied  defendants' April 1999 motion for summary judgment
on statute of limitations grounds.  Plaintiffs have appealed the denial of their
motions. Discovery has resumed.

      In August  1992 the  Company  was  served  with an  amended  complaint  in
Jackson,  et al. v. The Glidden  Co., et al.,  Court of Common  Pleas,  Cuyahoga
County,  Cleveland,  Ohio (Case No. 236835).  Plaintiffs seek  compensatory  and
punitive  damages for personal  injury caused by the  ingestion of lead,  and an
order directing  defendants to abate lead-based  paint in buildings.  Plaintiffs
purport to represent a class of similarly  situated persons throughout the State
of Ohio. The amended complaint asserts causes of action under theories of strict
liability,  negligence  per  se,  negligence,  breach  of  express  and  implied
warranty,  fraud, nuisance,  restitution,  and negligent infliction of emotional
distress.  The complaint  asserts several theories of liability  including joint
and several,  market share,  enterprise and  alternative  liability.  Plaintiffs
moved for class certification in October 1998, and all briefing on the issue was
completed in April 1999.  No decision  regarding  class  certification  has been
issued by the trial court.


                                    -11-

<PAGE>



      In November  1993 the Company was served with a complaint  in Brenner,  et
al. v. American  Cyanamid,  et al., (No.  12596-93) Supreme Court,  State of New
York, Erie County alleging injuries to two children  purportedly  caused by lead
pigment.  The  complaint  seeks $24 million in  compensatory  and $10 million in
punitive damages for alleged negligent failure to warn, strict liability,  fraud
and   misrepresentation,   concert  of  action,  civil  conspiracy,   enterprise
liability,  market share  liability,  and  alternative  liability.  In June 1998
defendants  moved for partial summary  judgment  dismissing  plaintiffs'  market
share and alternative  liability claims. In January 1999 the trial court granted
defendants'  summary  judgment motion to dismiss the  alternative  liability and
enterprise liability claims, but denied defendants' motion to dismiss the market
share  liability  claim.  In May 1999  defendants  appealed  the denial of their
motion to dismiss  the  market  share  liability  claim.  The Fourth  Department
intermediate  appellate  court in  December  1999  reversed  the trial court and
dismissed the market share claim.  The case has been remanded to the trial court
for further  proceedings on the remaining claims.  Plaintiffs are seeking review
in the Court of Appeals.

      In April 1997 the  Company  was served  with a  complaint  in Parker v. NL
Industries,  et al.  (Circuit  Court,  Baltimore  City,  Maryland,  No. 97085060
CC915).  Plaintiff,  now an adult, and his wife, seek  compensatory and punitive
damages from the Company,  another former manufacturer of lead paint and a local
paint retailer,  based on claims of negligence,  strict liability and fraud, for
plaintiff's  alleged  ingestion of lead paint as a child.  In February  1998 the
Court  dismissed  the fraud claim.  In July 1998 the Court granted the Company's
motion for summary  judgment on all  remaining  claims.  In  September  1999 the
Special Court of Appeals  reversed the grant of summary  judgment to defendants.
The Court of Appeals denied review of this decision in December 1999.  Trial has
been set for May 2000.

      In December 1998 the Company was served with a complaint on behalf of four
children and their guardians in Sabater, et al. v. Lead Industries  Association,
et al.  (Supreme  Court of the  State of New York,  County  of Bronx,  Index No.
25533/98).  Plaintiffs  purport to  represent a class of all  persons  similarly
situated.  The complaint alleges against the Company,  the LIA, and other former
manufacturers  of lead pigment  various causes of action  including  negligence,
strict products liability, fraud and misrepresentation, concert of action, civil
conspiracy,  enterprise liability, market share liability, breach of warranties,
nuisance,  and  violation  of New York  State's  consumer  protection  act.  The
complaint  seeks  damages for  establishment  of property  abatement and medical
monitoring funds and compensatory damages for alleged injuries to plaintiffs. In
February 2000 the trial court granted defendants' motions to dismiss the product
defect, express warranty, nuisance and consumer fraud statute claims.

      In April 1999 the Company was served with an amended  complaint  in Sweet,
et al. v. Sheahan, et al., (U.S. District Court,  Northern District of New York,
Civil Action No. 97-CV-1666/LEK-DNH), adding the Company and other defendants to
a suit originally filed against plaintiffs' landlord.  Plaintiffs,  a parent and
child, allege injuries  purportedly caused by lead pigment, and seek recovery of
actual and punitive damages from their landlord, alleged former manufacturers of
lead pigment, and the LIA, and purport to allege causes of action against the

                                    -12-

<PAGE>



former pigment  manufacturers  based on negligence,  strict products  liability,
fraud and  misrepresentation,  concert of action,  civil conspiracy,  and market
share  liability.  In November 1999 the trial court denied  defendants'  October
1999 motion  arguing for  dismissal due to absence of Federal  jurisdiction.  In
January 2000 the court certified for  interlocutory  review the issue of Federal
jurisdiction.  Defendants  have  requested  such review  from the U.S.  Court of
Appeals for the Second Circuit.

      In  September  1999 an  amended  complaint  was  filed in  Thomas  v. Lead
Industries Association,  et al. (Circuit Court, Milwaukee,  Wisconsin,  Case No.
99-CV-6411)  adding as defendants the Company and seven other companies  alleged
to have  manufactured  lead products in paint to a suit originally filed against
plaintiff's  landlords.  Plaintiff, a minor, alleges injuries purportedly caused
by lead on the  surfaces of  premises  in homes in which he  resided.  Plaintiff
seeks  compensatory and punitive  damages.  Plaintiff  alleges strict liability,
negligence,    negligent    misrepresentation    and    omissions,    fraudulent
misrepresentations  and  omissions,  concert of action,  civil  conspiracy,  and
enterprise  liability causes of action against the Company,  seven other alleged
former  manufacturers  of lead  products  contained  in paint,  and the LIA.  In
January 2000 the Company filed an answer  denying all  wrongdoing and liability,
and all  manufacturer  defendants  filed a motion to dismiss the product  defect
claim  and to  strike  the  demand  for  relief  under  the  Wisconsin  consumer
protection statute.

      In October  1999 the Company was served with a complaint in State of Rhode
Island v. Lead Industries  Association,  et al. (Superior Court of Rhode Island,
No.  99-5226).  Rhode  Island,  by  and  through  its  Attorney  General,  seeks
compensatory  and punitive damages for medical,  school,  and public and private
building  abatement  expenses  that the State alleges were caused by lead paint,
and for funding of a public education campaign and screening programs. Plaintiff
seeks judgments of joint and several liability against the Company,  seven other
companies  alleged to have  manufactured  lead  products in paint,  and the LIA.
Plaintiffs  allege public  nuisance,  violation of the Rhode Island Unfair Trade
Practices and Consumer Protection Act, strict liability,  negligence,  negligent
misrepresentation  and omissions,  fraudulent  misrepresentation  and omissions,
civil conspiracy, unjust enrichment,  indemnity, and equitable relief to protect
children.  In January 2000 defendants  moved to dismiss all claims.  Plaintiffs'
response is not yet due.

      In October 1999 the Company was served with a complaint in Cofield, et al.
v. Lead  Industries  Association,  et al.  (Circuit  Court for  Baltimore  City,
Maryland,  Case  No.  24-C-99-004491).   Plaintiffs,  six  homeowners,  seek  to
represent a class of all owners of nonrental residential properties in Maryland.
Plaintiffs  seek   compensatory  and  punitive  damages  for  the  existence  of
lead-based paint in their homes,  including funds for monitoring,  detecting and
abating  lead-based  paint  in  those  residences.  Plaintiffs  allege  that the
Company,  fourteen other companies  alleged to have  manufactured  lead pigment,
paint and/or  gasoline  additives,  the LIA, and the National Paint and Coatings
Association  are jointly and  severally  liable for  alleged  negligent  product
design,    negligent   failure   to   warn,    supplier    negligence,    strict
liability/defective   design,   strict   liability/failure  to  warn,  nuisance,
indemnification, fraud and deceit,

                                    -13-

<PAGE>



conspiracy,  concert of action,  aiding and abetting,  and enterprise liability.
Plaintiffs  seek  damages in excess of $20,000 per  household.  In October  1999
defendants  removed  the  case to  Maryland  federal  court.  In  February  2000
defendants moved to dismiss the design defect, fraud and deceit, indemnification
and nuisance claims.

      In October 1999 the Company was served with a complaint  in Smith,  et al.
v. Lead  Industries  Association,  et al.  (Circuit  Court for  Baltimore  City,
Maryland,   Case  No.  24-C-99-004490).   Plaintiffs,   six  minors,  each  seek
compensatory  damages  of $5  million  and  punitive  damages  of  $10  million.
Plaintiffs  allege that the Company,  fourteen other  companies  alleged to have
manufactured  lead pigment,  paint and/or gasoline  additives,  the LIA, and the
National  Paint and Coatings  Association  are jointly and severally  liable for
alleged   negligent  product  design,   negligent  failure  to  warn,   supplier
negligence,  fraud  and  deceit,  conspiracy,  concert  of  action,  aiding  and
abetting,  strict  liability/  failure to warn,  and strict  liability/defective
design.  In October 1999 defendants  removed the case to Maryland  federal court
and in November 1999 the case was remanded to state court.  In February 2000 the
Company answered the complaint and denied all wrongdoing and liability,  and all
defendants  filed  motions to dismiss  the  product  defect and fraud and deceit
claims.

      In February  2000 the  Company was served with a complaint  in City of St.
Louis v. Lead  Industries  Association,  et al.  (Missouri  Circuit  Court  22nd
Judicial  Circuit,  St. Louis City, Cause No. 002-245,  Division 1). The City of
St. Louis seeks  compensatory and punitive damages for its expenses  discovering
and  abating  lead,   detecting  lead  poisoning  and  providing  medical  care,
educational  programs for City  residents,  and the costs of educating  children
suffering injuries due to lead exposure.  Plaintiff seeks judgments of joint and
several  liability  against the Company,  eight other companies  alleged to have
manufactured  lead products for paint, and the LIA.  Plaintiff alleges claims of
public nuisance,  product liability,  negligence,  negligent  misrepresentation,
fraudulent   misrepresentation,   civil  conspiracy,   unjust  enrichment,   and
indemnity.  The  Company  intends  to deny all  allegations  of  wrongdoing  and
liability and to defend the case vigorously.

      The Company  believes that the foregoing lead pigment  actions are without
merit  and  intends  to  continue  to deny all  allegations  of  wrongdoing  and
liability and to defend such actions vigorously.

      The Company  has filed  actions  seeking  declaratory  judgment  and other
relief against various  insurance  carriers with respect to costs of defense and
indemnity coverage for certain of its environmental and lead pigment litigation.
NL Industries,  Inc. v. Commercial  Union Insurance Cos., et al., Nos.  90-2124,
-2125 (HLS) (District Court of New Jersey).  The action relating to lead pigment
litigation  defense costs filed in May 1990 against  Commercial  Union Insurance
Company ("Commercial Union") seeks to recover defense costs incurred in the City
of New York lead pigment case and two other cases which have since been resolved
in the Company's  favor. In July 1991 the court granted the Company's motion for
summary judgment and ordered  Commercial  Union to pay the Company's  reasonable
defense costs for such cases. In June 1992 the Company filed an amended

                                    -14-

<PAGE>



complaint  in the United  States  District  Court for the District of New Jersey
against  Commercial  Union seeking to recover costs  incurred in defending  four
additional  lead pigment  cases which have since been  resolved in the Company's
favor.  In August  1993 the court  granted  the  Company's  motion  for  summary
judgment and ordered  Commercial  Union to pay the reasonable costs of defending
those  cases.  In July 1994 the court  entered  judgment on the order  requiring
Commercial  Union to pay previously  incurred  Company costs in defending  those
cases.  In  September  1995 the U.S.  Court of  Appeals  for the  Third  Circuit
reversed and remanded for further  consideration the decision by the trial court
that  Commercial  Union was  obligated to pay the Company's  reasonable  defense
costs in  certain  of the lead  pigment  cases.  The  trial  court  had made its
decision  applying New Jersey law; the appeals court concluded that New York and
not New  Jersey  law  applied  and  remanded  the case to the trial  court for a
determination under New York law. On remand from the Court of Appeals, the trial
court in April 1996 granted the Company's motion for summary  judgment,  finding
that  Commercial  Union had a duty to defend the  Company in the four lead paint
cases which were the subject of the  Company's  second  amended  complaint.  The
court also  issued a partial  ruling on  Commercial  Union's  motion for summary
judgment in which it sought  allocation of defense costs and  contribution  from
the Company and two other  insurance  carriers in connection with the three lead
paint  actions on which the court had granted the  Company  summary  judgment in
1991.  The court  ruled  that  Commercial  Union is  entitled  to  receive  such
contribution  from the Company and the two  carriers,  but reserved  ruling with
respect  to the  relative  contributions  to be made  by  each  of the  parties,
including  contributions  by the Company  that may be required  with  respect to
periods in which it was  self-insured and  contributions  from one carrier which
were reinsured by a former  subsidiary of the Company,  the reinsurance costs of
which the Company may  ultimately  be required to bear. In June 1997 the Company
reached a settlement  in principle  with its insurers  regarding  allocation  of
defense costs in the lead pigment cases in which  reimbursement of defense costs
had been sought.

      Other than  granting  motions for summary  judgment  brought by two excess
liability  insurance  carriers,  which  contended that their policies  contained
absolute  pollution  exclusion  language,  and certain summary  judgment motions
regarding policy periods and ruling  regarding  choice of law issues,  the Court
has not made any final  rulings  on defense  costs or  indemnity  coverage  with
respect to the Company's  pending  environmental  litigation.  Nor has the Court
made any final ruling on indemnity coverage in the lead pigment  litigation.  No
trial  dates  have been set.  Other than  rulings to date,  the issue of whether
insurance coverage for defense costs or indemnity or both will be found to exist
depends  upon a variety  of  factors,  and there can be no  assurance  that such
insurance coverage will exist in other cases. The Company has not considered any
potential insurance  recoveries for lead pigment or environmental  litigation in
determining related accruals.

Environmental matters and litigation

      The  Company  has been named as a  defendant,  PRP,  or both,  pursuant to
CERCLA and  similar  state laws in  approximately  75  governmental  and private
actions  associated with waste disposal sites,  mining  locations and facilities
currently  or  previously  owned,  operated  or  used  by  the  Company,  or its
subsidiaries, or

                                    -15-

<PAGE>



their  predecessors,  certain of which are on the U.S. EPA's Superfund  National
Priorities List or similar state lists.  These  proceedings  seek cleanup costs,
damages for personal  injury or property  damage,  and/or  damages for injury to
natural resources.  Certain of these proceedings  involve claims for substantial
amounts.  Although  the  Company may be jointly  and  severally  liable for such
costs,  in most cases it is only one of a number of PRPs who may also be jointly
and severally liable.

      The extent of CERCLA liability  cannot  accurately be determined until the
Remedial  Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA
issues a record of decision and costs are  allocated  among PRPs.  The extent of
liability under analogous state cleanup  statutes and for common law equivalents
are  subject to similar  uncertainties.  The Company  believes  it has  provided
adequate  accruals for reasonably  estimable  costs for CERCLA matters and other
environmental  liabilities.  At December 31, 1999,  the Company had accrued $112
million for those  environmental  matters which are  reasonably  estimable.  The
Company  determines the amount of accrual on a quarterly  basis by analyzing and
estimating the range of possible costs to the Company. Such costs include, among
other things,  expenditures for remedial investigations,  monitoring,  managing,
studies,  certain  legal  fees,  cleanup,  removal  and  remediation.  It is not
possible  to  estimate  the range of costs for  certain  sites.  The Company has
estimated  that the upper end of the range of reasonably  possible  costs to the
Company for sites for which it is possible  to estimate  costs is  approximately
$150 million.  The Company's  estimate of such liability has not been discounted
to present  value and the Company has not  recognized  any  potential  insurance
recoveries.  No assurance  can be given that actual costs will not exceed either
accrued amounts or the upper end of the range for sites for which estimates have
been made,  and no assurance  can be given that costs will not be incurred  with
respect to sites as to which no estimate  presently can be made.  The imposition
of  more  stringent  standards  or  requirements  under  environmental  laws  or
regulations,  new  developments or changes with respect to site cleanup costs or
allocation  of such costs among  PRPs,  or a  determination  that the Company is
potentially  responsible for the release of hazardous  substances at other sites
could result in  expenditures  in excess of amounts  currently  estimated by the
Company to be required for such matters. Furthermore,  there can be no assurance
that  additional  environmental  matters  will  not  arise in the  future.  More
detailed  descriptions of certain legal  proceedings  relating to  environmental
matters are set forth below.

      In July 1991 the United States filed an action in the U.S.  District Court
for the  Southern  District of Illinois  against the Company and others  (United
States of America v. NL  Industries,  Inc.,  et al.,  Civ. No. 91-CV 00578) with
respect  to the  Granite  City,  Illinois  lead  smelter  formerly  owned by the
Company.  The  complaint  seeks  injunctive  relief to compel the  defendants to
comply with an  administrative  order issued  pursuant to CERCLA,  and fines and
treble damages for the alleged failure to comply with the order. The Company and
the other  parties  did not  implement  the  order,  believing  that the  remedy
selected by the U.S. EPA was invalid, arbitrary, capricious and was not selected
in accordance  with law. The complaint  also seeks  recovery of past costs and a
declaration that the defendants are liable for future costs. Although the action
was filed against the Company and ten other defendants, there are 330 other PRPs
who have been

                                    -16-

<PAGE>



notified by the U.S. EPA. Some of those  notified were also  respondents  to the
administrative order. In February 1992 the court entered a case management order
directing  that the remedy  issues be tried  before the  liability  aspects  are
presented.  In  September  1995 the  U.S.  EPA  released  its  amended  decision
selecting  cleanup remedies for the Granite City site. The Company  presently is
challenging  portions of the U.S.  EPA's  selection of the remedy.  In September
1997 the U.S. EPA informed  the Company that past and future  cleanup  costs are
estimated to total approximately $63.5 million. In 1999 the U.S. EPA and certain
other PRPs entered into a consent decree  settling  their  liability at the site
for approximately 50% of the site costs. The Company and the U.S. EPA reached an
agreement in principle in 1999 to settle the Company's liability at the site for
$31.5  million.  The Company and the U.S. EPA are  negotiating a consent  decree
embodying the terms of this agreement in principle.

      At the  Pedricktown,  New Jersey lead smelter site  formerly  owned by the
Company the U.S. EPA has divided the site into two operable units. Operable unit
one  addresses  contaminated  ground  water,  surface  water,  soils and  stream
sediments.  In July 1994 the U.S. EPA issued the record of decision for operable
unit one. The U.S. EPA estimates the cost to complete operable unit one is $18.7
million.  In May  1996  certain  PRPs,  but not  the  Company,  entered  into an
administrative  consent  order with the U.S. EPA to perform the remedial  design
phase of  operable  unit one.  The U.S.  EPA  issued an order  with  respect  to
operable  unit two in March  1992 to the  Company  and 30 other  PRPs  directing
immediate removal activities  including the cleanup of waste,  surface water and
building  surfaces.  The Company has complied with the order,  and the work with
respect to operable  unit two is  completed.  The Company has paid $2.5 million,
which represents  approximately 50% of operable unit two costs. In June 1998 the
Company  entered  into a consent  decree  with the U.S.  EPA and  other  PRPs to
perform the remedial action phase of operable unit one. In addition, the Company
reached an agreement  with certain PRPs with respect to the Company's  liability
at the site to settle this matter within previously accrued amounts.

      Having completed the RIFS at the Company's  former  Portland,  Oregon lead
smelter site, the Company  conducted  predesign studies to explore the viability
of the U.S.  EPA's  selected  remedy  pursuant  to a June  1989  consent  decree
captioned U.S. v. NL Industries,  Inc., Civ. No. 89-408,  United States District
Court for the  District  of Oregon.  In May 1997 the U.S.  EPA issued an Amended
Record of Decision ("ARD") for the soils operable unit changing  portions of the
cleanup remedy selected.  The ARD requires construction of an onsite containment
facility  estimated to cost between $11.5 million and $13.5  million,  including
capital costs and operating and maintenance costs. The Company and certain other
PRPs have  entered into a consent  decree to perform the remedial  action in the
ARD.  In November  1991 Gould,  Inc.,  the current  owner of the site,  filed an
action, Gould, Inc. v. NL Industries,  Inc., No. 91-1091, United States District
Court for the  District  of Oregon,  against the Company for damages for alleged
fraud in the sale of the smelter,  rescission of the sale,  past CERCLA response
costs and a declaratory  judgment  allocating future response costs and punitive
damages.  In  February  1998 the  Company  reached  an  agreement  settling  the
litigation by agreeing to pay a portion of future costs,  which are estimated to
be  within  previously  accrued  amounts.   The  capital  construction  for  the
remediation is expected to be completed during 2000.

                                    -17-

<PAGE>



      In 1999 the Company and other PRPs entered into an administrative  consent
order with the U.S. EPA requiring the  performance  of a RIFS at two subsites in
Cherokee  County,  Kansas,  where the Company and others formerly mined lead and
zinc. A former  subsidiary of the Company mined at the Baxter  Springs  subsite,
where it is the  largest  viable  PRP.  In August  1997 the U.S.  EPA issued the
record of decision for the Baxter Springs and Treece subsites.  The U.S. EPA has
estimated that the selected remedy will cost an aggregate of approximately  $7.1
million for both subsites ($5.4 million for the Baxter Springs subsite). In 1999
the Company  entered  into a consent  decree  with the U.S.  EPA  resolving  its
liability  at the  Baxter  Springs  subsite,  and has  reached an  agreement  in
principle  with the other PRPs with  respect to  allocation  of site  costs.  In
addition,  the Company and other PRPs are  performing an  investigation  in four
additional subsites in Cherokee County.

      In 1996 the U.S. EPA ordered the Company to perform a removal  action at a
formerly owned facility in Chicago,  Illinois. The Company is complying with the
order and has completed the on-site work at the facility.  Offsite contamination
is being investigated.

      Residents  in the  vicinity  of the  Company's  former  Philadelphia  lead
chemicals  plant  commenced a class  action  allegedly  comprised  of over 7,500
individuals seeking medical monitoring and damages allegedly caused by emissions
from the plant.  Wagner, et al. v. Anzon, Inc. and NL Industries,  Inc., No. 87-
4420,  Court  of  Common  Pleas,   Philadelphia  County.  The  complaint  sought
compensatory  and punitive damages from the Company and the current owner of the
plant, and alleged causes of action for, among other things, negligence,  strict
liability,  and nuisance.  A class was certified to include persons who resided,
owned or rented property,  or who work or have worked within up to approximately
three-quarters  of a mile from the plant  from 1960  through  the  present.  The
Company  answered the complaint,  denying  liability.  In December 1994 the jury
returned  a  verdict  in  favor  of  the  Company.  Plaintiffs  appealed  to the
Pennsylvania  Superior  Court and in September  1996 the Superior Court affirmed
the  judgment in favor of the  Company.  In  December  1996  plaintiffs  filed a
petition for allowance of appeal to the  Pennsylvania  Supreme Court,  which was
declined.  Residents  also  filed  consolidated  actions  in the  United  States
District  Court for the Eastern  District of  Pennsylvania,  Shinozaki v. Anzon,
Inc.  and Wagner and  Antczak v. Anzon and NL  Industries,  Inc.  Nos.  87-3441,
87-3502,  87-4137  and 87- 5150.  The  consolidated  action is a putative  class
action seeking CERCLA response costs,  including cleanup and medical monitoring,
declaratory and injunctive relief and civil penalties for alleged  violations of
the RCRA,  and also asserting  pendent  common law claims for strict  liability,
trespass,  nuisance and punitive  damages.  The court  dismissed  the common law
claims without prejudice,  dismissed two of the three RCRA claims as against the
Company  with  prejudice,  and stayed the case  pending the outcome of the state
court litigation.

      At a municipal and industrial  waste  disposal site in Batavia,  New York,
the Company and  approximately  75 others have been identified as PRPs. The U.S.
EPA has divided the site into two operable units.  Pursuant to an administrative
consent order  entered into with the U.S. EPA, the Company  conducted a RIFS for
operable unit one, the closure of the industrial  waste disposal  section of the
landfill. The Company's RIFS costs were approximately $2 million. In June 1995

                                    -18-

<PAGE>



the U.S.  EPA issued the record of  decision  for  operable  unit one,  which is
estimated by the U.S. EPA to cost approximately $17.3 million. In September 1995
the U.S. EPA and certain PRPs  entered into an  administrative  order on consent
for the remedial design phase of the remedy for operable unit one and the design
phase is  proceeding.  The Company and other PRPs  entered  into an interim cost
sharing  arrangement for this phase of work. The Company and the other PRPs have
completed the work comprising  operable unit two (the extension of the municipal
water supply) with the exception of annual operation and  maintenance.  The U.S.
EPA alleges it has incurred  approximately $4 million in past costs. The Company
and other PRPs have concluded a nonbinding  allocation  process,  as a result of
which the Company was assigned  30% of future site costs.  The Company and other
PRPs currently are negotiating a consent decree based on this allocation.

      See Item 1.  "Business - Regulatory and Environmental Matters."

Other litigation

      The Company has been named as a defendant in various lawsuits in a variety
of jurisdictions alleging personal injuries as a result of occupational exposure
to  asbestos,  silica  and/or  mixed  dust in  connection  with  formerly  owned
operations. Various of these actions remain pending.

      In March 1997 the Company was served with a complaint in Ernest Hughes, et
al. v. Owens-Corning Fiberglass, Corporation, et al., No. 97-C-051, filed in the
Fifth Judicial District Court of Cass County,  Texas, on behalf of approximately
4,000  plaintiffs and their spouses  alleging injury due to exposure to asbestos
and seeking  compensatory and punitive damages.  The Company has filed an answer
denying the material  allegations.  The case has been stayed, and the plaintiffs
have refiled their cases in Ohio. The Company is a defendant in various asbestos
cases  pending  in  Ohio  on  behalf  of  approximately  2,000  personal  injury
claimants.

      In February 1999 the Company was served with a complaint in Cosey,  et al.
v. Bullard, et al., No. 95-0069, filed in the Circuit Court of Jefferson County,
Mississippi,  on behalf of approximately 1,600 plaintiffs alleging injury due to
exposure to asbestos and silica and seeking  compensatory and punitive  damages.
The case was removed to federal  court and has been  transferred  to the eastern
district of Pennsylvania for consolidated proceedings.  The Company has filed an
answer denying the material allegations of the complaint.

      The Company is also involved in various other environmental,  contractual,
product  liability  and other claims and disputes  incidental to its present and
former businesses, and the disposition of past properties and former businesses.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      No matters were submitted to a vote of security holders during the quarter
ended December 31, 1999.


                                    -19-

<PAGE>



                                     PART II

ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
            MATTERS

      NL's common stock is listed and traded on the New York Stock  Exchange and
the Pacific  Exchange  under the symbol "NL." As of March 16,  2000,  there were
approximately  7,000 holders of record of NL common stock.  The following  table
sets  forth the high and low sales  prices  for NL common  stock on the New York
Stock Exchange ("NYSE")  Composite Tape. On March 16, 2000, the closing price of
NL common stock according to the NYSE Composite Tape was $16-1/4.

<TABLE>
<CAPTION>

                                                                       Dividends
                                              High            Low      Declared
                                           ---------       ---------   ---------
<S>                                        <C>             <C>           <C>
Year ended December 31, 1998:
  First quarter                            $  19-3/8       $13-11/16     $     -
  Second quarter                                  23              17         .03
  Third quarter                              27-1/16              19         .03
  Fourth quarter                              19-3/8          12-3/4         .03

Year ended December 31, 1999:
  First quarter                            $14-15/16       $   8-3/4     $  .035
  Second quarter                             13-9/16          9-1/16        .035
  Third quarter                              13-5/16          11-1/8        .035
  Fourth quarter                             15-7/16           9-3/4        .035

Year ended December 31, 2000:
  First quarter thru March 16, 2000        $  16-1/4       $13-13/16     $   .15

</TABLE>

      The Company's  Senior Notes  generally limit the ability of the Company to
pay  dividends to 50% of  consolidated  net income,  as defined in the indenture
governing  the Senior Notes,  since  October  1993.  At December 31, 1999,  $114
million was  available  for payment of  dividends  and  acquisition  of treasury
shares.  The Company  reinstated a regular  quarterly  dividend in June 1998 and
subsequently  paid three  quarterly  $.03 per share cash  dividends in 1998.  In
February 1999 the Company increased the regular quarterly  dividend to $.035 per
share and  subsequently  paid four  quarterly  $.035 per share cash dividends in
1999.  On February 9, 2000,  the  Company's  Board of  Directors  increased  the
regular  quarterly  dividend  to $.15 per  share  and  declared  a  dividend  to
shareholders  of record as of March 16, 2000 to be paid on March 31,  2000.  The
declaration and payment of future dividends is discretionary, and the amount, if
any,  will be dependent  upon the  Company's  results of  operations,  financial
condition,  contractual  restrictions  and other factors deemed  relevant by the
Company's Board of Directors.

      During 1999 the Company's Board of Directors authorized the purchase of up
to 1.5 million shares of NL's common stock over an  unspecified  period of time,
to be held as treasury shares available for general corporate purposes. Pursuant
to this authorization,  the Company purchased 552,000 shares of its common stock
in the open  market at an  aggregate  cost of $7.2  million in 1999 and  575,000
shares at an aggregate cost of $8.3 million in January and February of 2000.


                                    -20-

<PAGE>



ITEM 6.     SELECTED FINANCIAL DATA

      The selected consolidated financial data set forth below should be read in
conjunction with the Consolidated  Financial  Statements and Notes thereto,  and
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of  Operations."  Certain  amounts  have been  reclassified  to conform with the
current year's consolidated financial statement presentation.

<TABLE>
<CAPTION>

                                           Years ended December 31,
                               -------------------------------------------------
                                  1995     1996      1997       1998      1999
                                  ----     ----      ----       ----      ----
                                    (In millions, except per share amounts)

<S>                            <C>       <C>       <C>        <C>       <C>
INCOME STATEMENT DATA:
Net sales                      $  894.1  $  851.2  $  837.2   $  894.7  $  908.4
Operating income                  161.2      71.6      82.5      171.2     145.7
Income (loss) from continuing
 operations                        66.5     (11.7)    (29.9)      89.9     159.8
Net income (loss)                  85.6      10.8      (9.5)     366.7     159.8

Earnings per share:
  Basic:
    Income (loss) from
     continuing operations     $   1.30  $   (.23) $   (.58)  $   1.75  $   3.09
    Net income (loss)              1.68       .21      (.19)      7.13      3.09
  Diluted:
    Income (loss) from
     continuing operations     $   1.29  $   (.23) $   (.58)  $   1.73  $   3.08
    Net income (loss)              1.66       .21      (.19)      7.05      3.08

Cash dividends                 $      -  $    .30  $      -   $    .09  $    .14

BALANCE SHEET DATA at
 year end:
Cash, cash equivalents,
 current marketable
 securities and current
 restricted cash equivalents   $  141.3  $  114.1  $  106.1   $  163.1  $  151.8
Current assets                    551.1     500.2     454.9      546.8     506.4
Total assets                    1,271.7   1,221.4   1,098.5    1,155.6   1,056.2
Current liabilities               302.4     290.3     276.7      310.7     264.8
Long-term debt including
 current maturities               783.7     829.0     744.2      357.6     244.5
Shareholders' equity
 (deficit)                       (209.4)   (203.5)   (222.3)     152.3     271.1

CASH FLOW DATA:
Operating activities           $   71.6  $   16.5  $   89.2   $   45.1  $  108.3
Investing activities              (56.7)    (68.4)    (11.1)     417.3     (38.4)
Financing activities               (3.3)     26.6     (82.6)    (396.2)    (88.0)

OTHER NON-GAAP FINANCIAL
 DATA:
EBITDA (1)                     $  170.3  $   90.7  $   67.6   $  187.4  $  162.5

</TABLE>


                                    -21-

<PAGE>

<TABLE>
<CAPTION>
                                            Years ended December 31,
                                 -----------------------------------------------
                                  1995     1996      1997       1998      1999
                                  ----     ----      ----       ----      ----
                                    (In millions, except per share amounts)


<S>                              <C>       <C>       <C>       <C>      <C>
OTHER DATA:
Net debt at year end (2)         $681.6    $740.7    $652.0    $230.9   $149.8
Interest expense, net (3)          69.5      64.6      63.0      43.1     30.3
Cash interest expense,
 net (4)                           50.9      44.2      39.9      24.8     28.6
Capital expenditures               60.7      64.2      28.2      22.4     35.6

TiO2 sales volumes (metric
 tons in thousands)                 366       388       427       408      427
Average TiO2 selling
 price index (1983=100)             152       138       133       153      152
</TABLE>

(1)   EBITDA, as presented,  represents operating income less corporate expense,
      net, plus depreciation, depletion and amortization. EBITDA is presented as
      a  supplement  to the  Company's  operating  income  and  cash  flow  from
      operations  because the Company  believes that EBITDA is a widely accepted
      financial  indicator of cash flows and the ability to service debt. EBITDA
      should not be considered as an alternative  to, or more  meaningful  than,
      operating  income  or  net  income  determined  under  generally  accepted
      accounting  principles ("GAAP") as an indicator of the Company's operating
      performance,  or  cash  flows  from  operating,  investing  and  financing
      activities determined under GAAP as a measure of liquidity.  EBITDA is not
      intended to depict funds available for reinvestment or other discretionary
      uses,  as  the  Company  has  significant  debt   requirements  and  other
      commitments.  Investors  should consider certain factors in evaluating the
      Company's EBITDA, including interest expense, income taxes, noncash income
      and   expense   items,   changes  in  assets  and   liabilities,   capital
      expenditures,  investments  in joint  ventures and other items included in
      GAAP cash flows as well as future debt  repayment  requirements  and other
      commitments,  including  those  described  in Notes  10,  13 and 17 to the
      Consolidated Financial Statements.  The Company believes that the trend of
      its  EBITDA is  consistent  with the trend of its GAAP  operating  income,
      except in 1997 when EBITDA  decreased and operating  income increased from
      1996 amounts due to a $30 million  noncash charge related to the Company's
      adoption  of  SOP  96-1,  "Environmental   Remediation  Liabilities."  See
      "Management's  Discussion  and  Analysis"  for a  discussion  of operating
      income  and cash  flows  during  the last  three  years and the  Company's
      outlook.  EBITDA  as a  measure  of a  company's  performance  may  not be
      comparable  to other  companies,  unless  substantially  all companies and
      analysts determine EBITDA as computed and presented herein.

(2)   Net debt  represents  notes  payable and  long-term  debt less cash,  cash
      equivalents,  current  marketable  securities and current  restricted cash
      equivalents.

(3)   Interest expense,  net represents  interest expense less general corporate
      interest and dividend income.


                                    -22-

<PAGE>



(4)   Cash interest expense,  net represents interest expense,  net less noncash
      interest expense (deferred interest expense on the Senior Secured Discount
      Notes and amortization of deferred financing costs).

ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
            RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

  General

      The Company's  continuing  operations  are conducted by Kronos in the TiO2
business segment. As discussed below,  average TiO2 selling prices significantly
increased  in 1998 and slightly  decreased  in 1999  compared to the prior year.
Kronos'  operating  income  increased  $88.7 million in 1998 and declined  $25.5
million in 1999.  Gross profit  margins were 22% in 1997, 31% in 1998 and 27% in
1999.

      Many factors influence TiO2 pricing levels,  including  industry capacity,
worldwide demand growth and customer inventory levels and purchasing  decisions.
Kronos  believes  that the TiO2  industry has  long-term  growth  potential,  as
discussed in "Item 1. Business - Industry" and "- Competition."

  Net sales and operating income

<TABLE>
<CAPTION>
                                        Years ended December 31,      % Change
                                      --------------------------  ----------------
                                        1997      1998      1999  1998-97  1999-98
                                        ----      ----      ----  -------  -------
                                               (In millions)

<S>                                    <C>       <C>       <C>     <C>       <C>
Net sales .......................      $837.2    $894.7    $908.4    +7%      +2%

Operating income ................       $82.5    $171.2    $145.7  +107%     -15%

Percent change in TiO2:
  Sales volume ..................                                    -4%      +5%
  Average selling prices
   (in billing currencies)........                                  +16%      -1%
</TABLE>

      Kronos'  operating  income in 1999 was lower than 1998,  primarily  due to
lower average TiO2 selling prices and lower production volume,  partially offset
by higher sales volume and a $5.3 million  currency  exchange  transaction  gain
related  to  certain  of  the  Company's  short-term  intercompany  cross-border
financings.  Kronos'  operating  income for 1998 was higher than 1997 due to 16%
higher average TiO2 selling prices,  partially  offset by lower sales volume and
$12.9  million of 1997  income  from  refunds  of German  trade  capital  taxes,
discussed below.

      In billing  currency terms,  Kronos' 1999 average TiO2 selling prices were
1% lower than in 1998 with higher prices in North America offset by lower prices
in Europe  and  export  markets.  European  prices at the end of the year  (when
expressed  in U.S.  dollars at year-end  exchange  rates)  were 9% below  prices
available in the U.S. as a result of the strong U.S. dollar against major

                                    -23-

<PAGE>



European currencies.  Pigment prices declined during the first three quarters of
1999,  but  increased  in the  fourth  quarter  as a result  of price  increases
announced by all major producers effective during the fourth quarter. Such price
increases  began to be phased in during the fourth  quarter of 1999 and continue
to be  implemented  in the first quarter of 2000.  Kronos  recently  announced a
price increase in Europe effective April 1, 2000. The successful  implementation
of the price increase will depend on market  conditions.  Average selling prices
in the fourth  quarter of 1999 were 3% lower than the fourth quarter of 1998, 1%
lower than the average  selling price for full-year  1999 and 1% higher than the
third quarter of 1999.  Selling  prices at the end of the fourth quarter were 1%
higher than the average for the quarter.  Average  TiO2  selling  prices in 1998
were 16% higher than 1997 with strong increases in all major regions.

      Industry-wide  demand  was  strong  throughout  1997 and the first half of
1998, before moderating in the second half of 1998 and early 1999. Demand in the
second half of 1999 was stronger than  comparable  periods in both 1998 and 1997
as a result of, among other things,  customers  buying in advance of anticipated
price  increases.  Kronos' sales volume in the fourth  quarter of 1999 increased
21% from the fourth quarter of 1998. Sales volume of 427,000 metric tons of TiO2
in 1999 was 5% higher than 1998 with growth in all major  regions.  Sales volume
in 1998  was 4% lower  than  1997,  reflecting  lower  sales  in Asia and  Latin
America.  Approximately  one-half of Kronos'  1999 TiO2 sales,  by volume,  were
attributable to markets in Europe with  approximately  37% attributable to North
America, and the balance to other regions.

      Kronos expects  industry demand in 2000 will be relatively  unchanged from
1999, depending primarily upon global economic conditions, and accordingly,  the
Company believes 2000 sales volume will approximate 1999 levels. Kronos produced
at or near full capacity in 1997 and 1998, but curtailed  production  during the
first quarter of 1999 to manage inventory  levels.  As a result,  Kronos reduced
finished  goods  inventories  by  approximately   15,000  metric  tons.  Kronos'
production  volume in 1999 was 5% lower than 1998 and  capacity  utilization  in
1999 was 93% compared to full  capacity in 1998.  Kronos'  production  volume in
2000 is expected to closely match  expected 2000 sales volume.  Kronos  believes
average  TiO2  selling  prices in 2000 should  continue  an upward  trend as the
Company expects to continue to phase-in  announced price increases  during 2000.
Should  demand  in 2000  remain  strong,  additional  price  increases  could be
announced  later in 2000.  The Company  believes  that  average 2000 prices will
exceed average 1999 prices. As a result of anticipated higher average prices and
its continued  focus on  controlling  costs,  Kronos  expects its 2000 operating
income  will be  higher  than  1999.  The  extent  of this  improvement  will be
determined primarily by the magnitude of realized price increases.

      Excluding the effects of foreign currency translation, which decreased the
Company's  expenses  in both  1998 and 1999,  Kronos'  cost of sales in 1999 was
higher  than 1998 due to higher  sales  volume  and  higher  unit  costs,  which
resulted primarily from lower production  levels.  Kronos' cost of sales in 1998
was lower than 1997  primarily  due to lower sales volume.  Cost of sales,  as a
percentage  of net sales,  increased in 1999  primarily due to the impact on net
sales of lower average  selling  prices and higher unit costs,  and decreased in
1998  primarily  due to the  impact on net sales of  increased  average  selling
prices.

                                    -24-

<PAGE>



      Excluding the effects of foreign currency translation, which decreased the
Company's  expenses  in  both  1998  and  1999,  Kronos'  selling,  general  and
administrative expenses, in absolute dollar amounts,  increased in 1999 from the
previous year due to higher  distribution  expenses  associated with higher 1999
sales volumes,  while 1998 expenses, in absolute dollar amounts, were lower than
1997 as a result of lower  distribution  expenses related to lower sales volume.
Selling, general and administrative expenses, as a percentage of net sales, were
14% in 1997 and 12% in both 1998 and 1999.

      The $12.9  million of German  trade  capital tax refunds  received in 1997
relates to years prior to 1997 and includes interest. The German tax authorities
were required to remit refunds  based on (i) court  decisions  which reduced the
trade  capital  tax base and (ii) prior  agreements  between the Company and the
German tax authorities regarding payment of disputed taxes.

      The Company has  substantial  operations  and assets  located  outside the
United States (principally Germany, Norway, Belgium and Canada). The U.S. dollar
translated  value of the Company's  foreign sales and operating costs is subject
to currency  exchange rate  fluctuations  which may impact reported earnings and
may affect the  comparability  of  period-to-period  revenues  and  expenses.  A
significant  amount of the Company's sales are  denominated in currencies  other
than the U.S. dollar (61% in 1999),  principally the euro,  other major European
currencies  and  the  Canadian  dollar.  Certain  purchases  of  raw  materials,
primarily titanium-containing feedstocks, are denominated in U.S. dollars, while
labor and other production costs are primarily  denominated in local currencies.
Fluctuations  in the  value  of the U.S.  dollar  relative  to other  currencies
decreased   sales  by  $24  million  and  $15  million  during  1998  and  1999,
respectively,  compared  to the  year-earlier  period.  Excluding  the 1999 $5.3
million  gain  described  above,  fluctuations  in the value of the U.S.  dollar
relative to other currencies similarly impacted the Company's operating expenses
and the net impact of currency  exchange rate  fluctuations on operating  income
comparisons was not significant in 1998 or 1999.

  General corporate

      The  following  table sets forth  certain  information  regarding  general
corporate income (expense).

<TABLE>
<CAPTION>
                                 Years ended December 31,            Change
                              ------------------------------    ----------------
                                1997       1998       1999      1998-97  1999-98
                              --------    -------    -------    -------  -------
                                               (In millions)

<S>                           <C>         <C>        <C>        <C>       <C>
Securities earnings .....     $    5.4    $  14.9    $   6.6    $   9.5   $  (8.3)
Corporate expenses, net .        (49.8)     (18.3)     (16.9)      31.5       1.4
Interest expense ........        (65.8)     (58.1)     (36.9)       7.7      21.2
                              --------    -------    -------    -------   -------

                              $ (110.2)   $ (61.5)   $ (47.2)   $  48.7   $  14.3
                              ========    =======    =======    =======   =======
</TABLE>

      Securities  earnings  fluctuate  in part  based  upon the  amount of funds
invested and yields thereon. Average funds invested in 1999 were lower than 1998
primarily due to the repayment of certain of the Company's debt in the last half
of 1998. Average funds invested in 1998 were higher than 1997 primarily due to

                                    -25-

<PAGE>



the net proceeds  from the sale of Rheox in January  1998.  The Company  expects
security earnings in 2000 will be lower than 1999 due to lower average levels of
funds available for investment due to debt reduction made during 1999 and higher
projected  expenditures  in 2000 for dividends,  environmental  remediation  and
other corporate purposes.

      Corporate  expenses,  net in 1999 were lower than 1998,  primarily  due to
$3.0  million of expenses in 1998  related to the  unsuccessful  acquisition  of
certain TiO2 businesses and assets.  Corporate expenses,  net in 1998 were lower
than 1997, primarily due to the $30 million noncash charge taken in 1997 related
to the Company's adoption of SOP 96-1, "Environmental  Remediation Liabilities."
See Note 2 to the Consolidated Financial Statements.  This charge is included in
selling,   general  and  administrative   expense  for  1997  in  the  Company's
Consolidated  Statements  of  Income.  Excluding  this  charge,  1998  corporate
expenses,  net were  slightly  lower  than 1997 due to the  recognition  of $3.7
million of income in 1998 related to the straight-line,  five-year  amortization
of $20  million  of  proceeds  received  in  conjunction  with the sale of Rheox
attributable  to a  five-year  agreement  by the  Company  not to compete in the
rheological  products  business,  partially  offset by the  aforementioned  $3.0
million  expense  in 1998.  In 1999 the  Company  recorded  $4 million of income
related to the amortization of this deferred income.

  Interest expense

      Interest  expense  declined in 1999 and 1998  compared  to the  respective
prior  years due to  prepayment  of the  Deutsche  mark-denominated  bank credit
facility  in  1999  and   prepayments  of  outstanding   indebtedness  in  1998,
principally the Senior Secured Discount Notes, the joint venture term loan and a
portion of  Kronos'  DM-denominated  debt.  Interest  expense  in 1998  declined
compared  to  1997   principally   due  to  prepayments   of  this   outstanding
indebtedness. Assuming no significant change in interest rates, interest expense
in 2000 is  expected  to be  lower  compared  to 1999  due to  lower  levels  of
outstanding indebtedness and lower margins on variable rate debt.

  Provision for income taxes

      The  principal  reasons  for  the  difference  between  the  U.S.  federal
statutory  income  tax rates and the  Company's  effective  income tax rates are
explained in Note 13 to the  Consolidated  Financial  Statements.  The Company's
operations  are conducted on a worldwide  basis and the geographic mix of income
can  significantly  impact the Company's  effective income tax rate. In 1998 and
1999 the Company's effective tax rate varied from the normally expected rate due
predominantly  to the  recognition of certain  deductible  tax attributes  which
previously did not meet the "more-likely-than-not" recognition criteria. Also in
1998 and 1999,  the Company  recognized  certain  one-time  benefits  related to
German tax settlements.  In 1997 the geographic mix of income,  including losses
in  certain  jurisdictions  for  which  no  current  refund  was  available  and
recognition of a deferred tax asset was not considered appropriate,  contributed
to the Company's effective tax rate varying from a normally expected rate.


                                    -26-

<PAGE>



      The Company's  contingencies  related to income taxes at December 31, 1999
are discussed in "Liquidity and Capital Resources."

  Other

      Minority  interest  in  1999  relates  to  the  Company's   majority-owned
environmental management subsidiary,  NL Environmental Management Services, Inc.
("EMS").  EMS was established in 1998, at which time EMS  contractually  assumed
certain of the Company's environmental liabilities.  EMS' earnings are based, in
part,  upon its ability to favorably  resolve these  liabilities on an aggregate
basis.  The  shareholders  of EMS, other than the Company,  actively  manage the
environmental  liabilities  and share in 39% of EMS'  cumulative  earnings.  The
Company  continues to consolidate  EMS and provides  accruals for the reasonably
estimable  costs  for the  settlement  of  EMS'  environmental  liabilities,  as
discussed below.

      Discontinued  operations in 1998 represent the Company's  former specialty
chemicals  operations which were sold in January 1998. The extraordinary item in
1998 resulted from early extinguishment of debt.

LIQUIDITY AND CAPITAL RESOURCES

      The Company's consolidated cash flows provided by operating, investing and
financing activities for each of the past three years are presented below.

<TABLE>
<CAPTION>
                                                      Years ended December 31,
                                                      -------------------------
                                                       1997     1998      1999
                                                      ------   ------    ------
                                                            (In millions)
<S>                                                    <C>     <C>       <C>
Net cash provided (used) by:
  Operating activities:
    Before changes in assets and liabilities
     and Rheox, net ...............................    $38.1   $137.0    $115.7
    Changes in assets and liabilities and
     Rheox, net ...................................     51.1    (91.9)     (7.4)
                                                      ------   ------    ------
                                                        89.2     45.1     108.3
  Investing activities ............................    (11.1)   417.3     (38.4)
  Financing activities ............................    (82.6)  (396.2)    (88.0)
                                                      ------   ------    ------

Net cash provided (used) by operating,
 investing and financing activities ...............    $(4.5)   $66.2    $(18.1)
                                                      ======   ======    ======
</TABLE>

  Operating cash flows

      The TiO2  industry is cyclical and changes in economic  conditions  within
the industry  significantly  impact the earnings and operating cash flows of the
Company. Cash flow from operations, before changes in assets and liabilities and
Rheox,  net,  declined  in 1999  from  the  prior  year  primarily  due to lower
operating income,  partially offset by $13.7 million of cash  distributions from
the Company's TiO2  manufacturing  joint venture,  and improved in 1998 from the
prior year primarily due to higher operating income.

      Changes in the Company's  assets and liabilities  (excluding the effect of
currency translation and Rheox, net) provided cash in 1997 and used cash in 1998

                                    -27-

<PAGE>



and 1999 primarily due to reductions in inventory  levels in 1997,  increases in
inventory levels in 1998 and increases in receivable  levels in 1999 due to high
year-end  demand.  Rheox,  net in 1998,  primarily income tax payments made as a
result of the gain on sale of Rheox,  significantly  decreased  cash  flows from
operating activities.

  Investing cash flows

      The Company's capital  expenditures were $28 million,  $22 million and $36
million in 1997, 1998 and 1999. The increase in capital  expenditures in 1999 is
partially  due to $6 million of  expenditures  for a landfill  expansion for the
Company's  Belgian  facility.  Capital  expenditures in 1997 included $7 million
related to a 20,000 metric ton debottlenecking  project. Capital expenditures of
the manufacturing  joint venture and the Company's  discontinued  operations are
not included in the Company's capital expenditures.

      The Company's capital  expenditures during the past three years include an
aggregate  of $22  million  ($10  million  in 1999)  for the  Company's  ongoing
environmental  protection and compliance programs.  The Company's estimated 2000
and 2001 capital expenditures are $37 million and $35 million, respectively, and
include $7 million and $11 million,  respectively,  in the area of environmental
protection and compliance.

      The Company sold the net assets of its Rheox specialty  chemicals business
to  Elementis  plc in  January  1998  for $465  million  cash  (before  fees and
expenses),  including $20 million  attributable to a five-year  agreement by the
Company  not to  compete  in the  rheological  products  business.  The  Company
recognized an after-tax gain of  approximately  $286 million on the sale of this
business segment.

  Financing cash flows

      The Company  prepaid its DM 107 million  ($60 million when paid) term loan
in full in the first quarter of 1999, principally by drawing DM 100 million ($56
million when drawn) on its DM revolving credit facility. In the second and third
quarters of 1999,  the Company  repaid DM 60 million  ($33 million when paid) of
the DM  revolving  credit  facility  with cash  provided  from  operations.  The
revolver's  outstanding balance of DM 120 million was further reduced in October
1999 by DM 20 million  ($11  million  when paid).  In December  1999 the Company
borrowed $26 million of short-term unsecured euro-denominated bank debt and used
the proceeds  along with cash on hand to prepay the remaining  balance of DM 100
million ($52 million when paid) under its Deutsche  mark-denominated bank credit
agreement.  The DM facility was then terminated,  which released  collateral and
eliminated certain restrictive loan covenants.

      Borrowings  in 1998  included DM 35 million ($19  million  when  borrowed)
under the Company's short-term non-U.S. credit facilities and DM 20 million ($11
million when borrowed) under the Company's DM revolving credit facility.

                                    -28-

<PAGE>



Repayments  in 1998  included DM 40 million  ($23  million  when paid) of the DM
revolving  credit  facility  and DM 81 million ($44 million when paid) of its DM
term loan.  In 1997 the Company  prepaid DM 207 million ($127 million when paid)
of its DM term loan,  repaid DM 43  million  ($26  million  when paid) of its DM
revolving credit facility, repaid $15 million of its joint venture term loan and
repaid DM 15 million ($9  million  when paid) of its  short-term  DM-denominated
notes  payable.  The  Company's  borrowings  and principal  repayments  excludes
activity related to the Company's discontinued operations.

      With a majority of the $380 million  after-tax  net proceeds from the sale
of Rheox,  the Company (i) prepaid $118 million of the Rheox term loan (included
as Rheox,  net on the Company's  Consolidated  Statements  of Cash Flows),  (ii)
prepaid $42 million of Kronos' tranche of the LPC joint venture term loan, (iii)
made $65 million of  open-market  purchases of the Company's 13% Senior  Secured
Discount  Notes at prices  ranging  from  $101.25 to  $105.19  per $100 of their
principal amounts, (iv) purchased $6 million of the Senior Secured Notes and $61
thousand of the Senior Secured  Discount Notes at a price of $100 and $96.03 per
$100 of their principal amounts, respectively,  pursuant to a June 1998 pro rata
tender offer to Note holders as required under the terms of the  indenture,  and
(v) redeemed $121 million of 13% Senior Secured  Discount  Notes  outstanding on
October 15, 1998 at the  redemption  price of 106% of the principal  amount,  in
accordance with the terms of the Senior Secured Discount Notes indenture.

      Dividends paid during 1998 and 1999 totaled $4.6 million and $7.2 million,
respectively.  No dividends were paid in 1997. At December 31, 1999, the Company
had $114 million  available for payment of dividends and acquisition of treasury
shares  pursuant  to the Senior  Notes  indenture.  On  February  9,  2000,  the
Company's Board of Directors increased the regular quarterly dividend from $.035
per share to $.15 per share and declared a dividend to shareholders of record as
of March 16, 2000 to be paid on March 31, 2000.

      During 1999 the Company's Board of Directors authorized the purchase of up
to 1.5 million shares of NL's common stock over an  unspecified  period of time,
to be held as treasury shares available for general corporate purposes. Pursuant
to this authorization,  the Company purchased 552,000 shares of its common stock
in the open  market at an  aggregate  cost of $7.2  million in 1999 and  575,000
shares at an aggregate  cost of $8.3 million in January and February of 2000. In
March 2000 the Company purchased 500,000 shares of Tremont's common stock in the
open market for $10 million.  Tremont owns 10.2 million shares,  or 20%, of NL's
outstanding common stock.

      In 1998 as a result of the settlement of a shareholder  derivative lawsuit
on  behalf  of the  Company,  Valhi  transferred  $14.4  million  in cash to the
Company,  and the Company paid plaintiffs'  attorneys' fees and expenses of $3.2
million.

  Cash, cash equivalents, restricted cash and borrowing availability

      At  December  31,  1999,  the  Company  had  cash  and  cash   equivalents
aggregating $134 million (54% held by non-U.S.  subsidiaries) and $18 million of
restricted cash  equivalents.  At December 31, 1999, the Company's  subsidiaries
had $19 million  available for borrowing under non-U.S.  credit  facilities.  At
December  31,  1999,  the  Company had  complied  with all  financial  covenants
governing its debt agreements.


                                    -29-

<PAGE>



      Based  upon  the  Company's   expectations   for  the  TiO2  industry  and
anticipated  demands on the Company's  cash resources as discussed  herein,  the
Company expects to have sufficient  liquidity to meet its near-term  obligations
including operations,  capital expenditures and debt service. To the extent that
actual developments differ from Company's expectations,  the Company's liquidity
could be adversely affected.

  Income tax contingencies

      Certain  of the  Company's  tax  returns  in  various  U.S.  and  non-U.S.
jurisdictions  are being  examined  and tax  authorities  have  proposed  or may
propose tax deficiencies,  including  non-income tax related items and interest.
Certain  significant  German tax  contingencies  aggregating an estimated DM 188
million ($100 million when resolved) through 1998 were resolved in the Company's
favor in 1999. See Note 13 to the Consolidated Financial Statements.

      During 1999 the German  government  enacted certain income tax law changes
that were retroactively effective as of January 1, 1999. Based on these changes,
the Company's  ongoing  current  (cash) income tax rate in Germany  increased in
1999.

      During 1997 the Company  received a tax assessment  from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($6 million at December
31,  1999)  relating  to 1994.  The Company  appealed  this  assessment  and, in
February  2000, the  Fredrikstad  City Court ruled in favor of the Norwegian tax
authorities  on the  primary  issue,  but  asserted  that such tax  authorities'
assessment  was  overstated by NOK 34 million ($4 million at December 31, 1999).
The tax authorities' response to the Court's assertion is expected by the end of
March 2000.  The Company is  considering  its appeals  options.  During 1998 the
Company was  informed by the  Norwegian  tax  authorities  that  additional  tax
deficiencies  of NOK 39 million ($5 million at December 31, 1999) will likely be
proposed for the year 1996 on an issue similar to the aforementioned  1994 case.
The outcome of the 1996 case is dependent  on the  eventual  outcome of the 1994
case. Although the Company believes that it will ultimately prevail, the Company
has granted a lien for the 1994 tax assessment on its  Fredrikstad,  Norway TiO2
plant in favor of the  Norwegian tax  authorities  and will be required to grant
security on the 1996 assessment when received.

      No assurance can be given that the Company's tax matters will be favorably
resolved due to the inherent  uncertainties  involved in court proceedings.  The
Company believes that it has provided adequate accruals for additional taxes and
related interest expense which may ultimately  result from all such examinations
and believes that the ultimate  disposition of such examinations should not have
a material  adverse  effect on the Company's  consolidated  financial  position,
results of operations or liquidity.

      At December 31, 1999, the Company had net deferred tax  liabilities of $97
million. The Company operates in numerous tax jurisdictions, in certain of which
it has temporary  differences that net to deferred tax assets (before  valuation
allowance).  The Company has provided a deferred tax valuation allowance of $234
million at December 31, 1999, principally related to Germany, partially

                                    -30-

<PAGE>



offsetting  deferred tax assets which the Company believes do not currently meet
the "more-likely-than-not" recognition criteria.

  Environmental matters and litigation

      In  addition to the  chemicals  business  conducted  through  Kronos,  the
Company  also has  certain  interests  and  associated  liabilities  relating to
certain discontinued or divested  businesses,  and holdings of marketable equity
securities including securities issued by Valhi and other Contran subsidiaries.

      The Company has been named as a  defendant,  PRP, or both,  in a number of
legal  proceedings  associated  with  environmental  matters,   including  waste
disposal sites,  mining locations and facilities  currently or previously owned,
operated  or used  by the  Company,  certain  of  which  are on the  U.S.  EPA's
Superfund National Priorities List or similar state lists. On a quarterly basis,
the Company evaluates the potential range of its liability at sites where it has
been  named  as  a  PRP  or  defendant,   including  sites  for  which  EMS  has
contractually  assumed the  Company's  obligation.  The Company  believes it has
adequate  accruals  for  reasonably  estimable  costs of such  matters,  but the
Company's ultimate  liability may be affected by a number of factors,  including
changes in  remedial  alternatives  and costs and the  allocation  of such costs
among PRPs.  The Company is also a  defendant  in a number of legal  proceedings
seeking  damages for personal injury and property damage arising out of the sale
of lead pigments and lead-based  paints.  There is no assurance that the Company
will not incur future liability in respect of this pending litigation in view of
the  inherent  uncertainties  involved in court and jury  rulings in pending and
possible  future cases.  However,  based on, among other things,  the results of
such litigation to date, the Company  believes that the pending lead pigment and
paint  litigation is without merit.  The Company has not accrued any amounts for
such pending litigation. Liability that may result, if any, cannot reasonably be
estimated.  The Company  currently  believes the  disposition  of all claims and
disputes,  individually and in the aggregate, should not have a material adverse
effect on the Company's consolidated  financial position,  results of operations
or liquidity.  There can be no assurance that additional  matters of these types
will not arise in the future. See Item 3. "Legal Proceedings" and Note 17 to the
Consolidated Financial Statements.

  Foreign operations

      As discussed above, the Company has substantial operations located outside
the United States for which the functional currency is not the U.S. dollar. As a
result,  the reported amount of the Company's assets and liabilities  related to
its non-U.S.  operations,  and therefore the Company's  consolidated net assets,
will fluctuate  based upon changes in currency  exchange  rates. At December 31,
1999, the Company had substantial net assets  denominated in the Canadian dollar
and Norwegian kroner, partially offset by a euro-denominated net liability.

  Year 2000 Issue

      As a result of certain  computer  programs  being written using two digits
rather than four to define the applicable year, certain computer programs that

                                    -31-

<PAGE>



had  date-sensitive  software may have  recognized a date using "00" as the year
1900 rather than the year 2000.  This could have resulted in a system failure or
miscalculations  causing  disruptions  of  operations,  including,  among  other
things, a temporary inability to process  transactions,  send invoices or engage
in normal business  activities.  This is generally referred to as the "Year 2000
Issue."

      Over the past few years, the Company spent time, effort and money in order
to address  the Year 2000 Issue in an attempt to ensure that  computer  systems,
both information technology ("IT") systems and non-IT systems involving embedded
chip  technology,  and  software  applications  would  function  properly  after
December 31, 1999. This process included, among other things, the identification
of all systems and applications potentially affected by the Year 2000 Issue, the
determination  of which systems and  applications  required  remediation and the
completion  thereof  and the  testing  of  systems  and  applications  following
remediation  for Year  2000  compliance.  In  addition,  the  Company  requested
confirmation  from its  major  software  and  hardware  vendors,  suppliers  and
customers that they were developing and  implementing  plans to become,  or that
they had become,  Year 2000 compliant.  Contingency plans were also developed to
address potential Year 2000 Issues related to business interruption in the event
one or more of the  Company's  internal  systems or the systems of third parties
upon which it relies ultimately proved not to be Year 2000 compliant. As part of
these  contingency  plans,  the  Company  temporarily  idled  its  manufacturing
facilities  shortly  before  the  end of  1999  as an  added  safeguard  against
unexpected loss of utility service;  all of such facilities  resumed  production
shortly  after  midnight of year-end  1999.  After all of the efforts  described
above,  the Company believed that its key systems were Year 2000 compliant prior
to December 31, 1999.

      As part  of its  normal  business  operations,  the  Company  had  already
installed upgraded  information systems at certain locations which addressed the
Year 2000 Issue.  Excluding the cost of the ongoing system upgrades,  the amount
spent to address the Year 2000 Issue was $2 million ($1.1 million in 1999).

      To date in  2000,  none of the  Company's  manufacturing  facilities  have
suffered any  downtime due to  noncompliant  systems,  nor have any  significant
problems associated with the Year 2000 Issue been identified in any systems. The
Company will  continue to monitor its major systems in order to ensure that such
systems  continue  to be Year 2000  compliant.  However,  based  primarily  upon
success  to date,  the  Company  does not  currently  expect to  experience  any
significant Year 2000 Issues.

  Euro currency

      Beginning  January 1, 1999,  eleven of the fifteen members of the European
Union ("EU"), including Germany,  Belgium, the Netherlands and France, adopted a
new  European  currency  unit  (the  "euro")  as their  common  legal  currency.
Following the introduction of the euro, the  participating  countries'  national
currencies remain legal tender as denominations of the euro from January 1, 1999
through  January 1,  2002,  and the  exchange  rates  between  the euro and such
national currency units are fixed.


                                    -32-

<PAGE>



      The Company  conducts  substantial  operations in Europe.  The  functional
currency of the Company's  German,  Belgian,  Dutch and French  operations  will
convert to the euro from their  respective  national  currencies over a two-year
period  beginning in 1999.  The Company has assessed and evaluated the impact of
the euro conversion on its business and made the necessary  system  conversions.
The euro conversion may impact the Company's operations  including,  among other
things,  changes in product pricing decisions necessitated by cross-border price
transparencies.  Such  changes in product  pricing  decisions  could impact both
selling prices and purchasing costs and, consequently,  favorably or unfavorably
impact results of operations, financial condition or liquidity.

  Other

      The Company periodically evaluates its liquidity requirements, alternative
uses of capital,  capital needs and  availability of resources in view of, among
other  things,  its  debt  service  and  capital  expenditure  requirements  and
estimated future operating cash flows. As a result of this process,  the Company
in the past has  sought,  and in the  future  may seek,  to  reduce,  refinance,
repurchase  or  restructure   indebtedness;   raise  additional  capital;  issue
additional  securities;  repurchase  shares  of its  common  stock;  modify  its
dividend policy; restructure ownership interests; sell interests in subsidiaries
or other assets;  or take a  combination  of such steps or other steps to manage
its liquidity and capital resources.  In the normal course of its business,  the
Company may review opportunities for the acquisition, divestiture, joint venture
or other  business  combinations  in the chemicals or other  industries.  In the
event of any acquisition or joint venture transaction,  the Company may consider
using available cash,  issuing equity  securities or increasing its indebtedness
to the extent permitted by the agreements governing the Company's existing debt.
See Note 10 to the Consolidated Financial Statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  General

      The  Company is exposed to market risk from  changes in currency  exchange
rates,  interest rates and equity security prices.  In the past, the Company has
periodically  entered  into  interest  rate swaps or other types of contracts in
order to manage a portion of its  interest  rate  market  risk.  Otherwise,  the
Company has not  generally  entered into  forward or option  contracts to manage
such market risks,  nor has the Company  entered into any such contract or other
type of derivative instrument for trading purposes.  The Company was not a party
to any forward or  derivative  option  contracts  related to  currency  exchange
rates,  interest rates or equity  security  prices at December 31, 1998 or 1999.
See Notes 2 and 8 to the Consolidated Financial Statements.

  Interest rates

      The  Company is exposed to market  risk from  changes in  interest  rates,
primarily related to indebtedness.


                                    -33-

<PAGE>



      At December 31,  1999,  the  Company's  aggregate  indebtedness  was split
between 81% of fixed-rate instruments and 19% of variable-rate  borrowings (1998
- 62% fixed-rate and 38% variable-rate). The large percentage of fixed-rate debt
instruments  minimizes  earnings  volatility  which would result from changes in
interest  rates.  The following  table presents  principal  amounts and weighted
average  interest  rates,  by  contractual  maturity  dates,  for the  Company's
aggregate  indebtedness  at December 31, 1998 and 1999. At December 31, 1998 and
1999, all outstanding  fixed-rate  indebtedness was denominated in U.S. dollars,
and all outstanding variable-rate  indebtedness was denominated in euros in 1999
and Deutsche marks in 1998.  Information  shown below for such  euro-denominated
indebtedness  is presented in its U.S.  dollar  equivalent  at December 31, 1999
using that date's  exchange rate of .99 euro per U.S. dollar (1998 - 1.66 DM per
U.S. dollar).
<TABLE>
<CAPTION>

                                                                         Fair Value
                                   Contractual Maturity Date            December 31,
                             -----------------------------------------  ------------
December 31, 1999:           N/A     2000   2001   2002   2003   Total     1999
                             ---     ----   ----   ----   ----   -----     ----
                                             (In millions)
<S>                                  <C>    <C>    <C>   <C>     <C>      <C>
Fixed-rate debt (U.S.
 dollar-denominated):
  Principal amount                   $ -    $ -    $ -   $244.0  $244.0   $253.2
  Weighted-average
   interest rate                       -      -      -   11.75%  11.75%

Variable rate debt (euro-
 denominated):
  Principal amount                   $57.1  $ -    $ -   $  -    $ 57.1   $ 57.1
  Weighted-average interest
   rate                                3.6%   -      -      -       3.6%

</TABLE>
<TABLE>
<CAPTION>

December 31, 1998:           1999    2000   2001   2002   2003   Total     1998
                             ----    ----   ----   ----   ----   -----    ------
                                             (In millions)
<S>                          <C>     <C>    <C>    <C>   <C>     <C>      <C>
Fixed-rate debt (U.S.
 dollar-denominated):
  Principal amount           $  -    $ -    $ -    $ -   $244.0  $244.0   $253.1
  Weighted-average interest
   rate                         -      -      -      -    11.75%  11.75%

Variable rate debt (DM-
 denominated):
  Principal amount           $100.9  $48.2  $ -    $ -   $  -    $149.1   $149.1
  Weighted-average interest
   rate                        5.4%   6.1%    -      -      -      5.6%
</TABLE>

  Currency exchange rates


      The Company is exposed to market  risk  arising  from  changes in currency
exchange rates as a result of manufacturing and selling its products  worldwide.
Earnings are primarily  affected by fluctuations in the value of the U.S. dollar
relative to the European Union euro,  Canadian  dollar,  Norwegian krone and the
United Kingdom pound sterling. See Item 7. "Management's Discussion and Analysis
of Financial  Condition and Results of Operations" for a discussion of risks and
uncertainties  related to the  conversion of certain of these  currencies to the
euro.

      As described  above,  at December 31, 1999, the Company had $58 million of
indebtedness  denominated in euros (1998 - $149 million outstanding  denominated
in Deutsche marks.) The potential increase in the U.S. dollar equivalent of the

                                    -34-

<PAGE>



principal amount outstanding resulting from a hypothetical 10% adverse change in
exchange rates would be approximately $6 million (1998 - $15 million).

  Marketable equity security prices

      The  Company  is  exposed  to market  risk due to changes in prices of the
marketable  securities which are owned. The fair value of such equity securities
at December 31, 1998 and 1999 was $18 million and $15 million, respectively. The
potential  change in the aggregate fair value of these  investments,  assuming a
10% change in prices, would be $1.8 million and $1.5 million, respectively.

  Other

      The Company  believes there are certain  shortcomings  in the  sensitivity
analyses  presented above,  which analyses are required under the Securities and
Exchange  Commission's  regulations.  For example,  the  hypothetical  effect of
changes in interest rates discussed above ignores the potential  effect on other
variables which affect the Company's  results of operations and cash flows, such
as demand for the  Company's  products,  sales  volumes and  selling  prices and
operating expenses. Contrary to the above assumptions, changes in interest rates
rarely  result  in   simultaneous   parallel   shifts  along  the  yield  curve.
Accordingly,  the  amounts  presented  above  are not  necessarily  an  accurate
reflection  of the  potential  losses  the  Company  would  incur  assuming  the
hypothetical changes in market prices were actually to occur.

      The above  discussion and estimated  sensitivity  analysis amounts include
forward-looking  statements of market risk which assume hypothetical  changes in
market prices.  Actual future market  conditions  will likely differ  materially
from such assumptions.  Accordingly,  such forward-looking statements should not
be  considered  to be  projections  by the  Company of future  events,  gains or
losses.

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The information  required by this Item is contained in a separate  section
of this Annual Report. See "Index of Financial Statements and Schedules" on page
F-1.

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

     Not applicable.

                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information  required by this Item is incorporated by reference to the
Company's  definitive  proxy  statement  to be  filed  with the  Securities  and
Exchange  Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this report (the "NL Proxy Statement").

                                    -35-

<PAGE>



ITEM 11.    EXECUTIVE COMPENSATION

      The information  required by this Item is incorporated by reference to the
NL Proxy Statement.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information  required by this Item is incorporated by reference to the
NL Proxy Statement.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information  required by this Item is incorporated by reference to the
NL Proxy Statement. See also Note 16 to the Consolidated Financial Statements.

                                     PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K

 (a) and (d)   Financial Statements and Schedules

               The consolidated financial statements and schedules listed by the
               Registrant on the accompanying Index of Financial  Statements and
               Schedules (see page F-1) are filed as part of this Annual Report.

 (b)           Reports on Form 8-K

               Reports on Form 8-K for the quarter  ended  December 31, 1999 and
               thereafter through the date of this report.

               October 20, 1999  -  reported Items 5 and 7.
               October 28, 1999  -  reported Items 5 and 7.
               November 19, 1999 -  reported Items 5 and 7.
               January 26, 2000  -  reported Items 5 and 7.
               February 9, 2000  -  reported Items 5 and 7.

 (c)           Exhibits

               Included as exhibits are the items  listed in the Exhibit  Index.
               NL will furnish a copy of any of the  exhibits  listed below upon
               payment  of  $4.00  per  exhibit  to  cover  the  costs  to NL of
               furnishing  the  exhibits.  Instruments  defining  the  rights of
               holders of debt  issues  which do not exceed 10% of  consolidated
               total  assets will be furnished  to the  Securities  and Exchange
               Commission upon request.

                                    -36-

<PAGE>



Item No.                                Exhibit Index

  3.1       By-Laws,  as amended on June 28, 1990 - incorporated by reference to
            Exhibit 3.1 to the  Registrant's  Annual Report on Form 10-K for the
            year ended December 31, 1990.

  3.2       Certificate  of Amended and Restated  Certificate  of  Incorporation
            dated June 28, 1990 - incorporated  by reference to Exhibit 1 to the
            Registrant's  Proxy Statement on Schedule 14A for the annual meeting
            held on June 28, 1990.

  4.1       Registration Rights Agreement dated October 30, 1991, by and between
            the Registrant and Tremont  Corporation - incorporated  by reference
            to Exhibit 4.3 to the  Registrant's  Annual  Report on Form 10-K for
            the year ended December 31, 1991.

  4.2       Indenture dated October 20, 1993 governing the  Registrant's  11.75%
            Senior  Secured  Notes  due  2003,  including  form of  Senior  Note
            incorporated  by  reference  to  Exhibit  4.1  to  the  Registrant's
            Quarterly  Report on Form 10-Q for the quarter  ended  September 30,
            1993.

  4.3       Senior  Mirror  Notes  dated  October  20,  1993 -  incorporated  by
            reference  to Exhibit 4.3 to the  Registrant's  Quarterly  Report on
            Form 10-Q for the quarter ended September 30, 1993.

  4.4       Senior  Note  Subsidiary  Pledge  Agreement  dated  October 20, 1993
            between  Registrant and Kronos,  Inc. - incorporated by reference to
            Exhibit 4.4 to the  Registrant's  Quarterly  Report on Form 10-Q for
            the quarter ended September 30, 1993.

  4.5       Third Party Pledge and  Intercreditor  Agreement  dated  October 20,
            1993 between Registrant, Chase Manhattan Bank (National Association)
            and Chemical Bank - incorporated  by reference to Exhibit 4.5 to the
            Registrant's  Quarterly  Report on Form 10-Q for the  quarter  ended
            September 30, 1993.

 10.1       Lease Contract dated June 21, 1952,  between  Farbenfabrieken  Bayer
            Aktiengesellschaft  and  Titangesellschaft  mit beschrankter Haftung
            (German   language   version   and  English   translation   thereof)
            incorporated  by  reference  to  Exhibit  10.14 to the  Registrant's
            Annual Report on Form 10-K for the year ended December 31, 1985.

 10.2       Contract on Supplies and Services among Bayer AG, Kronos  Titan-GmbH
            and  Kronos  International,   Inc.  dated  June  30,  1995  (English
            translation  from  German  language   document)  -  incorporated  by
            reference to Exhibit 10.1 to the  Registrant's  Quarterly  Report on
            Form 10-Q for the quarter ended September 30, 1995.

 10.3**     Richards Bay Slag Sales Agreement dated May 1, 1995 between Richards
            Bay Iron and Titanium (Proprietary) Limited and Kronos, Inc. -

                                    -37-

<PAGE>



            incorporated  by  reference  to  Exhibit  10.17 to the  Registrant's
            Annual Report on Form 10-K for the year ended December 31, 1995.

 10.4**     Amendment to Richards Bay Slag Sales Agreement dated May 1, 1999
            between Richards Bay Iron and Titanium (Proprietary) Limited and
            Kronos, Inc.

 10.5       Formation  Agreement  dated as of October  18,  1993  among  Tioxide
            Americas Inc., Kronos Louisiana, Inc. and Louisiana Pigment Company,
            L.P. - incorporated by reference to Exhibit 10.2 to the Registrant's
            Quarterly  Report on Form 10-Q for the quarter  ended  September 30,
            1993.

 10.6       Joint Venture Agreement dated as of October 18, 1993 between Tioxide
            Americas Inc. and Kronos Louisiana, Inc. - incorporated by reference
            to Exhibit 10.3 to the  Registrant's  Quarterly  Report on Form 10-Q
            for the quarter ended September 30, 1993.

 10.7       Kronos Offtake Agreement dated as of October 18, 1993 between Kronos
            Louisiana,  Inc. and Louisiana Pigment Company,  L.P. - incorporated
            by reference to Exhibit 10.4 to the Registrant's Quarterly Report on
            Form 10-Q for the quarter ended September 30, 1993.

 10.8       Amendment No. 1 to Kronos Offtake Agreement dated as of December 20,
            1995 between Kronos Louisiana, Inc. and Louisiana Pigment Company,
            L.P. - incorporated by reference to Exhibit 10.22 to the
            Registrant's Annual Report on Form 10-K for the year ended
            December 31, 1995.

 10.9       Tioxide Americas Offtake Agreement dated as of October 18, 1993
            between Tioxide Americas Inc. and Louisiana Pigment Company, L.P. -
            incorporated by reference to Exhibit 10.5 to the Registrant's
            Quarterly Report on Form 10-Q for the quarter ended September 30,
            1993.

 10.10      Amendment No. 1 to Tioxide Americas Offtake Agreement dated as of
            December 20, 1995 between Tioxide Americas Inc. and Louisiana
            Pigment Company, L.P. - incorporated by reference to Exhibit 10.24
            to the Registrant's Annual Report on Form 10-K for the year ended
            December 31, 1995.

 10.11      TCI/KCI  Output  Purchase  Agreement  dated as of October  18,  1993
            between  Tioxide Canada Inc. and Kronos Canada,  Inc. - incorporated
            by reference to Exhibit 10.6 to the Registrant's Quarterly Report on
            Form 10-Q for the quarter ended September 30, 1993.

 10.12      TAI/KLA  Output  Purchase  Agreement  dated as of October  18,  1993
            between   Tioxide   Americas   Inc.  and  Kronos   Louisiana,   Inc.
            incorporated  by  reference  to  Exhibit  10.7  to the  Registrant's
            Quarterly  Report on Form 10-Q for the quarter  ended  September 30,
            1993.

                                    -38-

<PAGE>



 10.13      Master  Technology  Exchange  Agreement dated as of October 18, 1993
            among Kronos,  Inc., Kronos Louisiana,  Inc., Kronos  International,
            Inc.,  Tioxide  Group  Limited and Tioxide  Group  Services  Limited
            incorporated  by  reference  to  Exhibit  10.8  to the  Registrant's
            Quarterly  Report on Form 10-Q for the quarter  ended  September 30,
            1993.

 10.14      Parents'  Undertaking  dated as of  October  18,  1993  between  ICI
            American Holdings Inc. and Kronos,  Inc. - incorporated by reference
            to Exhibit 10.9 to the  Registrant's  Quarterly  Report on Form 10-Q
            for the quarter ended September 30, 1993.

 10.15      Allocation  Agreement  dated as of October 18, 1993 between  Tioxide
            Americas Inc., ICI American Holdings,  Inc., Kronos, Inc. and Kronos
            Louisiana,  Inc. - incorporated by reference to Exhibit 10.10 to the
            Registrant's  Quarterly  Report on Form 10-Q for the  quarter  ended
            September 30, 1993.

 10.16      Form  of  Director's   Indemnity   Agreement   between  NL  and  the
            independent  members of the Board of Directors of NL -  incorporated
            by reference to Exhibit 10.20 to the  Registrant's  Annual Report on
            Form 10-K for the year ended December 31, 1987.

 10.17*     1989 Long Term Performance Incentive Plan of NL Industries, Inc. -
            incorporated by reference to Exhibit B to the Registrant's Proxy
            Statement on Schedule 14A for the annual meeting of shareholders
            held on May 8, 1996.

 10.18*     NL Industries,  Inc.  Variable  Compensation  Plan - incorporated by
            reference  to  Exhibit  A to the  Registrant's  Proxy  Statement  on
            Schedule 14A for the annual meeting of  shareholders  held on May 8,
            1996.

 10.19*     NL Industries, Inc. Retirement Savings Plan, as amended and restated
            effective April 1, 1996 - incorporated by reference to Exhibit 10.38
            to the  Registrant's  Annual  Report on Form 10-K for the year ended
            December 31, 1996.

 10.20*     NL Industries, Inc. 1992 Non-Employee Director Stock Option Plan, as
            adopted by the Board of Directors on February 13, 1992  incorporated
            by reference to Appendix A to the  Registrant's  Proxy  Statement on
            Schedule 14A for the annual meeting of  shareholders  held April 30,
            1992.

 10.21*     NL Industries,  Inc. 1998 Long-Term Incentive Plan - incorporated by
            reference  to  Appendix A to the  Registrant's  Proxy  Statement  on
            Schedule 14A for the annual meeting of  shareholders  held on May 6,
            1998.

 10.22      Intercorporate Services Agreement by and between Valhi, Inc. and the
            Registrant effective as of January 1, 1999 - incorporated by

                                    -39-

<PAGE>



            reference to Exhibit 10.1 to the  Registrant's  Quarterly  Report on
            Form 10-Q for the quarter ended March 31, 1999.

 10.23      Intercorporate Services Agreement by and between Contran Corporation
            and the Registrant effective as of January 1, 1999 - incorporated by
            reference to Exhibit 10.2 to the  Registrant's  Quarterly  Report on
            Form 10-Q for the quarter ended March 31, 1999.

 10.24      Intercorporate Services Agreement by and between Tremont Corporation
            and the Registrant effective as of January 1, 1999 - incorporated by
            reference to Exhibit 10.4 to the  Registrant's  Quarterly  Report on
            Form 10-Q for the quarter ended March 31, 1999.

 10.25      Intercorporate  Service  Agreement  by and between  Titanium  Metals
            Corporation   and  the   Registrant   effective   January   1,  1999
            incorporated  by  reference  to  Exhibit  10.3  to the  Registrant's
            Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.

 10.26      Intercorporate Services Agreement by and between CompX International
            Inc. and the Registrant effective as of January 1, 1999 incorporated
            by reference to Exhibit 10.1 to the Registrant's Quarterly Report of
            Form 10-Q for the quarter ended June 30, 1999.

 10.27      Insurance  Sharing  Agreement,  effective  January 1,  1990,  by and
            between the Registrant,  NL Insurance,  Ltd. (an indirect subsidiary
            of Tremont  Corporation)  and Baroid  Corporation - incorporated  by
            reference to Exhibit 10.20 to the Registrant's Annual Report on Form
            10-K for the year ended December 31, 1991.

 10.28*     Executive  severance  agreement effective as of March 9, 1995 by and
            between the  Registrant  and  Lawrence A. Wigdor -  incorporated  by
            reference to Exhibit 10.3 to the  Registrant's  Quarterly  Report on
            Form 10-Q for the quarter ended September 30, 1996.

 10.29*     Executive  severance  agreement effective as of July 24, 1996 by and
            between  the  Registrant  and J.  Landis  Martin -  incorporated  by
            reference to Exhibit 10.1 to the  Registrant's  Quarterly  Report on
            Form 10-Q for the quarter ended March 31, 1997.

 10.30*     Supplemental  Executive  Retirement Plan for Executives and Officers
            of NL Industries,  Inc. effective as of January 1, 1991 incorporated
            by reference to Exhibit 10.26 to the  Registrant's  Annual Report on
            Form 10-K for the year ended December 31, 1992.

 10.31*     Agreement to Defer Bonus Payment dated February 20, 1998 between the
            Registrant  and  Lawrence  A.  Wigdor and  related  trust  agreement
            incorporated  by  reference  to  Exhibit  10.48 to the  Registrant's
            Annual Report of Form 10-K for the year ended December 31, 1997.

 10.32*     Agreement to Defer Bonus Payment dated February 20, 1998 between the
            Registrant and J. Landis Martin and related trust agreement -

                                    -40-

<PAGE>



            incorporated  by  reference  to  Exhibit  10.49 to the  Registrant's
            Annual Report of Form 10-K for the year ended December 31, 1997.

 21.1       Subsidiaries of the Registrant.

 23.1       Consent of Independent Accountants.

 27.1       Financial Data Schedule for the year ended December 31, 1999.

 99.1       Annual Report of NL Industries,  Inc.  Retirement Savings Plan (Form
            11-K) to be filed  under  Form  10-K/A  to the  Registrant's  Annual
            Report on Form 10-K within 180 days after December 31, 1999.

*     Management contract, compensatory plan or arrangement.

**    Portions  of the  exhibit  have been  omitted  pursuant  to a request  for
      confidential treatment.

                                    -41-

<PAGE>



                                   SIGNATURES


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

                                       NL Industries, Inc.
                                       (Registrant)


                                   By /s/ J. Landis Martin
                                      --------------------------------
                                      J. Landis Martin, March 16, 2000
                                      President and Chief Executive Officer

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the date indicated:



/s/ J. Landis Martin                   /s/ Harold C. Simmons
-------------------------------------- -----------------------------------------
J. Landis Martin, March 16, 2000       Harold C. Simmons, March 16, 2000
Director, President and                Chairman of the Board
Chief Executive Officer


/s/ Glenn R. Simmons                   /s/ Joseph S. Compofelice
-------------------------------------- -----------------------------------------
Glenn R. Simmons, March 16, 2000       Joseph S. Compofelice, March 16, 2000
Director                               Director


/s/ Kenneth R. Peak                    /s/ Dr. Lawrence A. Wigdor
-------------------------------------- ----------------------------------------
Kenneth R. Peak, March 16, 2000        Dr. Lawrence A. Wigdor, March 16, 2000
Director                               Director, President and Chief
                                       Executive Officer of Kronos


/s/ Thomas P. Stafford                 /s/ Susan E. Alderton
-------------------------------------- ----------------------------------------
Thomas P. Stafford, March 16, 2000     Susan E. Alderton, March 16, 2000
Director                               Vice President and Chief Financial
                                        Officer
                                       (Principal Financial Officer)
/s/ Robert D. Hardy
--------------------------------------
Robert D. Hardy, March 16, 2000
Vice President and Controller
(Principal Accounting Officer)


                                    -42-
<PAGE>


                              NL INDUSTRIES, INC.

                          ANNUAL REPORT ON FORM 10-K

                           Items 8, 14(a) and 14(d)

                  Index of Financial Statements and Schedules


Financial Statements                                                  Pages

  Report of Independent Accountants                                F-2

  Consolidated Balance Sheets - December 31, 1998 and 1999         F-3 / F-4

  Consolidated Statements of Income - Years ended
   December 31, 1997, 1998 and 1999                                F-5 / F-6

  Consolidated Statements of Comprehensive Income - Years
   ended December 31, 1997, 1998 and 1999                          F-7

  Consolidated Statements of Shareholders' Equity - Years
   ended December 31, 1997, 1998 and 1999                          F-8

  Consolidated Statements of Cash Flows - Years ended
   December 31, 1997, 1998 and 1999                                F-9 / F-11

  Notes to Consolidated Financial Statements                       F-12 / F-42


Financial Statement Schedules

  Report of Independent Accountants                                S-1

  Schedule I - Condensed Financial Information of Registrant       S-2 / S-7

  Schedule II - Valuation and qualifying accounts                  S-8





                                    F-1

<PAGE>







                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Shareholders and Board of Directors of NL Industries, Inc.:

      In our  opinion,  the  accompanying  consolidated  balance  sheets and the
related consolidated statements of income,  comprehensive income,  shareholders'
equity and cash flows present fairly, in all material respects, the consolidated
financial position of NL Industries, Inc. at December 31, 1998 and 1999, and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity  with accounting
principles  generally accepted in the United States.  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 of these  statements in accordance with auditing  standards
generally accepted in the United States,  which require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.

      As  discussed  in Note 2 to the  consolidated  financial  statements,  the
Company changed its method of accounting for environmental  remediation costs in
1997 in accordance with Statement of Position No. 96-1.





                                    PricewaterhouseCoopers LLP

Houston, Texas
February 29, 2000




                                    F-2

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                          December 31, 1998 and 1999

                     (In thousands, except per share data)


<TABLE>
<CAPTION>

              ASSETS
                                                          1998           1999
                                                       ----------    ----------

<S>                                                     <C>           <C>
Current assets:
  Cash and cash equivalents ........................    $  154,953    $  134,224
  Restricted cash equivalents ......................         8,164        17,565
  Accounts and notes receivable, less
   allowance of $2,377 and $2,075 ..................       133,769       143,768
  Receivable from affiliates .......................           692           747
  Refundable income taxes ..........................        15,919         4,473
  Inventories ......................................       228,611       191,184
  Prepaid expenses .................................         2,724         2,492
  Deferred income taxes ............................         1,955        11,974
                                                        ----------    ----------

      Total current assets .........................       546,787       506,427
                                                        ----------    ----------



Other assets:
  Marketable securities ............................        17,580        15,055
  Investment in TiO2 manufacturing joint venture ...       171,202       157,552
  Prepaid pension cost .............................        23,990        23,271
  Other ............................................        13,927         5,410
                                                        ----------    ----------

      Total other assets ...........................       226,699       201,288
                                                        ----------    ----------



Property and equipment:
  Land .............................................        19,626        23,678
  Buildings ........................................       144,228       133,682
  Machinery and equipment ..........................       586,400       550,842
  Mining properties ................................        84,015        71,952
  Construction in progress .........................         4,385         6,805
                                                        ----------    ----------
                                                           838,654       786,959

  Less accumulated depreciation and depletion ......       456,495       438,501
                                                        ----------    ----------

      Net property and equipment ...................       382,159       348,458
                                                        ----------    ----------

                                                        $1,155,645    $1,056,173
                                                        ==========    ==========
</TABLE>




                                    F-3

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                    CONSOLIDATED BALANCE SHEETS (CONTINUED)

                          December 31, 1998 and 1999

                     (In thousands, except per share data)


<TABLE>
<CAPTION>

   LIABILITIES AND SHAREHOLDERS' EQUITY
                                                         1998           1999
                                                     -----------    -----------

<S>                                                  <C>            <C>
Current liabilities:
  Notes payable ..................................   $    36,391    $    57,076
  Current maturities of long-term debt ...........        64,826            212
  Accounts payable and accrued liabilities .......       187,661        190,360
  Payable to affiliates ..........................        11,317         11,240
  Income taxes ...................................         9,224          5,605
  Deferred income taxes ..........................         1,236            326
                                                     -----------    -----------

      Total current liabilities ..................       310,655        264,819
                                                     -----------    -----------

Noncurrent liabilities:
  Long-term debt .................................       292,803        244,266
  Deferred income taxes ..........................       196,180        108,226
  Accrued pension cost ...........................        44,649         32,946
  Accrued postretirement benefits cost ...........        41,659         37,105
  Other ..........................................       116,732         93,821
                                                     -----------    -----------

      Total noncurrent liabilities ...............       692,023        516,364
                                                     -----------    -----------

Minority interest ................................           633          3,903
                                                     -----------    -----------

Shareholders' equity:
  Preferred stock - 5,000 shares authorized,
   no shares issued or outstanding ...............          --             --
  Common stock - $.125 par value; 150,000
   shares authorized; 66,839 shares issued .......         8,355          8,355
  Additional paid-in capital .....................       774,288        774,304
  Retained earnings (deficit) ....................      (133,379)        19,150
  Accumulated other comprehensive income (loss):
    Currency translation .........................      (133,440)      (160,022)
    Marketable securities ........................         4,498          2,857
    Pension liabilities ..........................        (3,187)        (1,756)
  Treasury stock, at cost (15,028 and 15,555
   shares) .......................................      (364,801)      (371,801)
                                                     -----------    -----------

      Total shareholders' equity .................       152,334        271,087
                                                     -----------    -----------

                                                     $ 1,155,645    $ 1,056,173
                                                     ===========    ===========
</TABLE>

Commitments and contingencies (Notes 13 and 17)

         See accompanying notes to consolidated financial statements.
                                    F-4

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

                 Years ended December 31, 1997, 1998 and 1999

                     (In thousands, except per share data)

<TABLE>
<CAPTION>

                                                1997        1998         1999
                                             ---------    ---------    ---------
<S>                                          <C>          <C>          <C>
Revenues and other income:
  Net sales ..............................   $ 837,240    $ 894,724    $ 908,387
  Other, net .............................      19,367       25,453       23,646
                                             ---------    ---------    ---------

                                               856,607      920,177      932,033
                                             ---------    ---------    ---------

Costs and expenses:
  Cost of sales ..........................     649,945      618,447      662,315
  Selling, general and administrative ....     168,592      133,970      134,342
  Interest ...............................      65,759       58,070       36,884
                                             ---------    ---------    ---------

                                               884,296      810,487      833,541
                                             ---------    ---------    ---------
    Income (loss) from continuing
     operations before income
     taxes and minority interest .........     (27,689)     109,690       98,492

Income tax benefit (expense) .............      (2,244)     (19,788)      64,601
                                             ---------    ---------    ---------

    Income (loss) from continuing
     operations before minority
     interest ............................     (29,933)      89,902      163,093

Minority interest ........................         (58)          40        3,322
                                             ---------    ---------    ---------

    Income (loss) from continuing
     operations ..........................     (29,875)      89,862      159,771

Discontinued operations ..................      20,402      287,396         --

Extraordinary item - early
 extinguishment of debt, net of tax
 benefit of $5,698 .......................        --        (10,580)        --
                                             ---------    ---------    ---------

    Net income (loss) ....................   $  (9,473)   $ 366,678    $ 159,771
                                             =========    =========    =========
</TABLE>


                                    F-5

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)

                 Years ended December 31, 1997, 1998 and 1999

                    (In thousands, except per share data)



<TABLE>
<CAPTION>

                                              1997         1998          1999
                                          ----------    ----------    ----------
<S>                                       <C>           <C>           <C>
Basic earnings per share:
  Continuing operations ...............   $     (.58)   $     1.75    $     3.09
  Discontinued operations .............          .39          5.59          --
  Extraordinary item ..................         --            (.21)         --
                                          ----------    ----------    ----------

    Net income (loss) .................   $     (.19)   $     7.13    $     3.09
                                          ==========    ==========    ==========


Diluted earnings per share:
  Continuing operations ...............   $     (.58)   $     1.73    $     3.08
  Discontinued operations .............          .39          5.52          --
  Extraordinary item ..................         --            (.20)         --
                                          ----------    ----------    ----------

    Net income (loss) .................   $     (.19)   $     7.05    $     3.08
                                          ==========    ==========    ==========

Shares used in the calculation of
 earnings per share:
  Basic ...............................       51,152        51,460        51,774
  Dilutive impact of stock options ....         --             540            93
                                          ----------    ----------    ----------

  Diluted .............................       51,152        52,000        51,867
                                          ==========    ==========    ==========
</TABLE>


         See accompanying notes to consolidated financial statements.
                                    F-6

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                 Years ended December 31, 1997, 1998 and 1999

                                (In thousands)



<TABLE>
<CAPTION>
                                                    1997         1998         1999
                                                 ---------    ---------    ---------

<S>                                              <C>          <C>          <C>
Net income (loss) ............................   $  (9,473)   $ 366,678    $ 159,771
                                                 ---------    ---------    ---------

Other comprehensive income (loss), net of tax:
  Marketable securities adjustment ...........       3,019          201       (1,641)
  Minimum pension liabilities
   adjustment ................................       1,822       (3,187)       1,431
  Currency translation adjustment ............     (15,181)         370      (26,582)
                                                 ---------    ---------    ---------

    Total other comprehensive loss ...........     (10,340)      (2,616)     (26,792)
                                                 ---------    ---------    ---------

  Comprehensive income (loss) ................   $ (19,813)   $ 364,062    $ 132,979
                                                 =========    =========    =========
</TABLE>


         See accompanying notes to consolidated financial statements.
                                    F-7

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                 Years ended December 31, 1997, 1998 and 1999

                                (In thousands)

<TABLE>
<CAPTION>
                                                                              Accumulated other
                                                                         comprehensive income (loss)
                                             Additional  Retained    -----------------------------------
                                     Common   paid-in     earnings    Currency    Pension     Marketable   Treasury
                                      stock   capital    (deficit)   translation liabilities  securities    stock        Total
                                     ------  ---------- -----------  ----------- -----------  ----------   --------    ---------

<S>                                  <C>      <C>        <C>          <C>          <C>        <C>         <C>          <C>
Balance at December 31, 1996 .....   $8,355   $759,281   $(485,948)   $(118,629)   $(1,822)   $  1,278    $(365,996)   $(203,481)

Net loss .........................     --         --        (9,473)        --         --          --           --         (9,473)
Other comprehensive income (loss),
 net of tax ......................     --         --          --        (15,181)     1,822       3,019         --        (10,340)
Treasury stock reissued ..........     --         --          --           --         --          --          1,025        1,025
                                     ------   --------   ---------    ---------    -------    --------    ---------    ---------

Balance at December 31, 1997 .....    8,355    759,281    (495,421)    (133,810)      --         4,297     (364,971)    (222,269)

Net income .......................     --         --       366,678         --         --          --           --        366,678
Other comprehensive income (loss),
 net of tax ......................     --         --          --            370     (3,187)        201         --         (2,616)
Common dividends declared -
 $.09 per share ..................     --         --        (4,636)        --         --          --           --         (4,636)
Cash received upon settlement of
 shareholder derivative lawsuit,
 net of $3,198 in legal fees and
 expenses ........................     --       11,211        --           --         --          --           --         11,211
Tax benefit of stock options
 exercised .......................     --        3,796        --           --         --          --           --          3,796
Treasury stock reissued ..........     --         --          --           --         --          --            170          170
                                     ------   --------   ---------    ---------    -------    --------    ---------    ---------

Balance at December 31, 1998 .....    8,355    774,288    (133,379)    (133,440)    (3,187)      4,498     (364,801)     152,334

Net income .......................     --         --       159,771         --         --          --           --        159,771
Other comprehensive income (loss),
 net of tax ......................     --         --          --        (26,582)     1,431      (1,641)        --        (26,792)
Common dividends declared -
 $.14 per share ..................     --         --        (7,242)        --         --          --           --         (7,242)
Tax benefit of stock options
 exercised .......................     --           16        --           --         --          --           --             16
Treasury stock:
  Acquired .......................     --         --          --           --         --          --         (7,210)      (7,210)
  Reissued .......................     --         --          --           --         --          --            210          210
                                     ------   --------   ---------    ---------    -------    --------    ---------    ---------

Balance at December 31, 1999 .....   $8,355   $774,304   $  19,150    $(160,022)   $(1,756)   $  2,857    $(371,801)   $ 271,087
                                     ======   ========   =========    =========    =======    ========    =========    =========
</TABLE>



         See accompanying notes to consolidated financial statements.
                                    F-8

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 Years ended December 31, 1997, 1998 and 1999

                                (In thousands)



                                               1997         1998        1999
                                            ---------    ---------    ---------

Cash flows from operating activities:
  Net income (loss) .....................   $  (9,473)   $ 366,678    $ 159,771
  Depreciation, depletion and
   amortization .........................      34,887       34,545       33,730
  Noncash interest expense ..............      23,092       18,393        1,682
  Deferred income taxes .................      (5,627)       4,988      (86,772)
  Minority interest .....................         (58)          40        3,322
  Net (gains) losses from:
    Securities transactions .............      (2,657)        --           --
    Disposition of property and
     equipment ..........................      (1,735)         768          429
  Pension cost, net .....................      (5,112)      (5,566)      (4,702)
  Other postretirement benefits, net ....      (4,799)      (6,299)      (5,459)
  Distribution from TiO2 manufacturing
   joint venture ........................        --           --         13,650
  Change in accounting for environmental
   remediation costs ....................      30,000         --           --
  Discontinued operations:
    Net gain from sale of Rheox .........        --       (286,071)        --
    Income from operations of Rheox .....     (20,402)      (1,325)        --
  Extraordinary item ....................        --         10,580         --
  Other, net ............................        --            317         --
                                            ---------    ---------    ---------

                                               38,116      137,048      115,651

  Rheox, net ............................      31,506      (30,587)        --
  Change in assets and liabilities:
    Accounts and notes receivable .......     (14,925)      (2,012)     (22,289)
    Inventories .........................      22,872      (49,839)      20,663
    Prepaid expenses ....................          96          436         (463)
    Accounts payable and accrued
     liabilities ........................       9,347       (2,741)       7,315
    Income taxes ........................      12,978      (12,976)       6,729
    Accounts with affiliates ............      (3,915)       2,286       (3,572)
    Other noncurrent assets .............        (269)        (178)       1,090
    Other noncurrent liabilities ........      (6,640)       3,650      (16,816)
                                            ---------    ---------    ---------
        Net cash provided by operating
         activities .....................      89,166       45,087      108,308
                                            ---------    ---------    ---------


                                    F-9

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                 Years ended December 31, 1997, 1998 and 1999

                                (In thousands)


<TABLE>
<CAPTION>
                                              1997         1998         1999
                                            ---------    ---------    ---------

<S>                                         <C>          <C>          <C>
Cash flows from investing activities:
  Capital expenditures ..................   $ (28,220)   $ (22,392)   $ (35,559)
  Change in restricted cash
   equivalents, net .....................       1,144       (2,638)      (5,176)
  Proceeds from disposition of
   property and equipment ...............       3,049          769        2,344
  Proceeds from disposition of
   marketable securities ................       6,875        6,875         --
  Investment in joint venture, net ......       8,364         (372)        --
  Proceeds from sale of Rheox ...........        --        435,080         --
  Rheox, net ............................      (2,314)         (26)        --
                                            ---------    ---------    ---------

      Net cash provided (used) by
       investing activities .............     (11,102)     417,296      (38,391)
                                            ---------    ---------    ---------

Cash flows from financing activities:
  Indebtedness:
    Borrowings ..........................        --         30,491       82,038
    Principal payments ..................    (182,215)    (315,892)    (155,787)
    Deferred financing costs ............      (2,343)        --           --
  Dividends paid ........................        --         (4,636)      (7,242)
  Treasury stock purchased ..............        --           --         (7,210)
  Settlement of shareholder derivative
   lawsuit, net .........................        --         11,211         --
  Rheox, net ............................     100,940     (117,500)        --
  Other, net ............................       1,023          168          204
                                            ---------    ---------    ---------

      Net cash used by financing
       activities .......................     (82,595)    (396,158)     (87,997)
                                            ---------    ---------    ---------
      Net change during the year from
       operating, investing and
       financing activities .............   $  (4,531)   $  66,225    $ (18,080)
                                            =========    =========    =========
</TABLE>


                                    F-10

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                 Years ended December 31, 1997, 1998 and 1999

                                (In thousands)

<TABLE>
<CAPTION>

                                               1997        1998         1999
                                            ---------    ---------    ---------

<S>                                         <C>          <C>          <C>
Cash and cash equivalents:
  Net change during the year from:
    Operating, investing and financing
     activities .........................   $  (4,531)   $  66,225    $ (18,080)
    Currency translation ................      (2,295)         (36)      (2,649)
    Sale of Rheox .......................        --         (7,630)        --
                                            ---------    ---------    ---------

                                               (6,826)      58,559      (20,729)
  Balance at beginning of year ..........     103,220       96,394      154,953
                                            ---------    ---------    ---------

  Balance at end of year ................   $  96,394    $ 154,953    $ 134,224
                                            =========    =========    =========

Supplemental disclosures:
  Cash paid for:
    Interest, net of amounts capitalized.   $  55,908    $  37,965    $  35,540
    Income taxes ........................       6,875       54,230       14,963

  Noncash investing activities -
   marketable securities exchanged
   for a note receivable ................   $   6,875    $    --      $    --

</TABLE>


         See accompanying notes to consolidated financial statements.
                                    F-11

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Organization and basis of presentation:

      NL  Industries,  Inc.  conducts its  titanium  dioxide  pigments  ("TiO2")
operations  through its wholly owned  subsidiary,  Kronos,  Inc. At December 31,
1999,  Valhi,  Inc.  and  Tremont   Corporation,   each  affiliates  of  Contran
Corporation,  held approximately 59% and 20%, respectively,  of NL's outstanding
common  stock.  At  December  31,  1999,   Contran  and  its  subsidiaries  held
approximately  93% of  Valhi's  outstanding  common  stock,  and Valhi and other
entities  related  to Harold C.  Simmons  held  approximately  55% of  Tremont's
outstanding  common stock.  Substantially  all of Contran's  outstanding  voting
stock is held either by trusts  established for the benefit of certain  children
and grandchildren of Mr. Simmons,  of which Mr. Simmons is the sole trustee,  or
by Mr. Simmons  directly.  Mr. Simmons,  the Chairman of the Board of NL and the
Chairman  of the Board and Chief  Executive  Officer of Contran  and Valhi and a
director of Tremont, may be deemed to control each of such companies.

Note 2 - Summary of significant accounting policies:

Principles of consolidation and management's estimates

      The accompanying consolidated financial statements include the accounts of
NL and  its  majority-owned  subsidiaries  (collectively,  the  "Company").  All
material  intercompany  accounts  and  balances  have been  eliminated.  Certain
prior-year  amounts  have been  reclassified  to  conform  to the  current  year
presentation.  The  preparation  of  financial  statements  in  conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements,  and the  reported  amount  of  revenues  and  expenses  during  the
reporting  period.  Ultimate  actual results may in some  instances  differ from
previously estimated amounts.

Translation of foreign currencies

      Assets and liabilities of subsidiaries whose functional  currency is other
than the U.S.  dollar are  translated at year-end rates of exchange and revenues
and expenses are translated at weighted average exchange rates prevailing during
the year. Resulting translation  adjustments are included in other comprehensive
income  (loss),  net of related  income taxes.  Currency  transaction  gains and
losses are recognized in income currently.

Cash equivalents

      Cash  equivalents  include  U.S.  Treasury   securities   purchased  under
short-term  agreements to resell and bank  deposits with original  maturities of
three months or less.

                                    F-12

<PAGE>



Restricted cash equivalents

      At December 31, 1999,  restricted cash  equivalents of  approximately  $18
million  collateralized  undrawn  letters  of  credit.  At  December  31,  1998,
restricted cash equivalents of approximately $5 million  collateralized  undrawn
letters of credit,  and restricted cash  equivalents of approximately $7 million
collateralized certain environmental  remediation obligations of the Company, of
which $4 million was classified as a noncurrent asset.

Marketable securities and securities transactions

      Marketable  securities  are  classified  as  "available-for-sale"  and are
carried at market based on quoted market prices.  Unrealized gains and losses on
available-for-sale securities are included in other comprehensive income (loss),
net of  related  deferred  income  taxes.  See  Note  4.  Gains  and  losses  on
available-for-sale  securities are recognized in income upon realization and are
computed based on specific identification of the securities sold.

Inventories

      Inventories are stated at the lower of cost (principally  average cost) or
market. Amounts are removed from inventories at average cost.

Investment in joint venture

      Investment  in a 50%-owned  joint  venture is accounted  for by the equity
method.

Property, equipment, depreciation and depletion

      Property  and  equipment  are stated at cost.  Interest  costs  related to
major, long-term capital projects are capitalized as a component of construction
costs.  Expenditures for  maintenance,  repairs and minor renewals are expensed;
expenditures for major improvements are capitalized.

      Depreciation is computed  principally by the straight-line method over the
estimated  useful lives of ten to forty years for  buildings and three to twenty
years for machinery and equipment. Depletion of mining properties is computed by
the unit-of-production and straight-line methods.

Long-term debt

      Long-term  debt is  stated  net of  unamortized  original  issue  discount
("OID").  OID is amortized  over the period during which cash interest  payments
are not required and deferred financing costs are amortized over the term of the
applicable issue, both by the interest method.


                                    F-13

<PAGE>



Employee benefit plans

      Accounting and funding  policies for retirement  plans and  postretirement
benefits other than pensions ("OPEB") are described in Note 11.

      The Company accounts for stock-based  employee  compensation in accordance
with Accounting  Principles Board Opinion ("APBO") No. 25, "Accounting for Stock
Issued to  Employees,"  and its various  interpretations.  Under APBO No. 25, no
compensation  cost is generally  recognized for fixed stock options in which the
exercise price is not less than the market price on the grant date. Compensation
cost recognized by the Company in accordance with APBO No. 25 was nil in each of
the past three years.

Environmental remediation costs

      Environmental   remediation   costs  are  accrued  when  estimated  future
expenditures  are  probable  and  reasonably  estimable.  The  estimated  future
expenditures  generally  are not  discounted  to present  value.  Recoveries  of
remediation  costs from other parties,  if any, are reported as receivables when
their receipt is deemed probable.  At December 31, 1998 and 1999, no receivables
for recoveries have been recognized.

      The Company  adopted a new method of accounting as required by the AICPA's
Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities,"
in 1997. The SOP, among other things,  expanded the types of costs which must be
considered in determining  environmental  remediation  accruals.  As a result of
adopting the SOP,  the Company  recognized  a noncash  cumulative  charge of $30
million in 1997. The charge did not impact the Company's 1997 income tax expense
because the Company  believed the  resulting  deferred  income tax asset did not
then satisfy the  "more-likely-than-not"  recognition criteria and, accordingly,
the Company established an offsetting valuation allowance.

Net sales

      Sales are recognized as products are shipped.

Income taxes

      Deferred income tax assets and liabilities are recognized for the expected
future tax  consequences  of  temporary  differences  between the income tax and
financial  reporting  carrying  amounts  of assets  and  liabilities,  including
investments in subsidiaries  and  unconsolidated  affiliates not included in the
Company's  U.S.  tax  group  (the  "NL Tax  Group").  The  Company  periodically
evaluates its deferred tax assets and adjusts any related  valuation  allowance.
The Company's  valuation allowance is equal to the amount of deferred tax assets
which the Company  believes do not meet the  "more-likely-than-not"  recognition
criteria.


                                    F-14

<PAGE>



Interest rate swaps and contracts

      The Company  periodically  uses interest rate swaps and contracts (such as
caps and floors) to manage  interest rate risk with respect to financial  assets
or liabilities. The Company has not entered into these contracts for speculative
purposes in the past, nor does it currently  anticipate  doing so in the future.
Any cost associated with the swap or contract designated as a hedge of assets or
liabilities  is deferred  and  amortized  over the life of the  agreement  as an
adjustment to interest income or expense. If the swap or contract is terminated,
the resulting  gain or loss is deferred and amortized over the remaining life of
the underlying asset or liability.  If the hedged instrument is disposed of, the
swap or contract  agreement is marked to market with any resulting  gain or loss
included  with  the gain or loss  from  the  disposition.  The  Company  held no
derivative financial instruments at December 31, 1998 or 1999.

Earnings per share

      Basic earnings per share is based on the weighted average number of common
shares  outstanding  during each period.  Diluted earnings per share is based on
the weighted  average  common  shares  outstanding  and the  dilutive  impact of
outstanding  stock options.  The weighted  average  number of outstanding  stock
options which were excluded from the  calculation of diluted  earnings per share
because  their  impact  would  have  been  antidilutive   aggregated  2,709,000,
1,942,000  and  2,185,000 in 1997,  1998 and 1999,  respectively.  There were no
adjustments to income (loss) from continuing  operations or net income (loss) in
the computation of earnings per share.

New accounting principles not yet adopted

      The  Company  will  adopt  Statement  of  Financial  Accounting  Standards
("SFAS") No. 133, Accounting for Derivative  Instruments and Hedging Activities,
as amended,  no later than the first quarter of 2001.  SFAS No. 133  establishes
accounting  standards for derivative  instruments,  including certain derivative
instruments embedded in other contracts, and for hedging activities.  Under SFAS
No. 133, all derivatives  will be recognized as either assets or liabilities and
measured at fair value.  The accounting for changes in fair value of derivatives
will depend upon the intended use of the derivative. The impact of adopting SFAS
No. 133, if any, has not been  determined  but will be dependent upon the extent
to which the  Company  is then a party to  derivative  contracts  or  engaged in
hedging  activities,  including  derivatives  embedded  in  non-derivative  host
contracts.

Note 3 - Business and geographic segments:

      The Company's operations are conducted by Kronos in one operating business
segment - the production and sale of TiO2. Titanium dioxide pigments are used to
impart  whiteness,  brightness  and  opacity  to a  wide  variety  of  products,
including paints, plastics, paper, fibers and ceramics.  Discontinued operations
consists of the Company's  specialty chemicals business owned by Rheox which was
sold in January 1998. See Note 20. At December 31, 1998 and 1999, the net

                                    F-15

<PAGE>



assets of non-U.S. subsidiaries included in consolidated net assets approximated
$310 million and $375 million, respectively.

      The  Company  evaluates  segment  performance  based on segment  operating
income,  which is defined as income  before  income taxes and interest  expense,
exclusive of certain nonrecurring items and certain general corporate income and
expense items (including securities transactions gains and interest and dividend
income) which are not attributable to the operations of the reportable operating
segment.  The accounting  policies of the reportable  operating  segment are the
same as those  described in Note 1. Interest  income included in the calculation
of segment operating income is disclosed in Note 14 as "Trade interest income."

      Segment assets are comprised of all assets  attributable to the reportable
operating  segment.  The Company's  investment in the TiO2  manufacturing  joint
venture  (see Note 6) is included in TiO2  business  segment  assets.  Corporate
assets are not  attributable  to the  reportable  operating  segment and consist
principally  of  cash,  cash   equivalents,   restricted  cash  equivalents  and
marketable securities.  For geographic information,  net sales are attributed to
the place of  manufacture  (point of origin) and the  location  of the  customer
(point of destination);  property and equipment are attributed to their physical
location.

<TABLE>
<CAPTION>

                                                 Years ended December 31,
                                           -----------------------------------
                                              1997         1998       1999
                                           ---------    ---------    ---------
                                                     (In thousands)
<S>                                         <C>          <C>          <C>
Business segment - TiO2

  Net sales .............................   $ 837,240    $ 894,724    $ 908,387
  Other income, excluding corporate .....      12,339        6,110       12,484
                                            ---------    ---------    ---------
                                              849,579      900,834      920,871

  Cost of sales .........................     649,945      618,447      662,315
  Selling, general and administrative,
   excluding corporate ..................     117,133      111,206      112,888
                                            ---------    ---------    ---------

    Operating income ....................      82,501      171,181      145,668

  General corporate income (expense):
    Securities earnings, net ............       5,393       14,921        6,597
    Expenses, net .......................     (49,824)     (18,342)     (16,889)
    Interest expense ....................     (65,759)     (58,070)     (36,884)
                                            ---------    ---------    ---------

                                            $ (27,689)   $ 109,690    $  98,492
                                            =========    =========    =========

  Capital expenditures:
    Kronos ..............................   $  28,193    $  22,310    $  32,703
    General corporate ...................          27           82        2,856
                                            ---------    ---------    ---------

                                            $  28,220    $  22,392    $  35,559
                                            =========    =========    =========

  Depreciation, depletion and
   amortization:
    Kronos ..............................   $  34,684    $  34,341    $  33,047
    General corporate ...................         203          204          683
                                            ---------    ---------    ---------

                                            $  34,887    $  34,545    $  33,730
                                            =========    =========    =========
</TABLE>



                                    F-16

<PAGE>

<TABLE>
<CAPTION>
                                                 Years ended December 31,
                                           -----------------------------------
                                              1997         1998       1999
                                           ---------    ---------    ---------
                                                     (In thousands)

<S>                                         <C>          <C>          <C>
Geographic areas

  Net sales - point of origin:
    Germany .............................   $ 439,926    $ 451,061    $ 459,467
    United States .......................     250,798      289,701      299,520
    Canada ..............................     145,160      158,967      162,746
    Belgium .............................     122,784      159,558      138,671
    Norway ..............................      96,448       91,112       88,277
    Other ...............................      88,030       96,912       90,442
    Eliminations ........................    (305,906)    (352,587)    (330,736)
                                            ---------    ---------    ---------

                                            $ 837,240    $ 894,724    $ 908,387
                                            =========    =========    =========

  Net sales - point of destination:
    Europe ..............................   $ 442,043    $ 493,942    $ 478,652
    United States .......................     230,923      246,209      268,037
    Canada ..............................      58,231       66,843       60,834
    Latin America .......................      43,078       35,281       35,308
    Asia ................................      41,328       21,042       41,612
    Other ...............................      21,637       31,407       23,944
                                            ---------    ---------    ---------

                                            $ 837,240    $ 894,724    $ 908,387
                                            =========    =========    =========

</TABLE>

<TABLE>
<CAPTION>
                                                     December 31,
                                       ----------------------------------------
                                           1997          1998           1999
                                       ----------     ----------     ----------
                                                    (In thousands)

<S>                                     <C>            <C>            <C>
Identifiable assets

  Net property and equipment:
    Germany .......................     $  213,762     $  223,605     $  190,292
    Canada ........................         67,247         60,574         62,334
    Belgium .......................         50,783         51,683         49,146
    Norway ........................         44,841         42,336         39,845
    Other .........................          4,289          3,961          6,841
    Discontinued operations .......         30,307           --             --
                                        ----------     ----------     ----------

                                        $  411,229     $  382,159     $  348,458
                                        ==========     ==========     ==========

  Total assets:
    Kronos ........................     $  961,635     $  997,893     $  972,549
    General corporate .............         47,922        157,752         83,624
    Discontinued operations .......         88,635           --             --
                                        ----------     ----------     ----------

                                        $1,098,192     $1,155,645     $1,056,173
                                        ==========     ==========     ==========
</TABLE>


                                    F-17

<PAGE>



Note 4 - Marketable securities and securities transactions:

<TABLE>
<CAPTION>
                                                               December 31,
                                                         ----------------------
                                                           1998          1999
                                                         --------      --------
                                                              (In thousands)

<S>                                                      <C>           <C>
Available-for-sale securities - noncurrent
 marketable equity securities:
  Unrealized gains .................................     $  8,512      $  6,700
  Unrealized losses ................................       (1,591)       (2,304)
  Cost .............................................       10,659        10,659
                                                         --------      --------

      Aggregate market .............................     $ 17,580      $ 15,055
                                                         ========      ========
</TABLE>

      In 1997  securities  transactions  gains of $2.7 million were  realized on
sales of available-for-sale securities.

Note 5 - Inventories:

<TABLE>
<CAPTION>
                                                               December 31,
                                                         ----------------------
                                                           1998          1999
                                                         --------      --------
                                                              (In thousands)

<S>                                                       <C>         <C>
Raw materials                                             $ 46,114    $ 54,861
Work in process                                             11,530       8,065
Finished products                                          136,225     100,824
Supplies                                                    34,742      27,434
                                                          --------    --------

                                                          $228,611    $191,184
                                                          ========    ========
</TABLE>

Note 6 - Investment in TiO2 manufacturing joint venture:

      Kronos Louisiana,  Inc. ("KLA"), a wholly owned subsidiary of Kronos, owns
a  50%  interest  in  Louisiana  Pigment  Company,   L.P.  ("LPC").   LPC  is  a
manufacturing  joint  venture that is also  50%-owned by Tioxide  Americas  Inc.
("Tioxide").  Effective June 30, 1999, Imperial Chemicals Industries plc ("ICI")
sold its titanium  dioxide  business,  including  Tioxide and its 50%  ownership
interest in LPC, to Huntsman ICI Holdings,  a newly formed  company that is 70%-
owned by Huntsman  Corporation  and  30%-owned  by ICI.  LPC owns and operates a
chloride-process TiO2 plant in Lake Charles, Louisiana.

      KLA is  required to purchase  one-half  of the TiO2  produced by LPC.  LPC
operates on a break-even basis and,  accordingly,  Kronos' cost for its share of
the TiO2 produced is equal to its share of LPC's  production  costs and interest
expense.  Kronos' share of the production  costs is reported as cost of sales as
the  related  TiO2  acquired  from LPC is sold,  and its  share of the  interest
expense, if any, is reported as a component of interest expense.

      During 1999 LPC made cash  distributions  of $27.3 million,  equally split
between the partners.


                                    F-18

<PAGE>



      Summary balance sheets of LPC are shown below.

<TABLE>
<CAPTION>
                                                                December 31,
                                                         -----------------------
                                                           1998           1999
                                                         --------       --------
                                                              (In thousands)
                ASSETS
<S>                                                      <C>            <C>
Current assets ...................................       $ 60,686       $ 55,999
Property and equipment, net ......................        294,906        279,567
                                                         --------       --------

                                                         $355,592       $335,566
                                                         ========       ========

   LIABILITIES AND PARTNERS' EQUITY

Other liabilities, primarily current .............       $ 10,960       $ 18,234
Partners' equity .................................        344,632        317,332
                                                         --------       --------

                                                         $355,592       $335,566
                                                         ========       ========
</TABLE>


      Summary income statements of LPC are shown below.
<TABLE>
<CAPTION>
                                                 Years ended December 31,
                                           ------------------------------------
                                             1997          1998          1999
                                           --------      --------      --------
                                                    (In thousands)

<S>                                         <C>           <C>           <C>
Revenues and other income:
  Kronos .............................      $ 82,171      $ 90,392      $ 85,304
  Tioxide ............................        80,512        89,879        86,309
  Interest income ....................           636           753           569
                                            --------      --------      --------

                                             163,319       181,024       172,182
                                            --------      --------      --------
Cost and expenses:
  Cost of sales ......................       156,811       178,803       171,829
  General and administrative .........           355           348           353
  Interest ...........................         6,153         1,873          --
                                            --------      --------      --------

                                             163,319       181,024       172,182
                                            --------      --------      --------

    Net income .......................      $   --        $   --        $   --
                                            ========      ========      ========
</TABLE>

Note 7 - Other noncurrent assets:
<TABLE>
<CAPTION>
                                                               December 31,
                                                           ---------------------
                                                            1998           1999
                                                           -------        ------
                                                               (In thousands)

<S>                                                        <C>            <C>
Deferred financing costs, net .....................        $ 4,124        $2,278
Intangible assets, net of accumulated
 amortization of $23,704 and $22,095 ..............          1,985           120
Restricted cash equivalents .......................          4,225          --
Deferred income taxes .............................           --              41
Other .............................................          3,593         2,971
                                                           -------        ------

                                                           $13,927        $5,410
                                                           =======        ======
</TABLE>


                                    F-19

<PAGE>



Note 8 - Accounts payable and accrued liabilities:
<TABLE>
<CAPTION>
                                                            December 31,
                                                     ---------------------------
                                                       1998               1999
                                                     --------           --------
                                                            (In thousands)

<S>                                                  <C>                <C>
Accounts payable .........................           $ 55,270           $ 56,597
                                                     --------           --------
Accrued liabilities:
  Employee benefits ......................             37,399             35,243
  Environmental costs ....................             44,122             47,228
  Interest ...............................              7,346              6,761
  Deferred income ........................              4,000              4,000
  Other ..................................             39,524             40,531
                                                     --------           --------

                                                      132,391            133,763
                                                     --------           --------

                                                     $187,661           $190,360
                                                     ========           ========
</TABLE>

Note 9 - Other noncurrent liabilities:
<TABLE>
<CAPTION>
                                                              December 31,
                                                       -------------------------
                                                         1998             1999
                                                       --------          -------
                                                            (In thousands)

<S>                                                    <C>               <C>
Environmental costs .........................          $ 81,454          $64,491
Insurance claims expense ....................            10,872           11,688
Employee benefits ...........................             9,778            7,816
Deferred income .............................            12,333            8,333
Other .......................................             2,295            1,493
                                                       --------          -------

                                                       $116,732          $93,821
                                                       ========          =======
</TABLE>

Note 10 - Notes payable and long-term debt:
<TABLE>
<CAPTION>
                                                               December 31,
                                                           ---------------------
                                                            1998          1999
                                                           --------     --------
                                                              (In thousands)

<S>                                                        <C>          <C>
Notes payable ........................................     $ 36,391     $ 57,076
                                                           ========     ========

Long-term debt:
  NL Industries - 11.75% Senior Secured Notes ........     $244,000     $244,000
                                                           --------     --------

  Kronos:
    DM bank credit facility (DM 187,322) .............      112,674         --
    Other ............................................          955          478
                                                           --------     --------

                                                            113,629          478
                                                           --------     --------

                                                            357,629      244,478
  Less current maturities ............................       64,826          212
                                                           --------     --------

                                                           $292,803     $244,266
                                                           ========     ========
</TABLE>


                                    F-20

<PAGE>



      The Company's  $244 million of 11.75%  Senior  Secured Notes due 2003 (the
"Notes")  are  collateralized  by a series of  intercompany  notes  from  Kronos
International,  Inc.  ("KII"),  a wholly owned subsidiary of Kronos,  to NL, the
interest  rate and payment terms of which mirror those of the  respective  Notes
(the "Mirror Notes"). The Notes are also collateralized by a first priority lien
on the stock of Kronos and a second priority lien on the stock of another wholly
owned subsidiary of the Company.

      In the event of foreclosure, the holders of the Notes would have access to
the  consolidated  assets,  earnings  and  equity of the  Company.  The  Company
believes  the  collateralization  of  the  Notes,  as  described  above,  is the
functional  economic  equivalent of a full,  unconditional and joint and several
guarantee  of the Notes by Kronos  and the other  subsidiary,  whose net  assets
aggregated $559 million at December 31, 1999.

      The Notes are  redeemable,  at the Company's  option,  starting in October
2000 at a redemption  price of 101.5% of the  principal  amount and declining to
100% after  October  2001. In the event of a Change of Control as defined in the
indenture,  the Company would be required to make an offer to purchase the Notes
at 101% of the principal  amount of the Notes.  The Notes are issued pursuant to
an indenture which contains a number of covenants and restrictions  which, among
other things,  restrict the ability of the Company and its subsidiaries to incur
debt, incur liens, pay dividends, merge or consolidate with, or sell or transfer
all or  substantially  all of their  assets to another  entity.  At December 31,
1999, $114 million was available for payment of dividends  pursuant to the terms
of the  indenture.  The quoted market price of the Senior Secured Notes per $100
principal  amount  was  $103.73  and  $103.75  at  December  31,  1998 and 1999,
respectively.

      The Company  prepaid in full its DM 107 million  ($60  million  when paid)
term loan in the first  quarter of 1999,  principally  by drawing DM 100 million
($56 million when drawn) on its DM revolving credit facility.  In the second and
third quarters of 1999, the Company repaid DM 60 million ($33 million when paid)
of the DM revolving  credit  facility with cash provided  from  operations.  The
revolver's  outstanding balance of DM 120 million was further reduced in October
1999 by DM 20 million  ($11  million  when paid).  In December  1999 the Company
borrowed $26 million of short-term unsecured euro-denominated bank debt and used
the proceeds  along with cash on hand to prepay the remaining  balance of DM 100
million ($52 million when paid). The DM facility was then terminated,  releasing
collateral and eliminating all related loan covenants.

      Unused  lines of  credit  available  for  borrowing  under  the  Company's
non-U.S. credit facilities approximated $19 million at December 31, 1999.

      Notes  payable at December 31, 1998 and 1999 consist of DM 61 million ($36
million at December  31,  1998) and euro 57 million ($57 million at December 31,
1999), respectively,  of short-term borrowings due within one year from non-U.S.
banks with  interest  rates ranging from 3.75% to 4.60% at December 31, 1998 and
from 3.03% to 4.30% at December 31, 1999.


                                    F-21

<PAGE>



      During 1998 the Company  redeemed (i) $6 million  principal  amount of its
Senior  Secured  Notes at par value  pursuant  to a tender  offer;  and (ii) the
entire issue of its 13% Senior Secured Discount Notes ($187.5 million  principal
amount  at  maturity)  with  premiums  ranging  between  1.25%  and 6% in market
transactions or pursuant to a tender offer.

      The aggregate  maturities of long-term debt at December 31, 1999 are shown
in the table below.

<TABLE>
<CAPTION>

Years ending December 31,                                             Amount
-------------------------                                         --------------
                                                                  (In thousands)

      <S>                                                             <C>
      2000                                                            $    212
      2001                                                                 133
      2002                                                                 133
      2003                                                             244,000
                                                                      --------

                                                                      $244,478
                                                                      ========
</TABLE>

Note 11 - Employee benefit plans:

Company-sponsored pension plans

      The Company maintains various defined benefit and defined contribution
pension plans covering substantially all employees.  Non-U.S. employees are
covered by plans in their respective countries and a majority of U.S. employees
are eligible to participate in a contributory savings plan.

      The Company  contributes  to each  employee's  account an amount  equal to
approximately  3% of the  employee's  annual  eligible  earnings  and  partially
matches  employee  contributions  to the Plan. The Company also has an unfunded,
nonqualified  defined   contribution  plan  covering  certain  executives,   and
contributions are based on a formula involving eligible earnings.  The Company's
expense related to these plans included in continuing operations was $.7 million
in 1997, $1.3 million in 1998 and $1.1 million in 1999. Expense related to these
plans  included in  discontinued  operations  was $.5 million in 1997 and nil in
1998.

      Certain  actuarial  assumptions  used in  measuring  the  defined  benefit
pension assets, liabilities and expenses are presented below.

<TABLE>
<CAPTION>
                                              Years ended December 31,
                                     -----------------------------------------
                                        1997           1998            1999
                                        ----           ----            ----
                                                   (Percentages)

<S>                                  <C>            <C>             <C>
Discount rate                        6.0 to 8.5     5.5 to 8.5      5.8 to 7.5
Rate of increase in future
 compensation levels                 3.0 to 6.0     2.5 to 6.0      2.5 to 4.5
Long-term rate of return on
 plan assets                         6.0 to 9.0     6.0 to 9.0      6.0 to 9.0

</TABLE>

      During 1998 the Company  curtailed  certain U.S. employee pension benefits
and  recognized  a gain of $1.5  million,  which  is  included  in  discontinued
operations. Plan assets are comprised primarily of investments in U.S. and

                                    F-22

<PAGE>



non-U.S.  corporate equity and debt securities,  short-term investments,  mutual
funds and group annuity contracts.

      SFAS No. 87,  "Employers'  Accounting for Pension Costs"  requires that an
additional pension liability be recognized when the unfunded accumulated pension
benefit  obligation  exceeds the unfunded accrued pension  liability.  Variances
from actuarially assumed rates will change accrued pension liabilities,  pension
expense and funding requirements in future periods.

      The components of the net periodic defined benefit pension cost, excluding
curtailment (gain) loss and discontinued operations, are set forth below.

<TABLE>
<CAPTION>
                                                    Years ended December 31,
                                               --------------------------------
                                                 1997        1998        1999
                                                 ----        ----        ----
                                                        (In thousands)

<S>                                            <C>         <C>         <C>
Net periodic pension cost:
  Service cost benefits ....................   $  4,067    $  3,835    $  3,942
  Interest cost on projected benefit
   obligation ("PBO") ......................     15,335      15,669      16,170
  Expected return on plan assets ...........    (13,271)    (15,172)    (15,567)
  Amortization of prior service cost .......        344         332         267
  Amortization of net transition
   obligation ..............................        255         173         578
  Recognized actuarial losses (gains) ......     (2,653)        385       1,144
                                               --------    --------    --------

                                               $  4,077    $  5,222    $  6,534
                                               ========    ========    ========
</TABLE>

      The funded status of the Company's  defined  benefit  pension plans is set
forth below.
<TABLE>
<CAPTION>
                                                             December 31,
                                                     --------------------------
                                                        1998             1999
                                                     ---------        ---------
                                                            (In thousands)

<S>                                                  <C>              <C>
Change in PBO:
  Beginning of year ..........................       $ 251,372        $ 296,013
  Service cost ...............................           3,835            3,942
  Interest ...................................          15,669           16,170
  Participant contributions ..................           1,228              939
  Actuarial (gain) loss ......................          30,768          (14,303)
  Curtailment gain ...........................          (1,513)            --
  Benefits paid ..............................         (15,748)         (16,345)
  Change in currency exchange rates ..........          10,402          (26,230)
                                                     ---------        ---------

    End of year ..............................         296,013          260,186
                                                     ---------        ---------
</TABLE>


                                    F-23

<PAGE>



<TABLE>
<CAPTION>
                                                             December 31,
                                                       ------------------------
                                                         1998            1999
                                                       ---------      ---------
                                                            (In thousands)

<S>                                                    <C>            <C>
Change in fair value of plan assets:
  Beginning of year ..............................     $ 199,371      $ 221,035
  Actual return on plan assets ...................        20,951         21,444
  Employer contributions .........................        10,788         11,236
  Participant contributions ......................         1,228            939
  Benefits paid ..................................       (15,748)       (16,345)
  Change in currency exchange rates ..............         4,445        (19,367)
                                                       ---------      ---------

    End of year ..................................       221,035        218,942
                                                       ---------      ---------

Funded status at year end:
  Plan assets less than PBO ......................       (74,978)       (41,244)
  Unrecognized actuarial loss ....................        44,945         21,603
  Unrecognized prior service cost ................         3,341          2,137
  Unrecognized net transition obligation .........         1,215            514
                                                       ---------      ---------

                                                       $ (25,477)     $ (16,990)
                                                       =========      =========

Amounts recognized in the balance sheet:
  Prepaid pension cost ...........................     $  23,990      $  23,271
  Accrued pension cost:
    Current ......................................        (8,005)        (9,071)
    Noncurrent ...................................       (44,649)       (32,946)
  Accumulated other comprehensive income .........         3,187          1,756
                                                       ---------      ---------

                                                       $ (25,477)     $ (16,990)
                                                       =========      =========
</TABLE>

      Selected  information  related to the Company's  defined  benefit  pension
plans that have accumulated  benefit obligations in excess of fair value of plan
assets is presented  below.  At December 31, 1999, 75% of the projected  benefit
obligations of such plans relate to non-U.S. plans (1998 - 83%).

<TABLE>
<CAPTION>
                                                              December 31,
                                                       -------------------------
                                                         1998             1999
                                                       --------         --------
                                                              (In thousands)

<S>                                                    <C>              <C>
Projected benefit obligation .................         $231,860         $194,204
Accumulated benefit obligation ...............          200,269          164,262
Fair value of plan assets ....................          148,682          146,435

</TABLE>

Incentive bonus programs

      The Company has incentive bonus programs for certain  employees  providing
for  annual  payments,  which  may be in the form of NL common  stock,  based on
formulas  involving  the  profitability  of Kronos  in  relation  to the  annual
operating plan and, for most of these employees, individual performance.


                                    F-24

<PAGE>



Postretirement benefits other than pensions

      In addition to providing pension benefits,  the Company currently provides
certain health care and life insurance  benefits for eligible retired employees.
Certain  of the  Company's  Canadian  employees  may  become  eligible  for such
postretirement  health care and life insurance benefits if they reach retirement
age while  working for the Company.  In 1989 the Company  began phasing out such
benefits for currently  active U.S.  employees  over a ten-year  period and U.S.
employees  retiring  after  1998  are not  entitled  to any such  benefits.  The
majority of all  retirees  are  required to  contribute a portion of the cost of
their benefits and certain  current and future retirees are eligible for reduced
health care benefits at age 65. The Company's  policy is to fund medical  claims
as they are incurred, net of any contributions by the retirees.

      For measuring the OPEB  liability at December 31, 1999,  the expected rate
of increase in health care costs is 9% in 2000 decreasing to 5.5% in 2007. Other
weighted-average  assumptions  used to measure  the  liability  and  expense are
presented below.
<TABLE>
<CAPTION>
                                                        Years ended December 31,
                                                        ------------------------
                                                          1997     1998     1999
                                                          ----     ----     ----
                                                               (Percentages)

<S>                                                        <C>      <C>      <C>
Discount rate .......................................      7.0      6.5      7.5
Long-term rate for compensation increases ...........      6.0      6.0      6.0
Long-term rate of return on plan assets .............      9.0      9.0      9.0

</TABLE>

      Variances  from  actuarially   assumed  rates  will  change  accrued  OPEB
liabilities,  net  periodic  OPEB  expense  and funding  requirements  in future
periods.  If the health care cost trend rate was  increased  (decreased)  by one
percentage  point for each  year,  postretirement  benefit  expense  would  have
increased  approximately $.1 million (decreased by $.1 million) in 1999, and the
projected  benefit  obligation  at  December  31, 1999 would have  increased  by
approximately $1.6 million (decreased by $1.4 million). During 1998, as a result
of the sale of Rheox,  the Company settled  certain U.S.  employee OPEB benefits
and  recognized a $3.2 million  gain,  all of which is included in  discontinued
operations.

      The components of the Company's net periodic  postretirement benefit cost,
excluding curtailment and settlement gains and discontinued operations,  are set
forth  below.  The  net  periodic   postretirement  benefit  costs  included  in
discontinued  operations  excluding the settlement  gain was $.2 million in 1997
and nil in 1998.


                                    F-25

<PAGE>

<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                                -------------------------------
                                                 1997        1998        1999
                                                -------     -------     -------
                                                        (In thousands)

<S>                                             <C>         <C>         <C>
Net periodic OPEB cost (benefit):
  Service cost benefits ....................    $    39     $    43     $    40
  Interest cost on PBO .....................      2,972       2,393       2,069
  Expected return on plan assets ...........       (584)       (583)       (526)
  Amortization of prior service cost .......     (2,075)     (2,075)     (2,075)
  Recognized actuarial gains ...............       (305)       (811)       (573)
                                                -------     -------     -------

                                                $    47     $(1,033)    $(1,065)
                                                =======     =======     =======
</TABLE>

<TABLE>
<CAPTION>
                                                              December 31,
                                                         ----------------------
                                                           1998          1999
                                                         --------      --------
                                                             (In thousands)
<S>                                                      <C>           <C>
Change in PBO:
  Beginning of year ................................     $ 36,994      $ 33,812
  Service cost .....................................           43            40
  Interest cost ....................................        2,393         2,069
  Actuarial losses .................................        2,117         5,714
  Discontinued operations - settlement gain ........       (2,354)         --
  Benefits paid from:
    Company funds ..................................       (4,179)       (3,316)
    Plan assets ....................................       (1,087)       (1,078)
  Change in currency exchange rates ................         (115)          113
                                                         --------      --------

      End of year ..................................       33,812        37,354
                                                         --------      --------

Change in fair value of plan assets:
  Beginning of year ................................        6,527         6,365
  Actual return on plan assets .....................          450           206
  Employer contributions ...........................          475           475
  Benefits paid ....................................       (1,087)       (1,078)
                                                         --------      --------

      End of year ..................................        6,365         5,968
                                                         --------      --------

Funded status at year end:
  Plan assets less than PBO ........................      (27,447)      (31,386)
  Unrecognized actuarial loss ......................       (7,447)         (575)
  Unrecognized prior service cost ..................      (12,008)       (9,933)
                                                         --------      --------

                                                         $(46,902)     $(41,894)
                                                         ========      ========

Amounts recognized in the balance sheet:
  Current ..........................................     $ (5,243)     $ (4,789)
  Noncurrent .......................................      (41,659)      (37,105)
                                                         --------      --------

                                                         $(46,902)     $(41,894)
                                                         ========      ========

</TABLE>

                                    F-26

<PAGE>



Note 12 - Shareholders' equity:

Common stock
<TABLE>
<CAPTION>

                                                  Shares of common stock
                                             -----------------------------------
                                                        Treasury
                                             Issued       stock      Outstanding
                                             ------     --------     -----------
                                                      (In thousands)

<S>                                           <C>          <C>           <C>
Balance at December 31, 1996 ...........      66,839       15,721        51,118
  Treasury shares reissued .............        --           (149)          149
                                              ------      -------       -------

Balance at December 31, 1997 ...........      66,839       15,572        51,267
  Treasury shares reissued .............        --           (544)          544
                                              ------      -------       -------

Balance at December 31, 1998 ...........      66,839       15,028        51,811
  Treasury shares acquired .............        --            552          (552)
  Treasury shares reissued .............        --            (25)           25
                                              ------      -------       -------

Balance at December 31, 1999 ...........      66,839       15,555        51,284
                                              ======      =======       =======

</TABLE>

      During 1999 the Company's Board of Directors authorized the purchase of up
to 1.5 million shares of NL's common stock over an  unspecified  period of time,
to be held as treasury shares available for general corporate purposes. Pursuant
to this authorization,  the Company purchased 552,000 shares of its common stock
in the open  market at an  aggregate  cost of $7.2  million in 1999 and  575,000
shares at an aggregate cost of $8.3 million in January and February 2000.

      The  Company  reinstated  a regular  quarterly  dividend  in June 1998 and
subsequently  paid three  quarterly  $.03 per share cash  dividends in 1998.  In
February 1999 the Company increased the regular quarterly  dividend to $.035 per
share and  subsequently  paid four  quarterly  $.035 per share cash dividends in
1999.  On February 9, 2000,  the  Company's  Board of  Directors  increased  the
regular  quarterly  dividend  to $.15 per  share  and  declared  a  dividend  to
shareholders of record as of March 16, 2000 to be paid on March 31, 2000.

Common stock options

      The NL  Industries,  Inc. 1998  Long-Term  Incentive  Plan (the "NL Option
Plan") provides for the discretionary  grant of restricted  common stock,  stock
options,  stock appreciation rights ("SARs") and other incentive compensation to
officers and other key employees of the Company.  Although certain stock options
granted  pursuant  to a similar  plan which  preceded  the NL Option  Plan ("the
Predecessor Option Plan") remain outstanding at December 31, 1999, no additional
options may be granted under the Predecessor Option Plan.

      Up to five million shares of NL common stock may be issued pursuant to the
NL Option Plan and, at December 31, 1999,  4,588,000  shares were  available for
future grants. The NL Option Plan provides for the grant of options that qualify
as  incentive  options and for options  which are not so  qualified.  Generally,
stock options and SARs (collectively, "options") are granted at a price equal to
or greater than 100% of the market price at the date of grant,  vest over a five
year  period  and expire  ten years  from the date of grant.  Restricted  stock,
forfeitable  unless  certain  periods of employment  are  completed,  is held in
escrow

                                    F-27

<PAGE>



in the name of the grantee until the restriction  period  expires.  No SARs have
been granted under the NL Option Plan.

      In addition to the NL Option Plan, the Company had a stock option plan for
its nonemployee directors that expired in 1998. At December 31, 1999, there were
options to acquire 6,000 shares of common stock outstanding under this plan, all
of which were fully  vested.  Future  grants to  directors  are  expected  to be
granted from the NL Option Plan.

      Changes in outstanding options granted pursuant to the NL Option Plan, the
Predecessor Option Plan and the nonemployee  director plan are summarized in the
table below.

<TABLE>
<CAPTION>
                                                               Exercise price        Amount
                                                                  per share          payable
                                                           ---------------------      upon
                                                Shares       Low        High         exercise
                                                ------       ---        ----         --------
                                                  (In thousands, except per share amounts)

<S>                                             <C>        <C>          <C>          <C>
Outstanding at December 31, 1996 .......        2,573      $   4.81     $  24.19     $ 30,278

  Granted ..............................          442         11.88        14.88        5,792
  Exercised ............................         (149)         4.81        11.81       (1,025)
  Forfeited ............................          (21)         5.00        22.29         (284)
                                                -----      --------     --------     --------

Outstanding at December 31, 1997 .......        2,845          4.81        24.19       34,761

  Granted ..............................          474         17.97        21.97        9,334
  Exercised ............................         (960)         4.81        17.25       (8,740)
  Forfeited ............................         (240)         5.00        19.97       (4,336)
                                                -----      --------     --------     --------

Outstanding at December 31, 1998 .......        2,119          5.00        24.19       31,019

  Granted ..............................          410         11.28        15.19        5,377
  Exercised ............................          (25)         5.00        11.81         (209)
  Forfeited ............................          (67)         8.69        22.63       (1,244)
                                                -----      --------     --------     --------

Outstanding at December 31, 1999 .......        2,437      $   5.00     $  24.19     $ 34,943
                                                =====      ========     ========     ========
</TABLE>


      At December 31, 1997, 1998 and 1999 options to purchase 1,801,955, 957,861
and 1,255,901  shares,  respectively,  were  exercisable and options to purchase
305,200  shares  become  exercisable  in 2000.  Of the  exercisable  options  at
December 31, 1999,  options to purchase  977,141 shares had exercise prices less
than the  Company's  December 31, 1999 quoted  market price of $15.06 per share.
Outstanding  options at December 31, 1999 expire at various  dates through 2009,
with a weighted-average remaining life of six years.

      The pro  forma  information  required  by SFAS No.  123,  "Accounting  for
Stock-Based  Compensation,"  is based  on an  estimation  of the  fair  value of
options issued subsequent to January 1, 1995. The  weighted-average  fair values
of options  granted during 1997,  1998 and 1999 were $6.35,  $9.78 and $6.94 per
share,  respectively.  The fair values of employee stock options were calculated
using the Black-Scholes stock option valuation model with the following weighted
average assumptions for grants in 1997, 1998 and 1999: stock price volatility

                                    F-28

<PAGE>



of 37%,  51% and 50% in 1997,  1998 and 1999,  respectively;  risk-free  rate of
return of 5% in 1997, 4% in 1998 and 6% in 1999; no dividend  yield in 1997, and
a  dividend  yield of .9% in 1998 and 1.2% in 1999;  and an  expected  term of 9
years in 1997,  8 years in 1998 and 9 years in 1999.  For  purposes of pro forma
disclosures,  the  estimated  fair value of the options is  amortized to expense
over the options' vesting period.

      The  Company's pro forma net income (loss) and basic net income (loss) per
common share were as follows.  The pro forma impact on earnings per common share
for 1997,  1998 and 1999 is not  necessarily  indicative  of future  effects  on
earnings per share.
<TABLE>
<CAPTION>

                                                Years ended December 31,
                                       -----------------------------------------
                                              1997         1998          1999
                                              ----         ----          ----
                                        (In thousands except per share amounts)

<S>                                      <C>           <C>           <C>
Net income (loss)- as reported .......   $    (9,473)  $   366,678   $   159,771
Net income (loss)- pro forma .........   $   (11,057)  $   363,843   $   156,868
Net income (loss) per basic common
 share - as reported .................   $      (.19)  $      7.13   $      3.09
Net income (loss) per basic common
 share - pro forma ...................   $      (.22)  $      7.07   $      3.03
</TABLE>

Preferred stock

      The  Company  is  authorized  to issue a total of five  million  shares of
preferred  stock.  The rights of preferred  stock as to  dividends,  redemption,
liquidation and conversion are determined upon issuance.

Note 13 - Income taxes:

      The  components of (i) income  (loss) from  continuing  operations  before
income taxes and minority interest ("pretax income (loss)"), (ii) the difference
between the provision for income taxes  attributable to pretax income (loss) and
the amounts that would be expected using the U.S.  federal  statutory income tax
rate of 35%, (iii) the provision for income taxes and (iv) the comprehensive tax
provision are presented below.
<TABLE>
<CAPTION>
                                                 Years ended December 31,
                                        ---------------------------------------
                                           1997            1998           1999
                                        ---------        --------       -------
                                                    (In thousands)

<S>                                      <C>              <C>            <C>
Pretax income (loss):
  U.S ............................       $  (9,308)       $ 57,638       $23,642
  Non-U.S ........................         (18,381)         52,052        74,850
                                         ---------        --------       -------

                                         $ (27,689)       $109,690       $98,492
                                         =========        ========       =======
</TABLE>



                                    F-29

<PAGE>


<TABLE>
<CAPTION>
                                                    Years ended December 31,
                                               --------------------------------
                                                 1997        1998        1999
                                               --------    --------    --------
                                                    (In thousands)
<S>                                            <C>         <C>         <C>
Expected tax benefit (expense) .............   $  9,692    $(38,391)   $(34,472)
Non-U.S. tax rates .........................        784        (339)        541
German solidarity and trade income
 taxes .....................................     (3,597)     (2,168)     (6,660)
Resolution of German income tax audits .....       --          --        36,490
Change in valuation allowance:
  Corporate restructuring in Germany
   and other ...............................       --          --        77,580
  Change in German income tax law ..........       --          --       (24,070)
  Recognition of certain deductible tax
   attributes which previously did not
   meet the "more-likely-than-not"
   recognition criteria ....................       --        19,143      15,807
  Increase in certain deductible tax
   attributes which previously did not
   meet the "more-likely-than-not"
   recognition criteria ....................     (5,107)       --          --
Incremental tax on income of companies
 not included in the NL Tax Group ..........     (3,886)     (4,277)     (2,747)
Refund of prior-year German dividend
 withholding taxes .........................       --         8,219        --
U.S. state income taxes ....................       (231)       (307)        680
Other, net .................................        101      (1,668)      1,452
                                               --------    --------    --------

    Income tax benefit (expense) ...........   $ (2,244)   $(19,788)   $ 64,601
                                               ========    ========    ========

Provision for income taxes:
  Current income tax benefit (expense):
    U.S. federal ...........................   $  6,881    $   (850)   $   (193)
    U.S. state .............................       (681)       (307)      2,489
    Non-U.S ................................    (14,071)    (13,643)    (24,467)
                                               --------    --------    --------

                                                 (7,871)    (14,800)    (22,171)
                                               --------    --------    --------
  Deferred income tax benefit (expense):
    U.S. federal ...........................     (1,224)     (2,112)     47,426
    U.S. state .............................        450        --        (1,809)
    Non-U.S ................................      6,401      (2,876)     41,155
                                               --------    --------    --------

                                                  5,627      (4,988)     86,772
                                               --------    --------    --------

                                               $ (2,244)   $(19,788)   $ 64,601
                                               ========    ========    ========

Comprehensive benefit (provision) for
 income taxes allocable to:
  Pretax income (loss) .....................   $ (2,244)   $(19,788)   $ 64,601
  Discontinued operations ..................    (12,475)    (87,000)       --
  Extraordinary item .......................       --         5,698        --
  Additional paid-in capital ...............       --         3,796          16
  Other comprehensive income:
    Marketable securities ..................     (1,626)       (108)        883
    Currency translation ...................       (410)       --          --
                                               --------    --------    --------

                                               $(16,755)   $(97,402)   $ 65,500
                                               ========    ========    ========
</TABLE>
                                    F-30

<PAGE>

      The components of the net deferred tax liability are summarized below:

<TABLE>
<CAPTION>
                                                   December 31,
                               --------------------------------------------------
                                         1998                       1999
                                         ----                       ----
                                     Deferred tax               Deferred tax
                               ------------------------  ------------------------
                                 Assets     Liabilities    Assets     Liabilities
                               ---------    -----------  ---------    -----------
                                                 (In thousands)
<S>                            <C>          <C>          <C>          <C>
Tax effect of temporary
 differences relating to:
  Inventories ..............   $   3,359    $  (3,858)   $   4,025    $  (2,086)
  Property and equipment ...        --       (110,189)      96,548      (53,313)
  Accrued postretirement
   benefits cost ...........      16,434         --         14,575         --
  Accrued (prepaid)
   pension cost ............       5,341      (18,921)       6,288      (24,830)
  Accrued environmental
   costs ...................      42,666         --         37,439         --
  Noncompete agreement .....       5,717         --          4,317         --
  Other accrued
   liabilities and
   deductible
   differences .............      17,094         --         16,878         --
  Other taxable
   differences .............        --       (135,487)        --        (87,041)
Tax on unremitted
 earnings of
 non-U.S. subsidiaries .....        --        (21,351)        --        (20,727)
Tax loss and tax credit
 carryforwards .............     138,211         --        144,985         --
Valuation allowance ........    (134,477)        --       (233,595)        --
                               ---------    ---------    ---------    ---------

  Gross deferred tax
   assets (liabilities) ....      94,345     (289,806)      91,460     (187,997)

Reclassification,
 principally netting by
 tax jurisdiction ..........     (92,390)      92,390      (79,445)      79,445
                               ---------    ---------    ---------    ---------

  Net total deferred tax
   assets (liabilities) ....       1,955     (197,416)      12,015     (108,552)
  Net current deferred
   tax assets
   (liabilities) ...........       1,955       (1,236)      11,974         (326)
                               ---------    ---------    ---------    ---------

  Net noncurrent deferred
   tax assets
   (liabilities) ...........   $    --      $(196,180)   $      41    $(108,226)
                               =========    =========    =========    =========
</TABLE>



                                    F-31

<PAGE>



      Changes in the  Company's  deferred  income tax  valuation  allowance  are
summarized  below.  The deductible  temporary  differences in 1998 include items
that have been reported as discontinued operations.
<TABLE>
<CAPTION>
                                                 Years ended December 31,
                                            -----------------------------------
                                              1997         1998         1999
                                            ---------    ---------    ---------
                                                    (In thousands)

<S>                                         <C>          <C>          <C>
Balance at the beginning of year ........   $ 207,117    $ 188,585    $ 134,477

  Recognition of certain deductible tax
   attributes which previously did not
   meet the "more-likely-than-not"
   recognition criteria .................     (11,106)     (64,274)     (70,946)
  Increase in certain deductible
   temporary differences which the
   Company believes do not meet the
   "more-likely-than-not" recognition
   criteria .............................      16,213        6,964        1,629
  Offset to the change in gross deferred
   income tax assets due principally to
   redeterminations of certain tax
   attributes and implementation of
   certain tax planning
   strategies ...........................     (11,300)      (3,734)     183,150
  Foreign currency translation ..........     (12,339)       6,936      (14,715)
                                            ---------    ---------    ---------

Balance at the end of year ..............   $ 188,585    $ 134,477    $ 233,595
                                            =========    =========    =========
</TABLE>

      Certain  of the  Company's  tax  returns  in  various  U.S.  and  non-U.S.
jurisdictions  are being  examined  and tax  authorities  have  proposed  or may
propose tax deficiencies,  including  non-income tax related items and interest.
Certain  significant  German tax  contingencies  aggregating an estimated DM 188
million ($100 million when resolved) through 1998 were resolved in the Company's
favor in 1999.

      The Company  recognized a $90 million  noncash  income tax benefit in 1999
related to (i) a favorable  resolution of the Company's  previously reported tax
contingency  in Germany ($36  million) and (ii) a net reduction in the Company's
deferred  income tax  valuation  allowance  due to a change in  estimate  of the
Company's   ability  to  utilize   certain  income  tax  attributes   under  the
"more-likely-than-not" recognition criteria ($54 million).

      With respect to the favorable  resolution  of the German tax  contingency,
the German  government has conceded  substantially  all of its income tax claims
against the Company and has released a DM 94 million ($50  million)  lien on the
Company's Nordenham, Germany TiO2 plant that secured the government's claim.

      The $54  million  net  reduction  in the  Company's  deferred  income  tax
valuation  allowance is comprised of (i) a $78 million decrease in the valuation
allowance to recognize the benefit of certain  deductible  income tax attributes
which the Company now believes  meets the  recognition  criteria as a result of,
among  other  things,   a  corporate   restructuring  of  the  Company's  German
subsidiaries offset by (ii) a $24 million increase in the valuation allowance to

                                    F-32

<PAGE>



reduce the previously  recognized benefit of certain other deductible income tax
attributes  which the Company now believes do not meet the recognition  criteria
due to a change in German tax law.

      During 1999 the German  government  enacted certain income tax law changes
that were retroactively effective as of January 1, 1999. Based on these changes,
the Company's  ongoing  current  (cash) income tax rate in Germany  increased in
1999.

      During 1997 the Company  received a tax assessment  from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($6 million at December
31,  1999)  relating  to 1994.  The Company  appealed  this  assessment  and, in
February  2000, the  Fredrikstad  City Court ruled in favor of the Norwegian tax
authorities  on the  primary  issue,  but  asserted  that such tax  authorities'
assessment  was  overstated by NOK 34 million ($4 million at December 31, 1999).
The tax authorities' response to the Court's assertion is expected by the end of
March 2000.  The Company is  considering  its appeals  options.  During 1998 the
Company was  informed by the  Norwegian  tax  authorities  that  additional  tax
deficiencies  of NOK 39 million ($5 million at December 31, 1999) will likely be
proposed for the year 1996 on an issue similar to the aforementioned  1994 case.
The outcome of the 1996 case is dependent  on the  eventual  outcome of the 1994
case. Although the Company believes that it will ultimately prevail, the Company
has granted a lien for the 1994 tax assessment on its  Fredrikstad,  Norway TiO2
plant in favor of the  Norwegian tax  authorities  and will be required to grant
security on the 1996 assessment when received.

      No assurance can be given that the Company's tax matters will be favorably
resolved due to the inherent  uncertainties  involved in court proceedings.  The
Company believes that it has provided adequate accruals for additional taxes and
related interest expense which may ultimately  result from all such examinations
and believes that the ultimate  disposition of such examinations should not have
a material  adverse  effect on the Company's  consolidated  financial  position,
results of operations or liquidity.

      In 1997 the  Company  utilized  foreign  tax credit  carryforwards  of $17
million and U.S. net operating loss  carryforwards of $20 million to reduce U.S.
federal  income  tax  expense.  In 1998 the  Company  utilized  $13  million  of
alternative  minimum  tax  credit   carryforwards  (the  benefit  of  which  was
recognized  in  discontinued  operations)  to reduce  U.S.  federal  income  tax
expense.  Unutilized  foreign tax credit carryovers of $6 million and $2 million
expired in 1998 and 1999, respectively.  The Company also has approximately $370
million of income tax loss carryforwards in Germany with no expiration date.


                                    F-33

<PAGE>



Note 14 - Other income, net:
<TABLE>
<CAPTION>
                                                  Years ended December 31,
                                              ---------------------------------
                                                1997       1998       1999
                                              --------    --------     --------
                                                       (In thousands)

<S>                                           <C>         <C>          <C>
Securities earnings:
  Interest and dividends .................    $  2,736    $ 14,921     $  6,597
  Securities transactions ................       2,657        --           --
                                              --------    --------     --------
                                                 5,393      14,921        6,597
Currency transaction gains, net ..........       5,919       4,157       10,161
Noncompete agreement income ..............        --         3,667        4,000
Trade interest income ....................       2,983       2,115        2,365
Disposition of property and equipment ....       1,735        (768)        (429)
Other, net ...............................       3,337       1,361          952
                                              --------    --------     --------

                                              $ 19,367    $ 25,453     $ 23,646
                                              ========    ========     ========
</TABLE>

      The  Company  received a $20  million  fee as part of the sale of Rheox in
January 1998 in payment for entering into a five-year covenant not to compete in
the rheological  products business.  The Company is amortizing the fee to income
using the  straight-line  method over the five-year  noncompete period beginning
January 30, 1998.

Note 15 - Other items:

      Advertising  expense  included  in  continuing  operations  is expensed as
incurred and was $1 million in each of 1997, 1998 and 1999.

      Research,  development and certain sales technical  support costs included
in continuing  operations is expensed as incurred and approximated $7 million in
each of 1997, 1998 and 1999.

      Interest  capitalized related to continuing  operations in connection with
long-term capital projects was $2 million in 1997, $1 million in 1998 and nil in
1999.

Note 16 - Related party transactions:

      The  Company  may  be  deemed  to be  controlled  by  Harold  C.  Simmons.
Corporations  that may be  deemed to be  controlled  by or  affiliated  with Mr.
Simmons sometimes engage in (a) intercorporate  transactions such as guarantees,
management and expense  sharing  arrangements,  shared fee  arrangements,  joint
ventures,  partnerships,  loans, options, advances of funds on open account, and
sales,  leases and  exchanges  of assets,  including  securities  issued by both
related  and  unrelated  parties  and  (b)  common  investment  and  acquisition
strategies,   business   combinations,    reorganizations,    recapitalizations,
securities  repurchases,  and  purchases and sales (and other  acquisitions  and
dispositions)  of  subsidiaries,   divisions  or  other  business  units,  which
transactions  have involved both related and unrelated parties and have included
transactions  which  resulted  in the  acquisition  by one  related  party  of a
publicly  held  minority  equity  interest in another  related  party.  While no
transactions of the type

                                    F-34

<PAGE>



described  above are planned or proposed  with respect to the Company other than
as set forth in this Annual  Report on Form 10-K,  the Company from time to time
considers, reviews and evaluates and understands that Contran, Valhi and related
entities consider,  review and evaluate,  such transactions.  Depending upon the
business,  tax and other objectives then relevant,  and  restrictions  under the
indentures  and other  agreements,  it is possible  that the Company  might be a
party to one or more such transactions in the future.

      It is the policy of the  Company to engage in  transactions  with  related
parties  on terms,  in the  opinion of the  Company,  no less  favorable  to the
Company than could be obtained from unrelated parties.

      The  Company  is a party  to an  intercorporate  services  agreement  with
Contran (the "Contran ISA") whereby Contran provides certain management services
to the Company on a fee basis.  Management  services fee expense  related to the
Contran ISA was $.5 million in 1997 and $1.0 million in each of 1998 and 1999.

      The Company is a party to an intercorporate  services agreement with Valhi
(the "Valhi ISA")  whereby  Valhi and the Company  provide  certain  management,
financial  and  administrative  services  to  each  other  on a fee  basis.  Net
management  services  fee  expense  (income)  related to the Valhi ISA was $(.1)
million in 1997, nil in 1998 and $.1 million in 1999.

      The Company is party to an intercorporate  services agreement with Tremont
(the  "Tremont  ISA").  Under the terms of the  contract,  the Company  provides
certain management and financial services to Tremont on a fee basis.  Management
services  fee income  related to the Tremont ISA was $.2 million in 1997 and $.1
million in each of 1998 and 1999.

      The Company is party to an intercorporate  services  agreement (the "Timet
ISA") with  Titanium  Metals  Corporation  ("Timet"),  approximately  47% of the
outstanding  common  stock of which is  currently  held by Tremont  and  another
entity  related  to Harold C.  Simmons.  Under  the terms of the  contract,  the
Company  provides  certain  management and financial  services to Timet on a fee
basis.  Management  services fee income related to the Timet ISA was $.3 million
in each of 1997, 1998 and 1999.

      The Company is party to an intercorporate  services  agreement (the "CompX
ISA") with CompX International, Inc. ("CompX"). Under the terms of the contract,
the Company provides certain management and administrative  services to CompX on
a fee basis.  Management  services  fee income  related to the CompX ISA was $.1
million in each of 1998 and 1999.

      Purchases of TiO2 from LPC were $78.1  million in 1997,  $89.0  million in
1998 and $85.3 million in 1999.


                                    F-35

<PAGE>



      The Company and NL  Insurance,  Ltd. of Vermont  ("NLIV"),  a wholly owned
subsidiary  of  Tremont,  are parties to an  Insurance  Sharing  Agreement  with
respect to certain loss payments and reserves established by NLIV that (i) arise
out of claims against other  entities for which the Company is  responsible  and
(ii) are subject to payment by NLIV under certain reinsurance  contracts.  Also,
NLIV will credit the Company  with  respect to certain  underwriting  profits or
credit recoveries that NLIV receives from independent  reinsurers that relate to
retained  liabilities.  At December  31,  1999,  the Company has $9.7 million of
restricted cash that  collateralizes  certain of NLIV's  outstanding  letters of
credit.

      EWI RE, Inc.  ("EWI")  arranges for and brokers  certain of the  Company's
insurance policies and those of the Company's  50%-owned joint venture.  Parties
related  to  Contran  own 90% of the  outstanding  common  stock  of EWI,  and a
son-in-law of Harold C. Simmons  manages the operations of EWI.  Consistent with
insurance  industry  practices,  EWI  receives a commission  from the  insurance
underwriters  for the policies that it arranges or brokers.  The Company and its
joint venture paid an aggregate of  approximately  $3.0 million and $3.7 million
for such  policies  in 1998 and 1999,  respectively,  which  amount  principally
included  payments for  reinsurance  premiums  paid to third  parties,  but also
included commissions paid to EWI.

      Amounts  receivable  from and payable to affiliates  are summarized in the
following table.
<TABLE>
<CAPTION>
                                                              December 31,
                                                        ------------------------
                                                          1998            1999
                                                        -------          -------
                                                              (In thousands)

<S>                                                     <C>              <C>
Receivable from affiliates:
  Timet ......................................          $   428          $   310
  CompX ......................................              142              176
  Other ......................................              122              261
                                                        -------          -------

                                                        $   692          $   747
                                                        =======          =======

Payable to affiliates:
  Tremont Corporation ........................          $ 3,053          $ 2,859
  LPC ........................................            8,264            8,381
                                                        -------          -------

                                                        $11,317          $11,240
                                                        =======          =======
</TABLE>


      Amounts  payable to LPC are  generally  for the purchase of TiO2 (see Note
6), and amounts payable to Tremont principally relate to the Company's Insurance
Sharing Agreement described above.


                                    F-36

<PAGE>



Note 17 - Commitments and contingencies:

Leases

      The Company leases,  pursuant to operating leases,  various  manufacturing
and  office  space and  transportation  equipment.  Most of the  leases  contain
purchase  and/or  various  term  renewal  options at fair market and fair rental
values,  respectively.  In most cases  management  expects  that,  in the normal
course of business, leases will be renewed or replaced by other leases.

      Kronos'  principal German operating  subsidiary  leases the land under its
Leverkusen  TiO2 production  facility  pursuant to a lease expiring in 2050. The
Leverkusen  facility,  with  approximately  one-third  of Kronos'  current  TiO2
production  capacity,  is located  within the lessor's  extensive  manufacturing
complex,  and Kronos is the only unrelated  party so situated.  Under a separate
supplies and services  agreement  expiring in 2011, the lessor provides some raw
materials, auxiliary and operating materials and utilities services necessary to
operate the  Leverkusen  facility.  Both the lease and the supplies and services
agreements  restrict the Company's  ability to transfer  ownership or use of the
Leverkusen facility.

      Net rent expense included in continuing  operations  aggregated $7 million
in each of 1997 and 1998 and $9 million in 1999.  At December 31, 1999,  minimum
rental commitments under the terms of noncancellable operating leases, excluding
discontinued operations, were as follows:
<TABLE>
<CAPTION>

Years ending December 31,                               Real Estate   Equipment
-------------------------                               -----------   ---------
                                                             (In thousands)

  <S>                                                       <C>         <C>
  2000                                                      $ 2,191     $1,503
  2001                                                        1,988        815
  2002                                                        1,791        433
  2003                                                        1,603        193
  2004                                                        1,533        122
  2005 and thereafter                                        20,971          1
                                                            -------     ------

                                                            $30,077     $3,067
                                                            =======     ======
</TABLE>

Capital expenditures

      At December 31, 1999, the estimated cost to complete  capital  projects in
process  approximated  $11 million,  including $2 million to complete a landfill
expansion for the Company's Belgian facility.

Purchase commitments

      The Company has long-term  supply contracts that provide for the Company's
chloride feedstock requirements through 2003. The agreements require the Company
to purchase certain minimum  quantities of feedstock with average minimum annual
purchase commitments aggregating approximately $114 million.


                                    F-37

<PAGE>



Legal proceedings

      Lead   pigment   litigation.   Since  1987  the   Company,   other  former
manufacturers  of lead pigments for use in paint and lead-based  paint,  and the
Lead  Industries  Association  have been named as  defendants  in various  legal
proceedings  seeking damages for personal  injury and property damage  allegedly
caused by the use of lead-based paints. Certain of these actions have been filed
by or on behalf of states,  large United States  cities or their public  housing
authorities and certain others have been asserted as class actions.  These legal
proceedings  seek  recovery  under a variety of  theories,  including  negligent
product  design,  failure  to  warn,  strict  liability,   breach  of  warranty,
conspiracy/concert  of action,  enterprise  liability,  market share  liability,
intentional tort, and fraud and misrepresentation.

      The plaintiffs in these actions generally seek to impose on the defendants
responsibility for lead paint abatement and asserted health concerns  associated
with the use of  lead-based  paints,  including  damages  for  personal  injury,
contribution  and/or  indemnification  for medical expenses,  medical monitoring
expenses and costs for educational programs. Most of these legal proceedings are
in various pre-trial stages; some are on appeal.

      The Company  believes  that these  actions are without  merit,  intends to
continue to deny all  allegations  of wrongdoing and liability and to defend all
actions vigorously. The Company has not accrued any amounts for the pending lead
pigment litigation.  Considering the Company's previous  involvement in the lead
and  lead  pigment  businesses,  there  can  be  no  assurance  that  additional
litigation similar to that currently pending will not be filed.

      Environmental  matters and litigation.  Some of the Company's  current and
former facilities, including several divested secondary lead smelters and former
mining  locations,   are  the  subject  of  civil   litigation,   administrative
proceedings  or  investigations  arising under  federal and state  environmental
laws. Additionally,  in connection with past disposal practices, the Company has
been named a potential  responsible  party ("PRP") pursuant to the Comprehensive
Environmental  Response,  Compensation  and  Liability  Act,  as  amended by the
Superfund  Amendments and  Reauthorization  Act ("CERCLA") in  approximately  75
governmental  and private  actions  associated  with  hazardous  waste sites and
former  mining  locations,  certain  of  which  are  on the  U.S.  Environmental
Protection  Agency's  Superfund  National  Priorities  List.  These actions seek
cleanup costs, damages for personal injury or property damage and/or damages for
injury to natural  resources.  While the Company  may be jointly  and  severally
liable for such costs,  in most cases it is only one of a number of PRPs who are
also jointly and  severally  liable.  In  addition,  the Company is a party to a
number of  lawsuits  filed in  various  jurisdictions  alleging  CERCLA or other
environmental claims.

      At December  31,  1999,  the Company  had accrued  $112  million for those
environmental  matters  which are  reasonably  estimable.  It is not possible to
estimate  the range of costs for  certain  sites.  The upper end of the range of
reasonably  possible  costs to the  Company  for sites  which it is  possible to
estimate costs is approximately $150 million. The Company's estimates of such

                                    F-38

<PAGE>



liabilities  have not been discounted to present value,  and the Company has not
recognized any potential insurance recoveries.

      The  imposition  of  more  stringent   standards  or  requirements   under
environmental  laws or regulations,  new developments or changes respecting site
cleanup costs or allocation  of such costs among PRPs, or a  determination  that
the Company is potentially  responsible for the release of hazardous  substances
at other  sites  could  result in  expenditures  in excess of amounts  currently
estimated by the Company to be required for such  matters.  No assurance  can be
given that actual costs will not exceed accrued  amounts or the upper end of the
range for sites for which estimates have been made and no assurance can be given
that costs will not be  incurred  with  respect to sites as to which no estimate
presently  can be made.  Further,  there  can be no  assurance  that  additional
environmental matters will not arise in the future.

      Certain  of the  Company's  businesses  are and have been  engaged  in the
handling,  manufacture  or use of substances or compounds that may be considered
toxic or hazardous within the meaning of applicable  environmental laws. As with
other  companies  engaged  in  similar  businesses,  certain  past  and  current
operations and products of the Company have the potential to cause environmental
or other damage.  The Company has implemented and continues to implement various
policies  and programs in an effort to minimize  these risks.  The policy of the
Company  is to  maintain  compliance  with  applicable  environmental  laws  and
regulations at all of its facilities and to strive to improve its  environmental
performance.  It  is  possible  that  future  developments,   such  as  stricter
requirements of environmental laws and enforcement  policies  thereunder,  could
adversely   affect   the   Company's   production,   handling,   use,   storage,
transportation,  sale or disposal of such  substances  as well as the  Company's
consolidated financial position, results of operations or liquidity.

      Other   litigation.   The  Company  is  also  involved  in  various  other
environmental,  contractual,  product  liability  and other  claims and disputes
incidental to its present and former businesses.

      The Company currently  believes the disposition of all claims and disputes
individually or in the aggregate,  should not have a material  adverse effect on
the  Company's  consolidated  financial  condition,  results  of  operations  or
liquidity.

Concentrations of credit risk

      Sales of TiO2  accounted  for more than 90% of net sales  from  continuing
operations  during each of the past three years. The remaining sales result from
the mining and sale of ilmenite ore (a raw material used in the sulfate  pigment
production process),  and the manufacture and sale of iron-based water treatment
chemicals (derived from co-products of the TiO2 production  processes).  TiO2 is
generally  sold to the paint,  plastics and paper  industries.  Such markets are
generally  considered   "quality-of-life"  markets  whose  demand  for  TiO2  is
influenced  by  the  relative  economic  well-being  of the  various  geographic
regions.  TiO2 is sold to over  4,000  customers,  none of  which  represents  a
significant portion of net sales.  Approximately  one-half of the Company's TiO2
sales by

                                    F-39

<PAGE>



volume were to Europe in each of the past three years and  approximately  36% in
1997  and 37% in each of 1998  and  1999 of  sales  were  attributable  to North
America.

      Consolidated  cash,  cash  equivalents  and  restricted  cash  equivalents
includes  $136  million and $78 million  invested  in U.S.  Treasury  securities
purchased under  short-term  agreements to resell at December 31, 1998 and 1999,
respectively,  of which $126  million  and $58  million,  respectively,  of such
securities are held in trust for the Company by a single U.S. bank.

Note 18 - Financial instruments:

      Summarized  below is the  estimated  fair value and related  net  carrying
value of the Company's financial instruments.
<TABLE>
<CAPTION>
                                                    December 31,       December 31,
                                                       1998               1999
                                                 -----------------  ----------------
                                                 Carrying    Fair   Carrying   Fair
                                                  Amount     Value   Amount    Value
                                                 --------    -----  --------   -----
                                                              (In millions)

<S>                                             <C>       <C>       <C>       <C>
Cash, cash equivalents and current
 restricted cash equivalents ...............    $  163.1  $  163.1  $  151.8  $  151.8
Marketable securities - classified as
 available-for-sale ........................        17.6      17.6      15.1      15.1

Notes payable and long-term debt:
  Fixed rate with market quotes -
   Senior Secured Notes ....................    $  244.0     253.1  $  244.0  $  253.2
  Variable rate debt .......................       150.0     150.0      57.6      57.6

Common shareholders' equity ................    $  152.3  $  735.1  $  271.1  $  774.1
</TABLE>

      Fair value of the Company's marketable securities and Notes are based upon
quoted market prices and the fair value of the  Company's  common  shareholder's
equity is based upon quoted  market  prices for NL's common  stock at the end of
the year. The Company held no derivative  financial  instruments at December 31,
1998 or 1999.


                                    F-40

<PAGE>



Note 19 - Quarterly financial data (unaudited):
<TABLE>
<CAPTION>

                                                    Quarter ended
                                       -----------------------------------------
                                       March 31    June 30   Sept. 30   Dec. 31
                                       --------    -------   --------   -------
                                       (In thousands, except per share amounts)
<S>                                    <C>        <C>        <C>        <C>
Year ended December 31, 1998:

  Net sales ........................   $222,629   $241,645   $221,520   $208,930
  Cost of sales ....................    156,915    167,329    151,782    142,421
  Operating income .................     39,399     46,725     45,024     40,033
  Income from continuing
   operations ......................     16,300     23,414     31,359     18,789
  Net income .......................    301,015     23,729     28,959     12,975

  Earnings per share:
    Basic:
      Income from continuing
       operations ..................   $    .32   $    .46   $    .61   $    .36
                                       ========   ========   ========   ========
      Net income ...................   $   5.87   $    .46   $    .56   $    .25
                                       ========   ========   ========   ========
    Diluted:
      Income from continuing
       operations ..................   $    .31   $    .45   $    .60   $    .36
                                       ========   ========   ========   ========
      Net income ...................   $   5.80   $    .46   $    .55   $    .25
                                       ========   ========   ========   ========

  Weighted average common
   shares and potential
   common shares outstanding:
    Basic ..........................     51,282     51,341     51,444     51,805
    Diluted ........................     51,852     52,030     52,194     52,014

Year ended December 31, 1999:

  Net sales ........................   $201,569   $232,658   $242,621   $231,629
  Cost of sales ....................    147,040    167,779    181,745    165,751
  Operating income .................     30,961     44,136     34,759     35,812
  Net income .......................     13,940    111,823     17,146     16,862

  Earnings per share - net
   income:
    Basic ..........................   $    .27   $   2.16   $    .33   $    .33
                                       ========   ========   ========   ========
    Diluted ........................   $    .27   $   2.16   $    .33   $    .33
                                       ========   ========   ========   ========

  Weighted average common
   shares and potential
   common shares outstanding:
    Basic ..........................     51,819     51,826     51,835     51,614
    Diluted ........................     51,870     51,883     51,943     51,758
</TABLE>

Note 20 - Discontinued operations:

      The Company sold the net assets of its Rheox specialty  chemical  business
to Elementis  plc for $465  million  cash (before fees and  expenses) in January
1998, including $20 million attributable to a five-year agreement by the Company
not to compete in the rheological  products business.  The Company recognized an
after-tax  gain of  approximately  $286  million  on the  sale of this  business
segment.  As a result of the sale, the Company has presented the results of this
business segment as discontinued operations for all periods presented.

                                    F-41

<PAGE>



      Condensed  income  statements  related to discontinued  operations for the
year  ended  December  31,  1997 and the month  ended  January  31,  1998 are as
follows. Interest expense has been allocated to discontinued operations based on
the amount of debt specifically attributed to Rheox's operations.
<TABLE>
<CAPTION>
                                                      Year ended   Month ended
                                                     December 31,  January 31,
                                                        1997           1998
                                                     ------------  -----------
                                                           (In thousands)

<S>                                                  <C>              <C>
Net sales ....................................       $ 147,199        $  12,630
Other expense, net ...........................            (200)             (50)
                                                     ---------        ---------

                                                       146,999           12,580
                                                     ---------        ---------

Cost of sales ................................          73,583            6,969
Selling, general and administrative ..........          29,231            2,737
Interest expense .............................          11,207              771
                                                     ---------        ---------

                                                       114,021           10,477
                                                     ---------        ---------

    Income before income taxes and
     minority interest .......................          32,978            2,103

Income tax expense ...........................          12,475              778
Minority interest ............................             101             --
                                                     ---------        ---------

                                                        20,402            1,325

Gain from sale of Rheox, net of tax
 expense of $86,222 ..........................            --            286,071
                                                     ---------        ---------

                                                     $  20,402        $ 287,396
                                                     =========        =========
</TABLE>

      Condensed  cash  flow  data  for  Rheox  (excluding   dividends  paid  to,
contributions received from and intercompany loans with NL) is presented below.
<TABLE>
<CAPTION>
                                                      Year ended     Month ended
                                                     December 31,    January 31,
                                                        1997             1998
                                                     ------------    -----------
                                                            (In thousands)

<S>                                                   <C>             <C>
Cash flows from operating activities ...........      $  31,506       $ (30,587)
                                                      ---------       ---------

Cash flows from investing activities:
  Capital expenditures .........................         (2,330)            (26)
  Other, net ...................................             16            --
                                                      ---------       ---------

                                                         (2,314)            (26)
                                                      ---------       ---------

Cash flows from financing activities -
 indebtedness, net .............................        100,940        (117,500)
                                                      ---------       ---------

    Net change from operating,
     investing and financing
     activities ................................      $ 130,132       $(148,113)
                                                      =========       =========

</TABLE>

                                    F-42

<PAGE>



                       REPORT OF INDEPENDENT ACCOUNTANTS
                       ON FINANCIAL STATEMENT SCHEDULES


To the Board of Directors of NL Industries, Inc.:

      Our audits of the  consolidated  financial  statements  referred to in our
report dated  February 29, 2000  appearing on page F-2 of the 1999 Annual Report
on Form 10-K of NL  Industries,  Inc.  also  included an audit of the  financial
statement  schedules  listed in Item  14(a) and (d) of this  Form  10-K.  In our
opinion,  these financial  statement  schedules  present fairly, in all material
respects,  the information  set forth therein when read in conjunction  with the
related consolidated financial statements.

      As  discussed  in Note 2 to the  consolidated  financial  statements,  the
Company changed its method of accounting for environmental  remediation costs in
1997 in accordance with Statement of Position No. 96-1.



                                    PricewaterhouseCoopers LLP

Houston, Texas
February 29, 2000


                                    S-1

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES
           SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                           Condensed Balance Sheets
                          December 31, 1998 and 1999
                                (In thousands)
<TABLE>
<CAPTION>
                                                             1998         1999
                                                           --------     --------
                       ASSETS

<S>                                                        <C>          <C>
Current assets:
  Cash and cash equivalents ..........................     $ 13,853     $ 13,415
  Restricted cash equivalents ........................        5,500       17,565
  Accounts and notes receivable ......................           29           61
  Receivable from subsidiaries .......................        8,482       11,668
  Refundable income taxes ............................        5,713          317
  Prepaid expenses ...................................          162          227
  Deferred income taxes ..............................          115        5,774
                                                           --------     --------

      Total current assets ...........................       33,854       49,027
                                                           --------     --------

Other assets:
  Marketable securities ..............................        4,087        2,600
  Notes receivable from subsidiary ...................      419,164      244,000
  Investment in subsidiaries .........................      312,764      558,898
  Deferred income taxes ..............................         --          3,992
  Other ..............................................        3,223        2,620
                                                           --------     --------

      Total other assets .............................      739,238      812,110
                                                           --------     --------

Property and equipment, net ..........................        3,011        5,174
                                                           --------     --------

                                                           $776,103     $866,311
                                                           ========     ========
        LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued liabilities ...........     $ 28,873     $ 30,397
  Payable to affiliates ..............................        3,777        3,444
  Income taxes .......................................         --          1,470
                                                           --------     --------

      Total current liabilities ......................       32,650       35,311
                                                           --------     --------

Noncurrent liabilities:
  Long-term debt .....................................      244,000      244,000
  Notes payable to affiliates ........................      265,838      263,839
  Deferred income taxes ..............................        8,940         --
  Accrued pension cost ...............................       12,351        8,410
  Accrued postretirement benefits cost ...............       25,655       21,625
  Other ..............................................       34,335       22,039
                                                           --------     --------

      Total noncurrent liabilities ...................      591,119      559,913
                                                           --------     --------

Shareholders' equity .................................      152,334      271,087
                                                           --------     --------

                                                           $776,103     $866,311
                                                           ========     ========
</TABLE>

Contingencies (Note 4)

                                    S-2

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

     SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

                        Condensed Statements of Income

                 Years ended December 31, 1997, 1998 and 1999

                                (In thousands)


<TABLE>
<CAPTION>
                                                1997         1998         1999
                                              ---------    ---------    --------
<S>                                           <C>          <C>          <C>
Revenues and other income:
  Equity in income (loss) from
   continuing operations of
   subsidiaries ...........................   $  (1,019)   $  73,839    $154,625
  Interest and dividends ..................       1,246        1,812       1,184
  Interest income from subsidiaries:
    Continuing ............................      57,851       56,089      29,659
    Discontinued ..........................       1,189         --          --
  Securities transactions .................       2,657        5,635        --
  Other income, net .......................         523        4,421       4,565
                                              ---------    ---------    --------

                                                 62,447      141,796     190,033
                                              ---------    ---------    --------
Costs and expenses:
  General and administrative ..............      49,502       10,756      16,037
  Interest ................................      50,319       55,078      49,872
                                              ---------    ---------    --------

                                                 99,821       65,834      65,909
                                              ---------    ---------    --------

      Income (loss) from continuing
       operations before income taxes .....     (37,374)      75,962     124,124

Income tax benefit ........................       7,499       13,900      35,647
                                              ---------    ---------    --------

      Income (loss) from continuing
       operations .........................     (29,875)      89,862     159,771

Discontinued operations ...................      20,402      287,396        --
Extraordinary item ........................        --        (10,580)       --
                                              ---------    ---------    --------

      Net income (loss) ...................   $  (9,473)   $ 366,678    $159,771
                                              =========    =========    ========
</TABLE>



                                    S-3

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

     SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

                      Condensed Statements of Cash Flows

                 Years ended December 31, 1997, 1998 and 1999

                                (In thousands)

<TABLE>
<CAPTION>


                                                1997       1998         1999
                                             --------    ---------    ---------
<S>                                          <C>         <C>          <C>
Cash flows from operating activities:
  Net income (loss) .......................  $ (9,473)   $ 366,678    $ 159,771
  Equity in (income) loss of subsidiaries:
    Continuing ............................     1,019      (73,839)    (154,625)
    Discontinued ..........................   (20,402)    (287,396)        --
  Distributions from subsidiaries:
    Continuing ............................    35,000       15,000       50,000
    Discontinued ..........................    30,000         --           --
  Noncash interest expense ................    (7,523)      (8,660)        (390)
  Deferred income taxes ...................     1,224       (3,862)     (18,071)
  Securities transactions .................    (2,657)      (3,711)        --
  Change in accounting for environmental
   remediation costs ......................    30,000         --           --
  Other, net ..............................    (2,544)      (3,382)      (3,164)
                                             --------    ---------    ---------

                                               54,644          828       33,521

  Change in assets and liabilities, net ...       789       92,018       (4,779)
                                             --------    ---------    ---------

      Net cash provided by operating
       activities .........................    55,433       92,846       28,742
                                             --------    ---------    ---------

Cash flows from investing activities:
  Change in restricted cash equivalents,
   net ....................................      (101)        (566)     (12,065)
  Capital expenditures ....................       (15)         (82)      (2,856)
  Investments in and loans to subsidiaries    (58,900)        --            (27)
  Proceeds from disposition of securities .     6,875        6,875         --
  Other, net ..............................       (12)          87           10
                                             --------    ---------    ---------
      Net cash provided (used) by investing
       activities .........................   (52,153)       6,314      (14,938)
                                             --------    ---------    ---------
</TABLE>



                                    S-4

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

     SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

                Condensed Statements of Cash Flows (Continued)

                 Years ended December 31, 1997, 1998 and 1999

                                (In thousands)


<TABLE>
<CAPTION>
                                                  1997       1998        1999
                                                -------   ---------    --------

<S>                                             <C>       <C>          <C>
Cash flows from financing activities:
  Dividends .................................   $  --     $  (4,636)   $ (7,242)
  Treasury stock:
    Purchased ...............................      --          --        (7,210)
    Reissued ................................     1,025         170         210
  Indebtedness - principal payments .........      --      (193,498)       --
  Borrowings from affiliates ................      --        89,839        --
  Settlement of shareholder derivative
   lawsuit, net .............................      --        11,211        --
                                                -------   ---------    --------

      Net cash provided (used) by
       financing activities .................     1,025     (96,914)    (14,242)
                                                -------   ---------    --------

  Net change from operating, investing
   and financing activities .................     4,305       2,246        (438)
  Balance at beginning of year ..............     7,302      11,607      13,853
                                                -------   ---------    --------

  Balance at end of year ....................   $11,607   $  13,853    $ 13,415
                                                =======   =========    ========
</TABLE>



                                    S-5

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

    SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

                   Notes to Condensed Financial Information


Note 1 - Basis of presentation:

      The  Consolidated  Financial  Statements  of  NL  Industries,   Inc.  (the
"Company")  and the  related  Notes to  Consolidated  Financial  Statements  are
incorporated  herein by reference.  In 1997 the Company  adopted a new method of
accounting for environmental  remediation  costs. See Note 2 to the Consolidated
Financial Statements.

Note 2 - Net receivable from (payable to) subsidiaries and affiliates:

<TABLE>
<CAPTION>
                                                            December 31,
                                                    ---------------------------
                                                      1998               1999
                                                    ---------         ---------
                                                           (In thousands)

<S>                                                 <C>               <C>
Current:
  Receivable from:
    Kronos and NLCC:
      Income taxes .........................        $   1,099         $   3,790
      Other, net ...........................            5,873             6,507
    Timet ..................................              428               310
    CompX ..................................              142               176
    Other ..................................              940               885
                                                    ---------         ---------

                                                    $   8,482         $  11,668
                                                    =========         =========

  Payable to:
    Tremont Corporation ....................        $  (3,053)        $  (2,859)
    NLEMS ..................................             (520)             (562)
    Other ..................................             (204)              (23)
                                                    ---------         ---------

                                                    $  (3,777)        $  (3,444)
                                                    =========         =========

Noncurrent:
  Notes receivable from Kronos .............        $ 419,164         $ 244,000
                                                    =========         =========

  Notes payable to:
    NLCC ...................................        $(185,838)        $(185,839)
    NLEMS ..................................          (80,000)          (78,000)
                                                    ---------         ---------

                                                    $(265,838)        $(263,839)
                                                    =========         =========
</TABLE>


                                    S-6

<PAGE>



Note 3 - Long-term debt:

      See Note 10 of the Consolidated  Financial Statements for a description of
the Notes.  The Company's  $244 million of Senior  Secured Notes at December 31,
1999 are due October 2003. The Company has guaranteed  Kronos'  euro-denominated
notes payable of $57 million.

Note 4 - Contingencies:

See Legal proceedings in Note 17 to the Consolidated Financial Statements.


                                    S-7

<PAGE>


                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                -----------------------------------------------

                                (In thousands)

<TABLE>
<CAPTION>
                                                             Charges
                                                            (credits)
                                               Balance at   to costs                      Currency
                                               beginning      and                        translation        Balance at
                Description                    of year      expenses    Deductions       adjustments        end of year
                -----------                    ----------   --------    ----------       -----------        -----------

<S>                                             <C>         <C>          <C>               <C>               <C>
Year ended December 31, 1999:
  Allowance for doubtful accounts and notes
   receivable .............................     $ 2,377     $   140      $   (180)(a)      $  (262)          $ 2,075
                                                =======     =======      ========          =======           =======

  Amortization of intangibles .............     $23,704     $ 1,851      $   --            $(3,460)          $22,095
                                                =======     =======      ========          =======           =======


Year ended December 31, 1998:
  Allowance for doubtful accounts and notes
   receivable .............................     $ 2,828     $  (208)     $   (363)(a)(b)   $   120           $ 2,377
                                                =======     =======      ========          =======           =======

  Amortization of intangibles .............     $22,366     $ 2,438      $ (2,757)(b)      $ 1,657           $23,704
                                                =======     =======      ========          =======           =======


Year ended December 31, 1997:
  Allowance for doubtful accounts and notes
   receivable .............................     $ 3,813     $   382      $ (1,153)(a)      $  (214)          $ 2,828
                                                =======     =======      ========          =======           =======

  Amortization of intangibles .............     $22,207     $ 2,862      $   --            $(2,703)          $22,366
                                                =======     =======      ========          =======           =======

</TABLE>


(a)   Amounts written off, less recoveries.
(b)   Sale of Rheox's assets.

                                    S-8