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, 1996

                                      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 Stock Exchange

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months,  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|

As of March 20, 1997,  51,144,014 shares of common stock were  outstanding.  The
aggregate  market  value  of the  13,662,324  shares  of  voting  stock  held by
nonaffiliates as of such date approximated $149 million.

                     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 "Kronos-Industry,"  "Kronos-Products and
operations,"     "Kronos-Manufacturing     process    and    raw     materials,"
"Kronos-Competition,"   "Rheox-Products  and  operations,"  "Rheox-Manufacturing
process and raw materials," "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,  and (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,  are forward-looking statements that involve a number
of risks and uncertainties. The actual results of the future events described in
such  forward-looking  statements in this Annual Report could differ  materially
from those  stated in such  forward-looking  statements.  Among the factors that
could cause actual results to differ  materially are the risks and uncertainties
discussed in this Annual Report,  including,  without  limitation,  the portions
referenced  above,  and the  uncertainties  set  forth  from time to time in the
Company's filings with the Securities and Exchange  Committee,  and other public
statements.



<PAGE>



                                    PART I

ITEM 1.     BUSINESS

General

      NL  Industries,  Inc.,  organized  as a New  Jersey  corporation  in 1891,
conducts its operations through its principal wholly-owned subsidiaries, Kronos,
Inc. and Rheox,  Inc. Valhi,  Inc. and Tremont  Corporation,  each affiliates of
Contran Corporation,  hold 56% and 18%, respectively, of NL's outstanding common
stock.  Contran holds,  directly or through  subsidiaries,  approximately 91% of
Valhi's and 44% of Tremont's  outstanding  common  stock.  Substantially  all of
Contran's outstanding voting stock is held by trusts established for the benefit
of the children and  grandchildren  of Harold C. Simmons of which Mr. Simmons is
the sole trustee.  Mr. Simmons, the Chairman of the Board of NL and the Chairman
of the Board, President and Chief Executive Officer of each of Contran and Valhi
and a director of Tremont,  may be deemed to control each of such companies.  NL
and its consolidated  subsidiaries are sometimes referred to herein collectively
as the "Company."

      Kronos is the world's fourth largest producer of titanium dioxide pigments
("TiO2")  with an estimated  11% share of  worldwide  TiO2 sales volume in 1996.
Approximately  one-half of Kronos' 1996 sales volume was in Europe, where Kronos
is the second largest producer of TiO2. In 1996, Kronos accounted for 86% of the
Company's  sales and 63% of its operating  income.  Rheox is the world's largest
producer of rheological additives for solvent-based systems.

      The Company's  objective is to maximize total  shareholder  returns by (i)
focusing on continued  cost control,  (ii)  investing in certain cost  effective
debottlenecking  projects to increase TiO2 production capacity and productivity,
and (iii) deleveraging as excess liquidity becomes available.

Kronos

  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   to  be  a
"quality-of-life"  product with demand affected by the gross domestic product in
various regions of the world.

      Demand,  supply and  pricing  within the TiO2  industry is  cyclical,  and
changes in industry economic  conditions can significantly  impact the Company's
earnings and operating cash flow. The Company's average TiO2 selling prices have
been  declining  since the last half of 1995,  which  followed an upturn in TiO2
prices that began in the third quarter of 1993. The Company  expects TiO2 prices
will  begin to  increase  during  the  second  quarter  of 1997 as the impact of
recently-announced  price  increases  begin to take  effect.  Despite the recent
decline in TiO2 average  selling prices,  industry-wide  demand for TiO2 grew in
1996, and Kronos' record 1996 sales volume was about 6% higher than 1995. The

                                    -1-

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Company's expectations as to the future prospects of the TiO2 industry are based
upon  several  factors  beyond  the  Company's  control,  principally  continued
worldwide  growth of gross  domestic  product and the  absence of  technological
advancements in or modifications to TiO2 processes that would result in material
and  unanticipated  increases  in  production  efficiencies.  To the extent that
actual  developments differ from the Company's  expectations,  the Company's and
the TiO2 industry's future 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.  Consumption per capita
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. A significant market for TiO2 could emerge in Eastern Europe, the Far East
and  China if the  economies  in these  countries  develop  to the  point  where
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 the  Eastern  European  market.  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  affected TiO2 consumption over the past decade
because  extenders  generally  have,  to date,  failed to match the  performance
characteristics of TiO2. 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 over 70 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' 1996 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),  and the manufacture
and sale of iron-based  water treatment  chemicals  (derived from co-products of
the

                                    -2-

<PAGE>



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 in the past few years, and chloride-process  production
facilities in 1996 represented approximately 56% of industry capacity.

      Kronos  produced  373,000  metric  tons of TiO2 in 1996,  compared  to the
record  393,000  metric tons  produced in 1995 and 357,000  metric tons in 1994.
Kronos  reduced its  production  rates in early 1996 in  response  to  softening
demand and its high  inventory  levels at the end of 1995.  As demand  increased
during 1996 and inventories declined, Kronos' production rates were increased to
near  full  capacity  in  late  1996.  Kronos  believes  its  annual  attainable
production capacity is approximately 400,000 metric tons, including its one-half
interest in the joint  venture-owned  Louisiana  plant (see "TiO2  manufacturing
joint  venture").  Following the  completion of the $35 million  debottlenecking
expansion of its Leverkusen,  Germany  chloride-process  plant in late 1997, the
Company expects its worldwide annual attainable  production capacity to increase
to approximately 410,000 metric tons.

      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,  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),  approximately  50% of which is
owned by RTZ Iron and  Titanium  Inc.  ("RTZ"),  an indirect  subsidiary  of RTZ
Corp.,  under a long-term  supply contract that expires in 2000.  Natural rutile
ore, another chloride  feedstock,  is purchased primarily from RGC Mineral Sands
Limited (Australia), under a long-term supply contract that expires in 2000. Raw
materials under these contracts are expected to meet Kronos' chloride  feedstock
requirements  over the next  several  years.  The  Company  does not  expect  to
encounter  difficulties  obtaining new long-term  supply  contracts prior to the
expiration of its existing contracts.

      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

                                    -3-

<PAGE>



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-process  pigments,  Kronos operates a Norwegian rock ilmenite mine which
provided  all of Kronos'  feedstock  for its  European  sulfate-process  pigment
plants in 1996.  Kronos  also  purchases  sulfate  grade  slag  under  contracts
negotiated  annually with RTZ and,  through 1997,  with Tinfos Titanium and Iron
K/S.

      Kronos believes the availability of titanium-containing feedstock for both
the chloride  and sulfate  processes  is adequate  through the  remainder of the
decade.  Kronos does not anticipate  experiencing  any  interruptions of its raw
material supplies because of its long-term supply contracts.  However, political
and economic  instability in the 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 Tioxide Group, Ltd., a wholly-owned  subsidiary
of Imperial Chemicals  Industries PLC ("Tioxide"),  each own a 50%-interest in a
manufacturing   joint   venture.   The  joint   venture   owns  and  operates  a
chloride-process TiO2 plant located in Lake Charles, Louisiana.  Production from
the plant is shared equally by Kronos and Tioxide (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 the joint
venture,  including production and output decisions.  Two general managers,  one
appointed and  compensated by each Partner,  manage the daily  operations of the
joint venture acting under the direction of the supervisory committee.

      The manufacturing joint venture is intended to be operated 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.
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 is reported as a component of interest expense.

  Competition

      The TiO2 industry is highly  competitive.  During the early 1990s,  supply
exceeded  demand,   primarily  due  to  new  chloride-process   capacity  coming
on-stream. Relative supply/demand relationships, which had a favorable impact on
industry-wide  prices  during the late 1980s,  had a negative  impact during the
subsequent  downturn.  During  1994 and the first  half of 1995,  strong  demand
growth  improved  industry  capacity  utilization  and  resulted in increases in
worldwide TiO2 prices.  Kronos believes that the increased  demand was partially
due to customers stocking inventories. In the second half of 1995 and first half
of 1996, customers reduced inventory levels, which reduced industry-wide demand.
Demand improved in the second half of 1996,  indicating,  Kronos believes,  that
customer  inventories had returned to more-normal  levels.  Price increases were
announced in late 1996 by most major TiO2 producers,  including Kronos,  and the
results  of such  announcements  are  expected  to  impact  second-quarter  1997
operating results.

                                    -4-

<PAGE>



No  assurance  can be given  that price  trends  will  conform to the  Company's
expectations.

      Capacity additions that are the result of construction of grassroot plants
in the  worldwide  TiO2 market  require  significant  capital  expenditures  and
substantial   lead  time  (typically  three  to  five  years  in  the  Company's
experience) for, among other things, planning, obtaining environmental approvals
and construction. No grassroot plants have been announced, but industry capacity
can  be  expected  to   increase   as  Kronos  and  its   competitors   complete
debottlenecking  projects at  existing  plants.  Based on the factors  described
under the caption  "Kronos-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 few
years.

      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
grades and  substantially  all of Kronos'  production are  considered  commodity
pigments with price generally  being the most  significant  competitive  factor.
Kronos has an estimated 11% share of worldwide  TiO2 sales volume,  and believes
that it is the  leading  marketer  of TiO2 in a number of  countries,  including
Germany and Canada.

      Kronos'  principal  competitors  are E.I.  du Pont de  Nemours & Co.  ("Du
Pont");   Imperial  Chemical   Industries  PLC  (Tioxide)  ("ICI");   Millennium
Chemicals,  Inc.  (Millennium  Inorganic  Chemicals,  Inc.),  formerly a unit of
Hanson PLC; Kemira Oy;  Kerr-McGee  Corporation;  Ishihara Sangyo Kaisha,  Ltd.;
Bayer AG; and Thann et Mulhouse. In January 1997, ICI announced its intention to
spin off to its  shareholders  its  Tioxide  unit in the  next  six to  eighteen
months.  These eight competitors have estimated  individual  worldwide shares of
TiO2 sales volume  ranging from 3% to 21%, and an estimated  aggregate 75% share
of TiO2 sales volume.  Du Pont has about one-half of total U.S. TiO2  production
capacity and is Kronos' principal North American competitor.

Rheox

  Products and operations

      Rheological additives control the flow and leveling  characteristics for a
variety of products, including paints, inks, lubricants, sealants, adhesives and
cosmetics. Organoclay rheological additives are clays which have been chemically
reacted  with  organic  chemicals  and  compounds.  Rheox  produces  rheological
additives for both solvent-based and water-based  systems.  Rheox is the world's
largest producer of rheological  additives for solvent-based systems and is also
a supplier of rheological  additives used in  water-based  systems.  Rheological
additives for solvent-based  systems accounted for about 80% of Rheox's sales in
1996, with the remainder being principally rheological additives for water-based
systems.  Rheox  introduced a number of new products  during the past few years,
the majority of which are for water-based systems,  which are sold into a larger
market than solvent-based  systems. The Company believes  water-based  additives
will account for an increasing portion of its sales in the long term.


                                    -5-

<PAGE>



      Sales of rheological  additives  generally  follow gross domestic  product
growth  in  Rheox's  principal  markets  and are  influenced  by the  volume  of
shipments  of the  worldwide  coatings  industry.  Since a  portion  of  Rheox's
rheological  additives  are used in  industrial  coatings,  plant and  equipment
spending has an influence on demand for this product line.

  Manufacturing process and raw materials

      The  primary  raw  materials  utilized in the  production  of  rheological
additives are bentonite clays, hectorite clays, quaternary amines,  polyethylene
waxes and castor oil derivatives.  Bentonite clays are currently purchased under
a three-year  contract,  renewable  through  2004,  with a subsidiary of Dresser
Industries,  Inc.  ("Dresser"),  which has  significant  bentonite  reserves  in
Wyoming.  This  contract  assures  Rheox the right to purchase  its  anticipated
requirements  of  bentonite  clays for the  foreseeable  future,  and  Dresser's
reserves are believed to be  sufficient  for such purpose.  Hectorite  clays are
mined from  Company-owned  reserves in Newberry Springs,  California,  which the
Company  believes are adequate to supply its needs for the  foreseeable  future.
The Newberry Springs ore body contains the largest known  commercial  deposit of
hectorite clays in the world.  Quaternary amines are purchased  primarily from a
joint venture that is 50%-owned by Rheox and are also generally available on the
open market from a number of suppliers.  Castor oil-based  rheological additives
are  purchased  from  sources  outside  the  United  States.  Rheox has a supply
contract  with a  manufacturer  of these  products  which may not be  terminated
without 180 days notice by either party.

  Competition

      Competition  in the  specialty  chemicals  industry  generally  focuses on
product uniqueness,  quality and availability,  technical service,  knowledge of
end-use  applications and price.  Rheox's principal  competitors for rheological
additives for  solvent-based  systems are Laporte PLC and Sud-Chemie AG. Rheox's
principal  competitors  for  water-based  systems  are Rohm  and  Haas  Company,
Hercules Incorporated, and Union Carbide Corporation.

Research and Development

      The  Company's  expenditures  for  research  and  development  and certain
technical  support  programs have averaged  approximately  $11 million  annually
during  the  past  three  years  with  Kronos   accounting   for   approximately
three-quarters  of the annual  spending.  Research  and  development  activities
related to TiO2 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.  Activities
relating to rheological  additives are conducted  primarily in the United States
and are  directed  towards  the  development  of new  products  for  water-based
systems,  environmental  applications and new end-use  applications for existing
product lines.


                                    -6-

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Patents and Trademarks

      Patents  held for  products and  production  processes  are believed to be
important to the Company and contribute to the continuing business activities of
Kronos and Rheox.  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.  In
connection with the formation of the  manufacturing  joint venture with Tioxide,
Kronos and certain of its subsidiaries  exchanged  proprietary  chloride process
and product technologies with Tioxide and certain of its affiliates. Use by each
recipient of the other's  technology in Europe was  restricted  through  October
1996. The Company does not expect that the technology  sharing  arrangement with
Tioxide will  materially  impact the Company's  competitive  position within the
TiO2 industry. See "Kronos - TiO2 manufacturing joint venture."

      The Company's major trademarks,  including Kronos,  Titanox and Rheox, 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 international  markets
since the  1920s.  Most of Kronos'  current  production  capacity  is located in
Europe and Canada,  and approximately  one-third of Rheox's sales in each of the
past   three   years   have  been  from   European   production.   Approximately
three-quarters  of the  Company's  1996  consolidated  sales  were  to  non-U.S.
customers,  including  13% 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."

      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
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

                                    -7-

<PAGE>



generally higher in the second and third calendar quarters than in the first and
fourth calendar quarters.  Sales of rheological  additives are influenced by the
worldwide industrial protective coatings industry, where second calendar quarter
sales are generally the strongest.

Employees

      As of December 31, 1996, the Company employed approximately 3,100 persons,
excluding the joint venture  employees,  with approximately 400 employees in the
United States and approximately 2,700 at sites outside the United States. Hourly
employees in production facilities worldwide,  including the TiO2 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  achieve  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, 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
Reauthorization  Act  ("CERCLA"),  as well as the  state  counterparts  of these
statutes.  The Company  believes  that all of its U.S.  plants and the Louisiana
plant owned and operated by the joint venture are in substantial compliance with
applicable  requirements of these laws or compliance  orders issued  thereunder.
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

                                    -8-

<PAGE>



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,  Belgium and the United  Kingdom,  each a
member of the EU,  follow the  initiatives  of the EU.  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  environmental  authorities  and with an EU directive to
control the effluents produced by TiO2 production  facilities.  The Company also
believes  that  Rheox  is  in  substantial  compliance  with  the  environmental
regulations in Germany and the United Kingdom.

      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  notice  with  regard to the
Nordenham plant. After December 1998 and under certain circumstances, Kronos may
terminate  the  contract  after  giving six  months  notice  with  regard to the
Leverkusen plant.

      In order to reduce sulfur dioxide emissions into the atmosphere consistent
with applicable environmental regulations, Kronos is completing the installation
of off-gas  desulfurization  systems at its  Norwegian  and German  plants at an
estimated cost of $30 million.  The manufacturing  joint venture installed a $16
million  off-gas  desulfurization  system  at the  Louisiana  plant  and  Kronos
completed an $11 million water treatment  chemical  purification  project at its
Leverkusen, Germany facility in 1996.

      The Quebec provincial  government has environmental  regulatory  authority
over Kronos' Canadian chloride and  sulfate-process  TiO2 production facility in
Varennes,  Quebec. The provincial  government  regulates discharges into the St.
Lawrence River. In May 1992, the Quebec provincial  government  extended Kronos'
right to discharge effluents from its Canadian  sulfate-process  TiO2 plant into
the  St.  Lawrence  River  until  June  1994.  Kronos  completed  a  waste  acid
neutralization  facility  and  discontinued  discharging  untreated  waste  acid
effluents  into  the St.  Lawrence  River  in  June  1994.  Notwithstanding  the
foregoing,  in March 1993, Kronos' Canadian  subsidiary and two of its directors
were charged by the Canadian  federal  government  with five  violations  of the
Canadian  Fisheries Act relating to discharges  into the St. Lawrence River from
the  Varennes  sulfate-process  TiO2  plant.  The  monetary  penalty  for  these
violations, if proven, could be up to Canadian $15 million.  Additional charges,
if brought,  could involve additional penalties.  The Company believes that this
charge is  inconsistent  with the extension  granted by provincial  authorities,
referred to above,  and is vigorously  contesting  the charge.  A trial date has
been set for May 1997.

      The Company's capital  expenditures  related to its ongoing  environmental
protection and improvement  programs are currently  expected to be approximately
$3 million in 1997 and $5 million in 1998.


                                    -9-

<PAGE>



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

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.  Certain of the  Company's  properties  collateralize
long-term debt agreements and the Company's Nordenham TiO2 plant has a lien that
secures  the  German  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,  and  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.

      Specialty  chemicals are produced by Rheox at  facilities  in  Charleston,
West Virginia;  Newberry Springs,  California; St. Louis, Missouri;  Livingston,
Scotland and  Nordenham,  Germany.  A portion of the land under the  Livingston,
Scotland  facility  is leased  from an  unrelated  party;  all of the  remaining
production facilities are owned.

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 and property damage
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

                                    -10-

<PAGE>



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. 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 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.

      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. The Company has
answered the remaining  portions of the  complaint  denying all  allegations  of
wrongdoing, and the case is in discovery. 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

                                    -11-

<PAGE>



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. Defendants' motion for summary judgment on the
fraud claim was denied in August 1995;  defendants  have  appealed.  In December
1995,  defendants  moved for summary  judgment on the basis that the fraud claim
was  time-barred.  In February 1996,  the motion was denied and defendants  have
appealed. Discovery is proceeding.

      In March 1992,  the Company was served with a complaint  in  Skipworth  v.
Sherwin-Williams Co., et al. (No. 92-3069), Court of Common Pleas,  Philadelphia
County. Plaintiffs are a minor and her legal guardians seeking damages from lead
paint and pigment producers, the LIA, the Philadelphia Housing Authority and the
owners of the plaintiffs' premises for bodily injuries allegedly suffered by the
minor from lead-based paint. Plaintiffs' counsel has asserted that approximately
200 similar complaints would be served shortly,  but no such complaints have yet
been served.  In April 1994,  the court granted  defendants'  motion for summary
judgment and the dismissal  was affirmed by the Superior  Court in October 1995.
In February  1997,  the  Pennsylvania  Supreme  Court  unanimously  affirmed the
Superior Court's decision.

      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  identifies 18 other  defendants  who allegedly
manufactured  lead products or lead-based  paint,  and 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.  In October  1992,  the  Company  and the other  defendants  moved to
dismiss the complaint  with  prejudice.  In July 1993,  the court  dismissed the
complaint.  In December 1994, the Ohio Court of Appeals reversed the trial court
dismissal  and  remanded the case to the trial  court.  In July 1996,  the trial
court granted  defendants'  motion to dismiss the property damage and enterprise
liability  claims,  but  denied  the  remainder  of  the  motion.  Discovery  is
proceeding with respect to class certification.

      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 January 1994,
the Company answered the complaint, denying liability. Discovery is proceeding.


                                    -12-

<PAGE>



      In January 1995, the Company was served with  complaints in Wright (Alvin)
and Wright (Allen) v. Lead  Industries,  et. al.,  (Nos.  94-363042 and 363043),
Circuit  Court,  Baltimore  City,  Maryland.  Plaintiffs  are two brothers  (one
deceased) who allege  injuries due to exposure to lead pigment.  The complaints,
as amended  in April  1995,  seek more than $100  million  in  compensatory  and
punitive damages for alleged strict liability, negligence, conspiracy, fraud and
unfair and  deceptive  trade  practices  claims.  In July 1995,  the trial court
granted,  in  part,  the  defendants'  motion  to  dismiss,  and  dismissed  the
plaintiffs' fraud and unfair and deceptive trade practices claims. In June 1996,
the trial court granted defendants' motions for summary judgement on plaintiffs'
conspiracy  claim,  and dismissed the Company and certain other  defendants from
the cases. In September 1996, the trial court granted the remaining  defendants'
motions for summary judgment. Plaintiffs have appealed as to all defendants.

      In November  1995,  the Company was served with the complaint in Jefferson
v. Lead Industry Association,  et. al. (No. 95-2835), filed in the U.S. District
Court for the Eastern  District  of  Louisiana.  The  complaint  asserts  claims
against the LIA and the lead pigment defendants on behalf of a putative class of
allegedly injured children in Louisiana. The complaint purports to allege claims
for strict liability, negligence, failure to warn, breach of alleged warranties,
fraud and  misrepresentation,  and  conspiracy,  and seeks  actual and  punitive
damages.  The complaint  asserts several theories of liability,  including joint
and several and market share  liability.  In June 1996,  the trial court granted
defendants'  motions to dismiss the complaint  and entered  judgment in favor of
all defendants. Plaintiffs appealed to the Fifth Circuit Court of Appeals, which
affirmed the judgment in favor of all defendants in March 1997.

      In January  1996,  the Company  was served  with a complaint  on behalf of
individual  intervenors in German,  et. al. v. Federal Home Loan Mortgage Corp.,
et. al., (U.S.  District Court,  Southern District of New York, Civil Action No.
93 Civ.  6941 (RWS)).  This class  action  lawsuit had  originally  been brought
against the City of New York and other  landlord  defendants.  The  intervenors'
complaint  alleges claims against the Company and other former  manufacturers of
lead pigment for medical monitoring,  property  abatement,  and other injunctive
relief,  based on various causes of action,  including negligent product design,
negligent  failure  to warn,  strict  liability,  fraud  and  misrepresentation,
concert  of  action,  civil  conspiracy,   enterprise  liability,  market  share
liability,   breach  of  express  and  implied  warranties,  and  nuisance.  The
intervenors  purport to  represent a class of children  and  pregnant  women who
reside  in New  York  City.  In May  1996,  the  Company  and the  other  former
manufacturers  of lead  pigments  filed  motions  to  dismiss  the  intervenors'
complaint. Class discovery is proceeding.

      In April  1996,  the  Company  was  served  with a  complaint  in Gates v.
American  Cyanamid Co., et al., (No.  I1996-2114)  Supreme  Court,  State of New
York, Erie County, an action alleging personal injury arising out of exposure to
lead  pigment.  Plaintiff  seeks  compensatory  and  punitive  damages  from the
Company,  other former lead pigment manufacturers and the LIA based on claims of
negligence,  strict  liability,  fraud,  concert  of action,  civil  conspiracy,
enterprise  liability,   market  share  liability  and  alternative   liability.
Plaintiff also asserts claims against the landlords of the apartments in which

                                    -13-

<PAGE>



plaintiff  has lived  since  1977.  In July 1996,  the  Company  filed an answer
denying  plaintiff's  allegations  of  wrongdoing  and  liability.  Discovery is
proceeding.

      In September  1996,  the Company was served with a complaint in Ritchie v.
NL  Industries,  et al.  (U.S.  District  Court,  Northern  District  of Western
Virginia,  Civil Action No.  5:96-CV-166),  an action  originally  filed in West
Virginia  state  court on behalf  of a minor  allegedly  injured  as a result of
exposure to lead pigment.  Plaintiffs  seeks  compensatory  and punitive damages
from the Company and five other former  manufacturers  of lead pigment  based on
claims of negligence,  strict liability,  breach of warranty, fraud, conspiracy,
market  share  liability  and  alternative  liability.   In  October  1996,  the
defendants  removed  the case to federal  court and filed  motions  to  dismiss.
Plaintiffs has filed a motion to remand the case to state court. The motions are
pending.

      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
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

                                    -14-

<PAGE>



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. 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,  the court has not made any final
rulings on defense  costs or indemnity  coverage  with respect to the  Company's
pending  environmental  litigation.  The Court has not 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 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,  or both.
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, 1996,  the Company had accrued $113
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, remedial investigations,  monitoring,  studies,  clean-up, removal
and remediation. During the first quarter of 1997, the Company's accrual will be
increased  to include  legal fees and other  costs of  managing  and  monitoring
environmental  remediation  sites as  required  by the  adoption  of the AICPA's
Statement of Position 96-1, "Environmental  Remediation Liabilities." See Note 2
to the  Consolidated  Financial  Statements.  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  $160  million.  The  Company's
estimate of such liability has not been discounted to present value and the

                                    -15-

<PAGE>



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 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.
Further,  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.

      At  Pedricktown,  the U.S. EPA 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. In addition, the U.S. EPA incurred past costs in the
estimated  amount of $5 million.  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  approximately
50% of operable unit two costs, or $2.5 million.

      At Granite City, the RIFS is complete, and in 1990 the U.S. EPA selected a
remedy estimated at that time to cost  approximately $28 million.  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 smelter.  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  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. At that
time,  the cost of the  remedies  selected by the U.S.  EPA  aggregated,  in its
estimation,  $40.8 million to $67.8 million,  although its decision  stated that
the higher amount was not considered to be representative of expected costs. The
Company  presently is challenging  portions of the U.S.  EPA's  selection of the
remedy.  The U.S. EPA's current  estimate for completion of the cleanup is $24.3
million,  and in January  1997,  the  Company  was  informed  that the U.S.  EPA
incurred

                                    -16-

<PAGE>



cleanup and other past costs  approximating  $30 million.  There is currently no
allocation among the PRPs for these costs.

      Having  completed the RIFS at Portland,  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.  Subsequent to the
completion of the predesign  studies,  the U.S. EPA issued  notices of potential
liability to  approximately  20 PRPs,  including the Company,  directing them to
perform the remedy,  which was  initially  estimated to cost  approximately  $17
million,  exclusive  of  administrative  and overhead  costs and any  additional
costs, for the disposition of recycled materials from the site. In January 1992,
the U.S.  EPA issued  unilateral  administrative  orders to the  Company and six
other PRPs directing the  performance  of the remedy.  The Company and the other
PRPs  commenced  performance  of the  remedy.  In  August  1994,  the  U.S.  EPA
authorized  the Company and the other PRPs to cease  performing  most aspects of
the  selected  remedy.  The U.S.  EPA has issued a proposed  Record of  Decision
Amendment  changing  portions of the cleanup  remedy  selected for the site. The
U.S. EPA  currently  estimates  the cost of the  proposed  remedy to be from $10
million to $13 million.  Pursuant to an interim allocation,  the Company's share
of remedial  costs is  approximately  50%. 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.  The court granted Gould's motion to
amend the complaint to add additional  defendants  (adjoining current and former
landowners and generators). The amended complaint deletes the fraud and punitive
damages claims asserted  against NL; thus, the pending action is essentially one
for  reallocation of past and future cleanup costs.  Discovery is proceeding.  A
trial  date has been set for  September  1997.  The  Company  and the other PRPs
performing  the cleanup have reached  settlement  in principle  with many of the
generators and adjoining landowner defendants.

      The Company and other PRPs entered into an  administrative  consent  order
with the U.S. EPA requiring the  performance  of a RIFS at two sites 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. The final RIFS was  submitted to the U.S. EPA in May
1993.  In August 1994,  the U.S. EPA issued its proposed plan for the cleanup of
the Baxter Springs and Treece sites in Cherokee  County.  The proposed remedy is
estimated by U.S. EPA to cost $6 million.

      In January  1989,  the State of  Illinois  brought an action  against  the
Company and several other subsequent owners and operators of the former plant in
Chicago, Illinois (People of the State of Illinois v. NL Industries, et al., No.
88-CH-11618,  Circuit Court, Cook County).  The complaint seeks recovery of $2.3
million of cleanup  costs  expended  by the  Illinois  Environmental  Protection
Agency, plus penalties and treble damages. In October 1992, the Supreme Court of
Illinois reversed the Appellate  Division,  which had affirmed the trial court's
earlier  dismissal  of  the  complaint,   and  remanded  the  case  for  further
proceedings. In December 1993, the trial court denied the State's petition to

                                    -17-

<PAGE>



reinstate the  complaint,  and dismissed  the case with  prejudice.  In November
1996, the appeals court reversed the dismissal. The U.S. EPA has issued an order
to the  Company to perform a removal  action at the  Company's  former  facility
involved in the State of Illinois case. The Company is complying with the order.


      In 1980, the State of New York commenced litigation against the Company in
connection with the operation of a plant in Colonie,  New York formerly owned by
the Company. Flacke v. NL Industries,  Inc., No. 1842-80 ("Flacke I") and Flacke
v. Federal Insurance Company and NL Industries, Inc., No. 3131-92 ("Flacke II"),
New York Supreme  Court,  Albany  County.  The plant  manufactured  military and
civilian products from depleted uranium and was acquired from the Company by the
U.S.  Department of Energy ("DOE") in 1984. Flacke I seeks penalties for alleged
violations of New York's Environmental  Conservation Law, and of a consent order
entered into to resolve these alleged violations.  Flacke II seeks forfeiture of
a $200,000  surety  bond  posted in  connection  with the  consent  order,  plus
interest from February 1980. The Company denied  liability in both actions.  The
litigation  had been inactive from 1984 until July 1993 when the State moved for
partial summary judgment for approximately $1.5 million on certain of its claims
in Flacke I and for summary  judgment in Flacke II. In January 1994, the Company
cross-moved for summary judgment in Flacke I and Flacke II. All summary judgment
motions have been denied. The Company has reached a settlement in principle with
the State.

      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,  requesting a new trial 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.  Plaintiffs'  petition  is  pending.  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 Resource  Conservation and Recovery Act
("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.


                                    -18-

<PAGE>



      In July 1991, a complaint  was filed in the United States  District  Court
for the Central  District of California,  United States of America v. Peter Gull
and NL Industries,  Inc.,  Civ. No. 91-4098,  seeking  recovery of $2 million in
costs  incurred  by the United  States in  response  to the  alleged  release of
hazardous  substances  into the  environment  from a facility  located in Norco,
California,  treble  damages and $1.75  million in penalties  for the  Company's
alleged  failure to comply with the U.S. EPA's  administrative  order No. 88-13.
The order, which alleged that the Company arranged for the treatment or disposal
of materials  at the Norco site,  directed  the  immediate  removal of hazardous
substances from the site. The Company carried out a portion of the remedy at the
Norco site, but did not complete the ordered activities because it believed they
were in  conflict  with  California  law.  The court  ruled that the Company was
liable for approximately  $2.7 million in response costs plus approximately $3.6
million in penalties  for failure to comply with the  administrative  order.  In
April 1994,  the court  entered  final  judgment in this  matter  directing  the
Company to pay $6.3 million plus  interest.  Both the Company and the government
have appealed.  In August 1994, this matter was referred to mediation,  which is
pending.

      At a municipal and industrial  waste  disposal site in Batavia,  New York,
the  Company  and six 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, the U.S.
EPA issued the record of decision for operable  unit one,  which is estimated by
the U.S. EPA to cost  approximately  $12.3 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.  With respect to the second  operable unit,
the extension of the municipal water supply, the U.S. EPA estimated the costs at
$1.2 million plus annual  operation and maintenance  costs.  The Company and the
other PRPs are  performing the work  comprising  operable unit two. The U.S. EPA
has also demanded approximately $.9 million in past costs from the PRPs.

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

  Other litigation

      Rhodes,  et al. v. ACF  Industries,  Inc., et al. (Circuit Court of Putnam
County,  West Virginia,  No. 95-C-261).  Twelve  plaintiffs  brought this action
against the Company and various other defendants in July 1995. Plaintiffs allege
that they were employed by demolition and disposal  contractors,  and claim that
as a result of the  defendants'  negligence they were exposed to asbestos during
demolition and disposal of materials from defendants' premises in West Virginia.
Plaintiffs allege personal injuries and seek compensatory damages totaling $18.5
million and punitive  damages  totaling $55.5 million.  The Company has filed an
answer denying plaintiffs' allegations. Discovery is proceeding.


                                    -19-

<PAGE>



      The  Company has been named as a defendant  in various  lawsuits  alleging
personal  injuries  as a result of  exposure  to  asbestos  in  connection  with
formerly-owned  operations.  Various of these actions remain  pending.  One such
case, In re:  Monongalia  Mass II,  (Circuit  Court of Monongalia  County,  West
Virginia,   Nos.  93-C-362,   et  al.),  involves  the  consolidated  claims  of
approximately  3,100  plaintiffs.  The Company  intends to defend these  matters
vigorously.

      Plaintiff brought the complaint in Frank D. Seinfeld v. Harold C. Simmons,
et al.  (Superior  Court of New York,  Bergen  County,  Chancery  Division,  No.
C-336-96) in September 1996 on behalf of himself and derivatively,  on behalf of
NL,  against the Company,  Valhi and certain  current and former  members of the
Company's Board of Directors.  The complaint alleges,  among other things,  that
the Company's  purchase of shares in an August 1991 "Dutch auction" tender offer
was an unfair and wasteful expenditure of the Company's funds that constituted a
breach  of the  defendants'  fiduciary  duties  to the  Company's  shareholders.
Plaintiff  seeks,  among  other  things,  to rescind the  Company's  purchase of
approximately 10.9 million shares of its common stock from Valhi pursuant to the
Dutch  auction,  and plaintiff has stated that damages  sought are $149 million.
The Company and the other defendants have answered the complaint and have denied
all allegations of wrongdoing.  The Company believes,  and understands that each
of the other  defendants  believes,  that the  complaint is without  merit.  The
Company  intends,  and believes that each of the other  defendants  intends,  to
defend the action vigorously. Trial is scheduled to begin in November 1997.

      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, 1996.



                                    -20-

<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 and Pacific  Stock
Exchanges under the symbol "NL." As of March 20, 1997, there were  approximately
9,000 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 20, 1997, the closing price of NL common stock
according to the NYSE Composite Tape was $10-7/8.


                                                          High            Low
                                                        -------         -------
Year ended December 31, 1995:
  First quarter ................................        $13-1/2         $11-3/4
  Second quarter ...............................         16-5/8          11-7/8
  Third quarter ................................         17-1/2          13-1/2
  Fourth quarter ...............................         16-5/8          10-7/8

Year ended December 31, 1996:
  First quarter ................................         14-3/4          12-1/4
  Second quarter ...............................         15-3/8          11-1/2
  Third quarter ................................         12-1/4           9-1/8
  Fourth quarter ...............................         11-1/4           7-5/8


      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 Notes,  subsequent  to October  1993.  At December 31,  1996,  no
amounts were  available for  dividends.  The Company paid three  quarterly  cash
dividends during 1996 of $.10 per share, beginning with a dividend paid on March
1, 1996.  The Company  suspended  its quarterly  dividend in October  1996.  The
Company did not pay dividends in 1994 or 1995.  The  declaration  and payment of
future  dividends  and the amount  thereof 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.



                                    -21-

<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."
<TABLE>
<CAPTION>

                                                     Years ended December 31,
                                  -------------------------------------------------------------
                                     1992         1993         1994         1995         1996
                                  ---------    ---------    ---------    ---------    ---------
                                               (In millions, except per share amounts)

<S>                               <C>          <C>          <C>          <C>          <C>      
INCOME STATEMENT DATA:
Net sales .....................   $   893.5    $   805.3    $   888.0    $ 1,023.9    $   986.1
Operating income ..............       110.7         62.4        111.4        199.7        113.4
Income (loss) from
 continuing operations ........       (44.6)       (83.2)       (24.0)        85.6         10.8
Net income (loss) .............       (76.4)      (109.8)       (24.0)        85.6         10.8

Per common share:
  Income (loss) from
   continuing operations ......   $    (.88)   $   (1.63)   $    (.47)   $    1.66    $     .21
  Net income (loss) ...........       (1.50)       (2.16)        (.47)        1.66          .21

  Cash dividends ..............   $     .35    $      --    $      --    $      --    $     .30

BALANCE SHEET DATA at year-end:
Cash, cash equivalents
 and current marketable
 securities, including
 restricted cash ..............   $   187.9    $   147.6    $   156.3    $   141.3    $   114.1
Current assets ................       635.8        467.5        486.4        551.1        500.2
Total assets ..................     1,472.1      1,206.5      1,162.4      1,271.7      1,221.4
Current liabilities ...........       248.8        232.5        244.9        302.4        290.3
Long-term debt including
 current maturities ...........     1,035.3        870.9        789.6        783.7        829.0
Shareholders' deficit .........      (146.3)      (264.8)      (293.1)      (209.4)      (203.5)

CASH FLOW DATA:
Operating activities ..........   $   (44.7)   $    (7.3)   $   181.8    $    71.6    $    16.5
Investing activities ..........       234.9        182.0        (32.8)       (62.2)       (67.6)
Financing activities ..........      (223.1)      (155.3)      (132.1)        (3.3)        26.6

OTHER NON-GAAP FINANCIAL DATA:
EBITDA (1) ....................   $   115.1    $    67.2    $   101.3    $   212.1    $   135.6

OTHER DATA:
Net debt (2) ..................   $   847.7    $   723.2    $   633.4    $   681.6    $   740.7
Interest expense, net (3) .....       104.3         95.1         78.9         75.4         70.3
Cash interest expense,
 net (4) ......................        98.0         86.8         60.8         59.7         49.4
Capital expenditures ..........        85.2         48.0         36.9         64.2         66.9

TiO2 sales volumes
 (metric tons in
 thousands) ...................         336          346          376          366          388
Average TiO2 selling
 price index (1983=100) .......         140          128          132          152          139
</TABLE>
                                    -22-


<PAGE>

(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,
      generally accepted accounting  principles ("GAAP") operating income or net
      income as an indicator of the  Company's  operating  performance,  or GAAP
      cash flows from operating, investing and financing activities 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.  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 (including restricted cash) and current marketable securities.

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

(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).



                                    -23-

<PAGE>



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

RESULTS OF OPERATIONS

  General

      The Company's  operations  are  conducted in two business  segments - TiO2
conducted by Kronos and  specialty  chemicals  conducted by Rheox.  As discussed
below, TiO2 selling prices increased during 1994 and the first half of 1995, but
declined in the last half of 1995 and during 1996.  Kronos' operating income and
margins improved during 1995, but declined in 1996.

      Many factors influence TiO2 pricing levels,  including  industry capacity,
worldwide demand growth and customer inventory levels and purchasing  decisions.
Kronos believes the decline in prices in 1996 was due, in part, to the impact of
recent  debottlenecking  projects increasing  capacity,  TiO2 customers reducing
inventory levels in a period of declining  prices,  and greater  competition for
sales volume with more industry  capacity  available.  Kronos  believes that the
TiO2 industry has long-term growth potential,  as discussed in "Item 1. Business
- Kronos - Industry" and "Competition."

  Net sales and operating income
<TABLE>
<CAPTION>


                                    Years ended December 31,       % Change
                                ------------------------------  ----------------
                                  1994       1995       1996    1995-94  1996-95
                                --------   --------   --------  -------  -------
                                                  (In millions)
<S>                             <C>        <C>        <C>         <C>      <C>
Net sales:
  Kronos ....................   $  770.1   $  894.1   $  851.2     +16%     -5%
                                --------   --------   -------- 
  Rheox .....................      117.9      129.8      134.9     +10%     +4%

                                $  888.0   $1,023.9   $  986.1     +15%     -4%
                                ========   ========   ======== 
Operating income:
  Kronos ....................   $   80.6   $  161.2   $   71.6    +100%    -56%
  Rheox .....................       30.8       38.5       41.8     +25%     +8%
                                --------   --------   -------- 

                                $  111.4   $  199.7   $  113.4     +79%    -43%
                                ========   ========   ======== 

Percent change in TiO2:
  Sales volume ..............                                       -3%     +6%
  Average selling prices
   (in billing currencies) ..                                      +15%     -9%
</TABLE>

      Kronos'  operating  income in 1996 was lower  than 1995  primarily  due to
lower average TiO2 selling prices,  partially offset by higher sales volumes. In
billing   currency  terms,   Kronos'  1996  average  TiO2  selling  prices  were
approximately  9% lower  than in 1995.  Average  selling  prices  in the  fourth
quarter of 1996 were 17% lower than the fourth quarter of 1995 and were 3% lower
than the third quarter of 1996. Selling prices at the end of 1996 were 17% below
year-end  1995  levels,  8% below  the  average  for 1996 and were 1% below  the
average  selling prices during the fourth  quarter of 1996.  The  improvement in
Kronos'  1995  results over 1994 was  primarily  due to 15% higher  average TiO2
selling

                                    -24-

<PAGE>



prices and higher TiO2 production volumes,  partially offset by lower TiO2 sales
volumes.

      Kronos'  cost of sales in 1996 was  higher  than 1995 due to higher  sales
volumes and higher unit costs, primarily due to lower production levels. Kronos'
costs of sales in 1995 was higher than 1994 due to slightly higher manufacturing
costs,  partially  offset by lower sales volumes.  As a percentage of net sales,
cost of sales  increased  in 1996 and  decreased  in 1995  primarily  due to the
impact  on net  sales  of  changes  in the  average  selling  price  during  the
respective years.

      Kronos' selling, general and administrative expenses declined in 1996 from
the previous year, as a result of continuing  cost  containment  efforts,  while
1995's expense was higher than 1994 due to the unfavorable  effect of changes in
currency exchange rates.

      Record  sales volume of 388,000  metric tons of TiO2 in 1996  increased 6%
compared  to 1995,  with  improvements  in all major  markets,  including  a 10%
increase  in North  America.  Sales  volumes in the second half of 1996 were 16%
higher  than the same  period in 1995.  In  response to soft demand in the first
half of 1996 and its high inventory levels at the end of 1995,  Kronos curtailed
production rates in early 1996. As demand increased during the last half of 1996
and inventories  declined,  Kronos' production rates were increased to near full
capacity in late 1996 and the average capacity utilization was 95% for the year.
Kronos'  production  rates were 94% of its capacity in 1994 and at full capacity
in 1995.  Approximately  one-half of Kronos'  1996 TiO2 sales,  by volume,  were
attributable to markets in Europe with  approximately  37% attributable to North
America and the balance to other regions.

      Demand, supply and pricing of TiO2 have historically been cyclical. Kronos
anticipates  its TiO2  operating  margins  will  begin to  improve in the second
quarter of 1997 as the impact of  recently-announced  TiO2 price increases takes
effect;  however, Kronos expects its 1997 operating income will be below that of
1996,  primarily  because  of lower  anticipated  average  TiO2  prices for 1997
compared  to 1996 and  lower  technology  fee  income.  Demand  for TiO2 in 1996
increased over 1995 and Kronos  expects demand to remain strong in 1997.  Kronos
believes continued growth in demand should result in significant  improvement in
average selling prices over the longer term.

      Rheox's  operating  income  improved  in 1996  compared  to 1995 due to 5%
higher sales volumes, lower selling,  general and administrative  expenses and a
$2.7 million gain related to the  curtailment of certain U.S.  employee  pension
benefits,  partially offset by slightly higher  manufacturing  costs.  Operating
income  increased  in 1995 over 1994 due to 5% higher  sales  volumes and higher
average selling prices,  partially offset by higher raw material costs.  Rheox's
cost of sales  increased  in 1995  and  1996  over  the  respective  prior  year
primarily due to higher sales volumes,  and cost of sales as a percentage of net
sales were approximately the same level in 1994, 1995 and 1996. Selling, general
and  administrative  expenses decreased slightly in 1996 compared to 1995 due to
lower variable  compensation  expense,  and selling,  general and administrative
expenses in 1995 approximated 1994 amounts.


                                    -25-

<PAGE>



      The Company has  substantial  operations  and assets  located  outside the
United States (principally Germany, Norway, Belgium and Canada). The U.S. dollar
value of the Company's  foreign sales and operating costs is subject to currency
exchange rate  fluctuations  which may slightly impact reported earnings and may
affect the comparability of  period-to-period  operating  results. A significant
amount of the Company's sales are denominated in currencies  other than the U.S.
dollar (61% in 1996),  principally  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  1996 sales by $14
million  compared to 1995 and  increased  1995 sales by $54 million  compared to
1994.

  General corporate

      The  following  table sets forth  certain  information  regarding  general
corporate income (expense).
<TABLE>
<CAPTION>


                                     Years ended December 31,        Change
                                     1994       1995      1996  1995-94  1996-95
                                    ------    ------    ------  -------  -------
                                             (In millions)

<S>                                <C>       <C>        <C>      <C>     <C>    
Securities earnings .............. $   3.9   $   7.4    $  4.7   $  3.5  $ (2.7)
Corporate expenses, net ..........   (44.7)    (26.6)    (17.4)    18.1     9.0
Interest expense .................   (83.9)    (81.6)    (75.0)     2.3     6.6
                                    ------    ------    ------   ------  ------

                                   $(124.7)  $(100.8)   $(87.7)  $ 23.9  $ 12.9
                                    ======    ======    ======   ======  ======
</TABLE>

      Securities  earnings  fluctuate  in part  based  upon the  amount of funds
invested and yields  thereon.  Corporate  expenses,  net in 1996 were lower than
1995 due to lower  provisions  for  environmental  remediation  cost.  Corporate
expenses,  net were  significantly  lower in 1995  compared to 1994 due to lower
provisions  for  environmental  remediation  and litigation  costs.  The Company
expects corporate expenses,  net in 1997 will exceed that of 1996, primarily due
to approximately $30 million of additional  environmental  remediation  accruals
related  to  the  adoption  of a new  accounting  standard.  See  Note  2 to the
Consolidated Financial Statements.

  Interest expense

      Interest  expense in 1996  declined  compared to 1995  principally  due to
lower  interest  rates on  variable  rate  debt,  principally  Kronos'  Deutsche
mark-denominated  debt, partially offset by higher levels of such DM-denominated
debt.  Interest expense in 1995 declined compared to 1994 due to lower levels of
debt,  principally  DM-denominated  debt,  and  lower  interest  rates  on  such
DM-denominated  debt. In January 1997, the Company  refinanced certain U.S. debt
and prepaid certain  DM-denominated debt, as discussed in "Liquidity and Capital
Resources," and expects its interest  expense will be higher in 1997 compared to
1996 as a result of higher anticipated interest rates and average debt levels.


                                    -26-

<PAGE>



  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 1994 and
1996, 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.

      Due to the  Company's  higher  U.S.  earnings  before  taxes in 1995,  the
Company's  valuation allowance was reduced by approximately $10 million due to a
change in estimate of the future tax benefit of certain U.S.  tax credits  which
the Company believes satisfies the "more-likely-than-not"  recognition criteria.
During 1995, the Company also recorded deferred tax benefits of $6.6 million due
to the reduction in dividend  withholding  tax rates pursuant to ratification of
the U.S./Canada  income tax treaty.  The Company's deferred income tax status at
December 31, 1996 is discussed in "Liquidity and Capital Resources."

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,
                                                  -----------------------------
                                                   1994        1995       1996
                                                  ------      ------     ------
                                                          (In millions)
<S>                                               <C>         <C>        <C>   
Net cash provided (used) by:
  Operating activities .......................    $181.7      $ 71.5     $ 16.5
  Investing activities .......................     (32.8)      (62.2)     (67.6)
  Financing activities .......................    (132.1)       (3.3)      26.6
                                                  ------      ------     ------

Net cash provided (used) by operating,
 investing and financing activities ..........    $ 16.8      $  6.0     $(24.5)
                                                  ======      ======     ======
</TABLE>

      The TiO2  industry is cyclical and changes in economic  conditions  within
the industry  significantly  impact the earnings and operating cash flows of the
Company. During 1996, declining TiO2 selling prices unfavorably impacted Kronos'
operating  income and cash  flows  from  operations  compared  to 1995.  Average
selling  prices  began a downward  trend in the last half of 1995 and  continued
throughout 1996. The Company expects prices will begin to increase in the second
quarter of 1997;  however,  no  assurance  can be given that price  trends  will
conform to the  Company's  expectations  and future cash flows will be adversely
affected should price trends be lower than the Company's expectations.

      Changes in the Company's inventories,  receivables and payables (excluding
the effect of currency  translation)  also  contributed  to the cash provided by
operations in 1994 and 1996;  however,  such changes used cash in 1995 primarily
due to increased inventory levels. In 1994 and 1995, net proceeds of $15 million
and  $26  million,  respectively,  from  the  sale  of  trading  securities  are
components  of the cash  provided  from  operations.  Certain  German income tax
refunds and

                                    -27-

<PAGE>



payments,  discussed  below,  significantly  increased cash flows from operating
activities  during 1994 and decreased  cash flows from  operating  activities in
1996.

      The Company's capital  expenditures during the past three years include an
aggregate  of $67  million  ($26  million  in 1996)  for the  Company's  ongoing
environmental  protection  and compliance  programs,  including a Canadian waste
acid neutralization  facility,  a Norwegian onshore tailings disposal system and
German and Norwegian off-gas  desulfurization  systems.  The Company's estimated
1997  and  1998   capital   expenditures   are  $35  million  and  $36  million,
respectively,  and include $3 million and $5 million,  respectively, in the area
of  environmental  protection  and compliance  primarily  related to the off-gas
desulfurization  systems.  The Company spent $9 million in 1995,  $18 million in
1996 and plans to spend an additional $8 million in 1997 in capital expenditures
related to a debottlenecking project at its Leverkusen, Germany chloride-process
TiO2  facility  that is expected  to increase  the  Company's  worldwide  annual
attainable  production to  approximately  410,000  metric tons in 1998.  Capital
expenditures  of  the  manufacturing  joint  venture  are  not  included  in the
Company's capital expenditures. Rheox acquired the minority interests of certain
of its non-U.S. subsidiaries for $5.2 million in 1996.

      In 1996,  the Company  borrowed DM 144 million ($96 million when borrowed)
under its DM credit  facility and used DM 49 million  ($32  million) to fund the
German tax settlement  payments  described  below, and used the remainder of the
proceeds  primarily  to fund  operations.  Repayments  of  indebtedness  in 1996
included  payments  of $23  million on the Rheox bank term loan,  $15 million in
payments on the joint  venture  term loan and DM 16 million  ($10  million  when
repaid)  in  payments  on  DM-denominated   notes  payable.  Net  repayments  of
indebtedness  in 1995  included  $30  million in payments on the Rheox bank term
loan and $15 million in payments on the joint  venture  term loan.  In addition,
the Company  borrowed a net DM 56 million  ($40  million  when  borrowed)  under
DM-denominated  short-term  credit lines.  In 1994,  the Company  borrowed DM 75
million ($45 million when borrowed) under the DM credit facility, and repayments
of indebtedness  included DM 225 million ($140 million when paid) in payments on
the DM credit facility,  $15 million in payments on the Rheox bank term loan and
$15 million in payments on the joint venture term loan.

      In order to improve its near-term  liquidity,  during  January  1997,  the
Company  refinanced  its Rheox  subsidiary,  obtaining a net $125 million of new
long-term  financing.  The net proceeds,  along with other available funds, were
used to prepay DM 207 million  ($127 million when paid) of the Company's DM term
loan and to repay DM 43 million  ($26  million  when paid) of the  Company's  DM
revolving  credit facility,  leaving DM 130 million ($80 million)  available for
borrowing at January 31, 1997. As a result of the  refinancing  and  prepayment,
the Company's  aggregate  scheduled debt payments for 1997 and 1998 decreased by
$103 million ($64 million in 1997 and $39 million in 1998).  In connection  with
the prepayment, the Company and its lenders modified certain financial covenants
of the DM credit agreement and NL guaranteed the facility.

      At  December  31,  1996,  the  Company  had  cash  and  cash   equivalents
aggregating  $114  million  (44%  held  by  non-U.S.   subsidiaries)   including
restricted cash and cash equivalents of $11 million. At December 31, 1996, after
giving pro forma

                                    -28-

<PAGE>



effect  for the  refinancing  discussed  above,  the  Company  had cash and cash
equivalents  aggregating  $87  million  and the  Company's  subsidiaries  had $9
million and $102 million available for borrowing under U.S. and non-U.S.  credit
facilities,  respectively.  At December 31, 1996, the Company had complied with,
or had  obtained  waivers  for,  all  financial  covenants  governing  its  debt
agreements.

      Dividends paid during 1996 totaled $15.3  million.  No dividends were paid
in 1994 or 1995. In October 1996, the Company's Board of Directors suspended the
Company's  quarterly  dividend  and  the  Company  is  currently  unable  to pay
dividends due to certain restrictions under the indentures of the Senior Notes.

      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.

      Certain of the  Company's  income tax returns in various U.S. and non-U.S.
jurisdictions  are being  examined  and tax  authorities  have  proposed  or may
propose tax  deficiencies.  During  1994,  the German tax  authorities  withdrew
certain  proposed  tax  deficiencies  of DM 100 million and remitted tax refunds
aggregating DM 225 million ($136 million when received),  including interest, on
a tentative basis while  examination of the Company's  German income tax returns
continued.  The Company  subsequently  reached an agreement  with the German tax
authorities  regarding such examinations which resolved certain  significant tax
contingencies for years through 1990. The Company received final assessments and
paid certain tax  deficiencies  of  approximately  DM 50 million ($32  million),
including interest, in settlement of these issues in 1996. The Company considers
the agreement to be a favorable  resolution of the contingencies and the payment
was within previously-accrued amounts for such matters.

      Certain  other  German  tax  contingencies  remain  outstanding  and  will
continue to be litigated.  Although the Company believes that it will ultimately
prevail in the litigation, the Company has granted a DM 100 million ($64 million
at December 31, 1996) lien on its Nordenham,  Germany TiO2 plant in favor of the
German tax  authorities  until the litigation is resolved.  No assurances can be
given that this  litigation  will be resolved in the Company's  favor in view of
the inherent  uncertainties involved in court rulings. The Company believes that
it has  adequately  provided  accruals for  additional  income 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, 1996, the Company had net deferred tax liabilities of $152
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 $207
million at December 31, 1996, principally related to the U.S. and Germany,

                                    -29-

<PAGE>



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

      In addition  to the  chemicals  businesses  conducted  through  Kronos and
Rheox,  the  Company  also has  certain  interests  and  associated  liabilities
relating to certain  discontinued  or divested  businesses and other 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.  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 or 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.

      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. The carrying value
of the Company's net investment in its German  operations is a net liability due
principally  to its DM credit  facility,  while its net  investment in its other
non-U.S. operations are net assets.

      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,   modify  its  dividend  policy,  restructure  ownership
interests, sell interests in subsidiaries or other assets, or take a combination
of such steps or other steps

                                    -30-

<PAGE>



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 industry.  In the
event of any such  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 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").

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


                                    -31-

<PAGE>



               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, 1996 and
               thereafter through the date of this report.

               October 23, 1996   -  reported Items 5 and 7.
               January 30, 1997   -  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  long-term  debt  issues  which do not  exceed 10% of
               consolidated total assets will be furnished to the Securities and
               Exchange Commission upon request.

                                    -32-

<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.

  4.6       Indenture  dated  October 20, 1993  governing the  Registrant's  13%
            Senior Secured  Discount Notes due 2005,  including form of Discount
            Note - incorporated by reference to Exhibit 4.6 to the  Registrant's
            Quarterly  Report on Form 10-Q for the quarter  ended  September 30,
            1993.

  4.7       Discount  Mirror  Notes dated  October 20,  1993 -  incorporated  by
            reference  to Exhibit 4.8 to the  Registrant's  Quarterly  Report on
            Form 10-Q for the quarter ended September 30, 1993.

  4.8       Discount Note  Subsidiary  Pledge  Agreement  dated October 20, 1993
            between  Registrant and Kronos,  Inc. - incorporated by reference to
            Exhibit 4.9 to the  Registrant's  Quarterly  Report on Form 10-Q for
            the quarter ended September 30, 1993.


                                    -33-

<PAGE>



 10.1       Amended and  Restated  Loan  Agreement  dated as of October 15, 1993
            among  Kronos  International,  Inc.,  the Banks  set forth  therein,
            Hypobank  International  S.A.,  as  Agent  and  Banque  Paribas,  as
            Co-agent  -  incorporated  by  reference  to  Exhibit  10.17  to the
            Registrant's  Quarterly  Report on Form 10-Q for the  quarter  ended
            September 30, 1993.

 10.2       Second Amended and Restated Loan  Agreement  dated as of January 31,
            1997 among Kronos International,  Inc., Hypobank International S.A.,
            as Agent, and the Banks set forth therein.

 10.3       Amended and Restated Liquidity Undertaking dated October 15, 1993 by
            the  Registrant,  Kronos,  Inc.  and Kronos  International,  Inc. to
            Hypobank  International  S.A.,  as  agent,  and the  Banks set forth
            therein  -  incorporated  by  reference  to  Exhibit  10.18  to  the
            Registrant's  Quarterly  Report on Form 10-Q for the  quarter  ended
            September 30, 1993.

 10.4       Second Amended and Restated Liquidity  Undertaking dated January 31,
            1997 by the Registrant, Kronos, Inc. and Kronos International,  Inc.
            to and in favor of Hypobank  International  S.A., as Agent,  and the
            Banks set forth therein.

 10.5       Guaranty  dated as of January  31,  1997 made by the  Registrant  in
            favor of Hypobank International S.A., as Agent.

 10.6       Credit Agreement dated as of March 20, 1991 between Rheox,  Inc. and
            Subsidiary   Guarantors  and  The  Chase  Manhattan  Bank  (National
            Association)   and  the  Nippon  Credit  Bank,  Ltd.,  as  Co-agents
            incorporated by reference to Exhibit 10.4 to the Registrant's Annual
            Report on Form 10-K for the year ended December 31, 1990.

 10.7       Amendments  1 and 2  dated  May  1,  1991  and  February  15,  1992,
            respectively,  to the  Credit  Agreement  between  Rheox,  Inc.  and
            Subsidiary   Guarantors  and  the  Chase  Manhattan  Bank  (National
            Association)   and  the  Nippon  Credit  Bank,   Ltd.  as  Co-agents
            incorporated  by  reference  to  Exhibit  10.2  to the  Registrant's
            Quarterly Report on form 10-Q for the quarter ended June 30, 1992.

 10.8       Third amendment to the Credit Agreement, dated March 5, 1993 between
            Rheox,  Inc. and Subsidiary  Guarantors and the Chase Manhattan Bank
            (National  Association) and the Nippon Credit Bank, Ltd as Co-agents
            -  incorporated  by reference  to Exhibit  10.7 to the  Registrant's
            Annual Report on Form 10-K for the year ended December 31, 1992.

 10.9       Fourth and Fifth Amendments to the Credit Agreement, dated September
            23, 1994 and December 15, 1994,  respectively,  between Rheox,  Inc.
            and  Subsidiary  Guarantors  and the Chase  Manhattan Bank (National
            Association)   and  the  Nippon  Credit  Bank,   Ltd.  as  Co-agents
            incorporated by reference to Exhibit 10.6 to the Registrant's Annual
            Report on Form 10-K for the year ended December 31, 1994.

                                    -34-

<PAGE>



 10.10      Sixth  and  Seventh  Amendments  to  the  Credit  Agreement,   dated
            September  23,  1995 and  February  2, 1996,  respectively,  between
            Rheox,  Inc. and Subsidiary  Guarantors and the Chase Manhattan Bank
            (National Association) and the Nippon Credit Bank, Ltd. as Co-agents
            -  incorporated  by reference  to Exhibit  10.7 to the  Registrant's
            Annual Report on Form 10-K for the year ended December 31, 1995.

 10.11      Eighth amendment to the Credit Agreement,  dated September 17, 1996,
            between  Rheox,  Inc.  and  Subsidiaries,  Guarantors  and the Chase
            Manhattan  Bank (National  Association)  and the Nippon Credit Bank,
            Ltd. as Co-Agents - incorporated by reference to Exhibit 10.1 to the
            Registrants'  Quarterly  Report on Form 10-Q for the  quarter  ended
            September 30, 1996.

 10.12      Amended and Restated  Credit  Agreement dated as of January 30, 1997
            between Rheox,  Inc., the Subsidiary  Guarantors Party thereto,  the
            Lenders Party thereto,  the Chase Manhattan Bank, as  Administrative
            Agent, and Bankers Trust Company, as Documentation Agent.

 10.13      Credit  Agreement  dated as of  October  18,  1993  among  Louisiana
            Pigment  Company,  L.P., as Borrower,  the Banks listed  therein and
            Citibank,  N.A.,  as Agent -  incorporated  by  reference to Exhibit
            10.11 to the  Registrant's  Quarterly  Report  on Form  10-Q for the
            quarter ended September 30, 1993.

 10.14      Security  Agreement  dated October 18, 1993 from  Louisiana  Pigment
            Company, L.P., as Borrower, to Citibank, N.A., as Agent incorporated
            by reference to Exhibit 10.12 to the  Registrant's  Quarterly Report
            on Form 10-Q for the quarter ended September 30, 1993.

 10.15      Security  Agreement  dated  October 18, 1993 from Kronos  Louisiana,
            Inc. as Grantor,  to  Citibank,  N.A.,  as Agent -  incorporated  by
            reference to Exhibit 10.13 to the  Registrant's  Quarterly Report on
            Form 10-Q for the quarter ended September 30, 1993.

 10.16      KLA Consent  and  Agreement  dated as of October  18,  1993  between
            Kronos Louisiana,  Inc. and Citibank,  N.A., as Agent - incorporated
            by reference to Exhibit 10.14 to the  Registrant's  Quarterly Report
            on Form 10-Q for the quarter ended September 30, 1993.

 10.17      Guaranty dated October 18, 1993, from Kronos, Inc., as guarantor, in
            favor of Lenders named therein, as Lenders,  and Citibank,  N.A., as
            Agent  -   incorporated   by  reference  to  Exhibit  10.15  to  the
            Registrant's  Quarterly  Report on Form 10-Q for the  quarter  ended
            September 30, 1993.

 10.18      Mortgage by Louisiana  Pigment Company,  L.P. dated October 18, 1993
            in favor of Citibank,  N.A. -  incorporated  by reference to Exhibit
            10.16 to the  Registrant's  Quarterly  Report  on Form  10-Q for the
            quarter ended September 30, 1993.

                                    -35-

<PAGE>



 10.19      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.

 10.20      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.

 10.21      Richards Bay Slag Sales Agreement dated May 1, 1995 between Richards
            Bay  Iron  and  Titanium  (Proprietary)  Limited  and  Kronos,  Inc.
            incorporated  by  reference  to  Exhibit  10.17 to the  Registrant's
            Annual Report on Form 10-K for the year ended December 31, 1995.

 10.22      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.

 10.23      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.

 10.24      Amendment No. 1 to Joint Venture  Agreement dated as of December 20,
            1995 between  Tioxide  Americas  Inc. and Kronos  Louisiana,  Inc. -
            incorporated  by  reference  to  Exhibit  10.20 to the  Registrant's
            Annual Report on Form 10-K for the year ended December 31, 1995.

 10.25      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.

 10.26      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.

 10.27      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.

 10.28      Amendment No. 1 to Tioxide  Americas  Offtake  Agreement dated as of
            December 20, 1995 between Tioxide Americas Inc. and Louisiana

                                    -36-

<PAGE>



            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.

 10.29      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.

 10.30      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.

 10.31      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.

 10.32      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.

 10.33      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.

 10.34*     1985 Long Term Performance Incentive Plan of NL Industries, Inc., as
            adopted by the Board of Directors on February 27, 1985  incorporated
            by reference  to Exhibit A to the  Registrant's  Proxy  Statement on
            Schedule 14A for the annual  meeting of  shareholders  held on April
            24, 1985.

 10.35      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.

 10.36*     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.

 10.37*     NL Industries,  Inc.  Variable  Compensation  Plan - incorporated by
            reference to Exhibit A to the Registrant's Proxy Statement on

                                    -37-

<PAGE>



            Schedule 14A for the annual meeting of  shareholders  held on May 8,
            1996.

 10.38*     NL Industries, Inc. Retirement Savings Plan, as amended and restated
            effective April 1, 1996.

 10.39*     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.

 10.40      Intercorporate Services Agreement by and between Valhi, Inc. and the
            Registrant effective as of January 1, 1996.

 10.41      Intercorporate Services Agreement by and between Contran Corporation
            and the Registrant effective as of January 1, 1996.

 10.42      Intercorporate Services Agreement by and between Tremont Corporation
            and the Registrant effective as of January 1, 1996.

 10.43      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.

 10.44*     Executive  severance  agreement effective as of February 16, 1994 by
            and between the Registrant and Joseph S.  Compofelice - incorporated
            by reference to Exhibit 10.2 to the Registrant's Quarterly Report on
            Form 10-Q for the quarter ended September 30, 1996.

 10.45*     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.

 10.46*     Executive  Severance  Agreement effective as of December 31, 1991 by
            and between the Registrant  and J. Landis Martin -  incorporated  by
            reference to Exhibit 10.22 to the Registrant's Annual Report on Form
            10-K for the year ended December 31, 1991.

 10.47*     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.

 10.48*     Agreement to Defer Bonus Payment dated December 28, 1995 between the
            Registrant  and  Lawrence  A.  Wigdor and  related  trust  agreement
            incorporated  by  reference  to  Exhibit  10.43 to the  Registrant's
            Annual Report on Form 10-K for the year ended December 31, 1995.


                                    -38-

<PAGE>



 21.1       Subsidiaries of the Registrant.

 23.1       Consent of Independent Accountants.

 27.1       Financial Data Schedules for the year ended December 31, 1996.

 99.1       Annual Report of Savings Plan for Employees of NL  Industries,  Inc.
            (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, 1996.

* Management contract, compensatory plan or arrangement.

                                    -39-

<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 20, 1997
                                      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 20, 1997       Harold C. Simmons, March 20, 1997
Director, President and                Chairman of the Board
Chief Executive Officer



/s/ Glenn R. Simmons                   /s/ Joseph S. Compofelice
-----------------------------------    ----------------------------------------
Glenn R. Simmons, March 20, 1997       Joseph S. Compofelice, March 20, 1997
Director                               Director, Vice President and
                                       Chief Financial Officer


/s/ Kenneth R. Peak                    /s/ Dr. Lawrence A. Wigdor
-----------------------------------    ----------------------------------------
Kenneth R. Peak, March 20, 1997        Dr. Lawrence A. Wigdor, March 20, 1997
Director                               Director, President and Chief
                                       Executive Officer of Kronos and Rheox


/s/ Elmo R. Zumwalt, Jr.               /s/ Dennis G. Newkirk
-----------------------------------    ----------------------------------------
Elmo R. Zumwalt, Jr., March 20,1997    Dennis G. Newkirk, March 20, 1997
Director                               Vice President and Controller
                                       (Principal Accounting Officer)




                                    -40-

<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, 1995 and 1996 ......    F-3 / F-4

  Consolidated Statements of Operations - Years ended
   December 31, 1994, 1995 and 1996 .............................    F-5

  Consolidated Statements of Shareholders' Deficit - Years
   ended December 31, 1994, 1995 and 1996 .......................    F-6

  Consolidated Statements of Cash Flows - Years ended
   December 31, 1994, 1995 and 1996 .............................    F-7 / F-9

  Notes to Consolidated Financial Statements ....................    F-10 / F-36


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.:

      We  have  audited  the  accompanying  consolidated  balance  sheets  of NL
Industries,  Inc. as of December 31, 1995 and 1996, and the related consolidated
statements of operations,  shareholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1996.  These  financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

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

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






                                    COOPERS & LYBRAND L.L.P.

Houston, Texas
February 7, 1997




                                    F-2

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                          December 31, 1995 and 1996

                     (In thousands, except per share data)


<TABLE>
<CAPTION>


              ASSETS
                                                           1995          1996
                                                       ----------     ----------

<S>                                                    <C>            <C>       
Current assets:
  Cash and cash equivalents, including
   restricted cash of $10,104 and $10,895 ........     $  141,333     $  114,115
  Accounts and notes receivable, less
   allowance of $4,039 and $3,813 ................        147,428        138,538
  Refundable income taxes ........................          4,941          9,267
  Inventories ....................................        251,630        232,510
  Prepaid expenses ...............................          3,217          4,219
  Deferred income taxes ..........................          2,522          1,597
                                                       ----------     ----------

      Total current assets .......................        551,071        500,246
                                                       ----------     ----------


Other assets:
  Marketable securities ..........................         20,944         23,718
  Investment in joint ventures ...................        185,893        181,479
  Prepaid pension cost ...........................         22,576         24,821
  Deferred income taxes ..........................            788            223
  Other ..........................................         31,165         24,825
                                                       ----------     ----------

      Total other assets .........................        261,366        255,066
                                                       ----------     ----------


Property and equipment:
  Land ...........................................         22,902         21,963
  Buildings ......................................        166,349        165,479
  Machinery and equipment ........................        648,458        660,333
  Mining properties ..............................         97,190         95,891
  Construction in progress .......................         11,187         13,231
                                                       ----------     ----------
                                                          946,086        956,897

  Less accumulated depreciation and depletion ....        486,870        490,851
                                                       ----------     ----------

      Net property and equipment .................        459,216        466,046
                                                       ----------     ----------

                                                       $1,271,653     $1,221,358
                                                       ==========     ==========
</TABLE>




                                    F-3

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                    CONSOLIDATED BALANCE SHEETS (CONTINUED)

                          December 31, 1995 and 1996

                     (In thousands, except per share data)



<TABLE>
<CAPTION>

   LIABILITIES AND SHAREHOLDERS' DEFICIT
                                                        1995            1996
                                                    -----------     -----------

<S>                                                 <C>             <C>        
Current liabilities:
  Notes payable ................................    $    39,247     $    25,732
  Current maturities of long-term debt .........         43,369          91,946
  Accounts payable and accrued liabilities .....        165,985         153,904
  Payable to affiliates ........................         10,181          10,204
  Income taxes .................................         40,088           5,664
  Deferred income taxes ........................          3,555           2,895
                                                    -----------     -----------

      Total current liabilities ................        302,425         290,345
                                                    -----------     -----------

Noncurrent liabilities:
  Long-term debt ...............................        740,334         737,100
  Deferred income taxes ........................        157,192         151,221
  Accrued pension cost .........................         69,311          57,941
  Accrued postretirement benefits cost .........         60,235          55,935
  Other ........................................        148,511         132,048
                                                    -----------     -----------

      Total noncurrent liabilities .............      1,175,583       1,134,245
                                                    -----------     -----------

Minority interest ..............................          3,066             249
                                                    -----------     -----------

Shareholders' deficit:
  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 ...................        759,281         759,281
  Adjustments:
    Currency translation .......................       (126,934)       (118,629)
    Pension liabilities ........................         (1,908)         (1,822)
    Marketable securities ......................           (525)          1,278
  Accumulated deficit ..........................       (481,432)       (485,948)
  Treasury stock, at cost (15,748 and 15,721
   shares) .....................................       (366,258)       (365,996)
                                                    -----------     -----------

      Total shareholders' deficit ..............       (209,421)       (203,481)
                                                    -----------     -----------

                                                    $ 1,271,653     $ 1,221,358
                                                    ===========     ===========
</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 OPERATIONS

                 Years ended December 31, 1994, 1995 and 1996

                     (In thousands, except per share data)


<TABLE>
<CAPTION>


                                             1994          1995         1996
                                         -----------   -----------  -----------

<S>                                      <C>           <C>          <C>        
Revenues and other income:
  Net sales ...........................  $   887,954   $ 1,023,939  $   986,074
  Other, net ..........................       44,828        22,241       30,480
                                         -----------   -----------  -----------

                                             932,782     1,046,180    1,016,554
                                         -----------   -----------  -----------

Costs and expenses:
  Cost of sales .......................      649,745       676,184      738,438
  Selling, general and administrative .      212,516       189,477      177,464
  Interest ............................       83,926        81,617       75,039
                                         -----------   -----------  -----------

                                             946,187       947,278      990,941
                                         -----------   -----------  -----------
    Income (loss) before income
     taxes and minority interest ......      (13,405)       98,902       25,613

Income tax expense ....................        9,734        12,671       14,833
                                         -----------   -----------  -----------

    Income (loss) before minority
     interest .........................      (23,139)       86,231       10,780

Minority interest .....................          843           622          (37)
                                         -----------   -----------  -----------

     Net income (loss) ................  $   (23,982)  $    85,609  $    10,817
                                         ===========   ===========  ===========


Net income (loss) per share of common
 stock and common stock equivalents ...  $      (.47)  $      1.66  $       .21
                                         ===========   ===========  ===========

Weighted average common shares and
 common stock equivalents outstanding .       51,022        51,512       51,350
                                         ===========   ===========  ===========

</TABLE>








         See accompanying notes to consolidated financial statements.

                                    F-5

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

                 Years ended December 31, 1994, 1995 and 1996

                                (In thousands)
<TABLE>
<CAPTION>

                                                               Adjustments
                                                   -----------------------------------
                                        Additional 
                              Common     paid-in    Currency      Pension   Marketable Accumulated  Treasury  
                               stock     capital   translation  liabilities securities   deficit     stock        Total
                              ---------  --------- -----------  ----------- ---------- -----------  ---------   ---------

<S>                           <C>        <C>        <C>         <C>         <C>         <C>         <C>         <C>       
Balance at December 31, 1993  $   8,355  $ 759,281  $(115,803)  $  (3,442)  $  (2,164)  $(543,059)  $(367,963)  $(264,795)

Net loss ...................         --         --         --          --          --     (23,982)         --     (23,982)
Treasury stock reissued ....         --         --         --          --          --          --       1,427       1,427
Adjustments ................         --         --     (9,691)      1,807       2,152          --          --      (5,732)
                              ---------  ---------  ---------   ---------   ---------   ---------   ---------   ---------

Balance at December 31, 1994      8,355    759,281   (125,494)     (1,635)        (12)   (567,041)   (366,536)   (293,082)

Net income .................         --         --         --          --          --      85,609          --      85,609
Treasury stock reissued ....         --         --         --          --          --          --         278         278
Adjustments ................         --         --     (1,440)       (273)       (513)         --          --      (2,226)
                              ---------  ---------  ---------   ---------   ---------   ---------   ---------   ---------

Balance at December 31, 1995      8,355    759,281   (126,934)     (1,908)       (525)   (481,432)   (366,258)   (209,421)

Net income .................         --         --         --          --          --      10,817          --      10,817
Common dividends declared -
 $.30 per share ............         --         --         --          --          --     (15,333)         --     (15,333)
Treasury stock reissued ....         --         --         --          --          --          --         262         262
Adjustments ................         --         --      8,305          86       1,803          --          --      10,194
                              ---------  ---------  ---------   ---------   ---------   ---------   ---------   ---------

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





         See accompanying notes to consolidated financial statements.

                                    F-6

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 Years ended December 31, 1994, 1995 and 1996

                                (In thousands)


<TABLE>
<CAPTION>


                                              1994          1995        1996
                                           ---------    ---------    ---------

<S>                                         <C>          <C>          <C>      
Cash flows from operating activities:
  Net income (loss) .....................   $ (23,982)   $  85,609    $  10,817
  Depreciation, depletion and
   amortization .........................      34,592       38,989       39,664
  Noncash interest expense ..............      18,071       19,396       20,959
  Deferred income taxes .................      11,907      (29,248)       2,802
  Minority interest .....................         843          622          (37)
  Net (gains) losses from:
    Securities transactions .............       1,220       (1,175)          --
    Disposition of property and
     equipment ..........................       1,981        2,713        2,312
  Pension cost, net .....................      (2,753)      (7,248)     (12,893)
  Other postretirement benefits, net ....      (3,437)      (4,169)      (5,086)
  Other, net ............................          68         (477)        (126)
                                            ---------    ---------    ---------

                                               38,510      105,012       58,412

  Change in assets and liabilities:
    Accounts and notes receivable .......     (13,152)      (1,483)       2,798
    Inventories .........................      17,778      (57,378)       8,401
    Prepaid expenses ....................       3,221        1,148       (1,426)
    Accounts payable and accrued
     liabilities ........................     (17,343)     (17,700)      (3,311)
    Income taxes ........................     109,243       14,861      (39,424)
    Accounts with affiliates ............      (2,024)      (4,059)       3,229
    Other noncurrent assets .............       2,219        1,587          684
    Other noncurrent liabilities ........      28,706        3,233      (12,825)
    Marketable trading securities:
      Purchases .........................        (870)        (762)          --
      Dispositions ......................      15,530       27,102           --
                                            ---------    ---------    ---------

    Net cash provided by operating
     activities .........................     181,818       71,561       16,538
                                            ---------    ---------    ---------

</TABLE>





                                    F-7

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                 Years ended December 31, 1994, 1995 and 1996

                                (In thousands)


<TABLE>
<CAPTION>


                                               1994         1995         1996
                                            ---------    ---------    ---------

<S>                                         <C>          <C>          <C>       
Cash flows from investing activities:
  Capital expenditures ..................   $ (36,931)   $ (64,196)   $ (66,906)
  Purchase of minority interest .........          --           --       (5,168)
  Investment in joint ventures, net .....       3,133        1,793        4,359
  Proceeds from disposition of
   property and equipment ...............         598          182          108
  Other, net ............................         362           --           --
                                            ---------    ---------    ---------

      Net cash used by investing
       activities .......................     (32,838)     (62,221)     (67,607)
                                            ---------    ---------    ---------

Cash flows from financing activities:
  Indebtedness:
    Borrowings ..........................      44,490       57,556       97,503
    Principal payments ..................    (175,886)     (61,128)     (55,403)
  Dividends paid ........................          --           --      (15,333)
  Other, net ............................        (742)         264         (202)
                                            ---------    ---------    ---------

      Net cash provided (used) by
       financing activities .............    (132,138)      (3,308)      26,565
                                            ---------    ---------    ---------

      Net change during the year from
       operating, investing and
       financing activities .............   $  16,842    $   6,032    $ (24,504)
                                            =========    =========    =========
</TABLE>





                                    F-8

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                 Years ended December 31, 1994, 1995 and 1996

                                (In thousands)


<TABLE>
<CAPTION>


                                             1994         1995       1996
                                            ---------    ---------    ---------

<S>                                         <C>          <C>          <C>       
Cash and cash equivalents:
 Net change during the year from:
    Operating, investing and financing
     activities .........................   $  16,842    $   6,032    $ (24,504)
    Currency translation ................       7,689        4,177       (2,714)
                                            ---------    ---------    ---------

                                               24,531       10,209      (27,218)
  Balance at beginning of year ..........     106,593      131,124      141,333
                                            ---------    ---------    ---------

  Balance at end of year ................   $ 131,124    $ 141,333    $ 114,115
                                            =========    =========    =========

Supplemental disclosures - cash paid
 (received) for:
  Interest, net of amounts capitalized ..   $  66,801    $  62,078    $  51,678
  Income taxes, net .....................    (111,418)      27,965       50,400

</TABLE>





         See accompanying notes to consolidated financial statements.
                                    F-9
                                   

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1 - Organization and basis of presentation:

      NL Industries,  Inc. conducts its operations primarily through its wholly-
owned  subsidiaries,  Kronos,  Inc.  (titanium  dioxide  pigments or "TiO2") and
Rheox, Inc. (specialty chemicals).

      Valhi,   Inc.  and  Tremont   Corporation,   each  affiliates  of  Contran
Corporation,  hold 56% and 18%, respectively,  of NL's outstanding common stock.
Contran holds,  directly or through  subsidiaries,  approximately 91% of Valhi's
and 44% of Tremont's  outstanding  common stock.  Substantially all of Contran's
outstanding  voting stock is held by trusts  established  for the benefit of the
children and  grandchildren  of Harold C. Simmons,  of which Mr.  Simmons is the
sole trustee.  Mr. Simmons,  the Chairman of the Board of NL and the Chairman of
the Board,  President,  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.   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 deemed
to be 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 and the related
income tax  effects  are  accumulated  in the  currency  translation  adjustment
component of shareholders'  deficit.  Currency  transaction gains and losses are
recognized in income currently.


                                    F-10

<PAGE>



Cash and cash equivalents

      Cash  equivalents,   including  restricted  cash,  include  U.S.  Treasury
securities purchased under short-term  agreements to resell, bank deposits,  and
government  and  commercial  notes and bills with  original  maturities of three
months or less.  Restricted cash of approximately $6 million in 1995 and 1996 is
restricted  under  the  Company's  joint  venture  indebtedness   agreement  and
restricted  cash of  approximately  $4  million  in 1995 and $5  million in 1996
secures undrawn letters of credit.

Marketable securities and securities transactions

      Marketable  securities  are classified as either  "available-for-sale"  or
"trading"  and are carried at market based on quoted market  prices.  Unrealized
gains and losses on  trading  securities  are  recognized  in income  currently.
Unrealized gains and losses on  available-for-sale  securities,  and the related
deferred  income tax  effects,  are  accumulated  in the  marketable  securities
adjustment  component of  shareholders'  deficit.  See Note 4. Realized gains or
losses 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 ventures

      Investments  in 20% to 50%-owned  entities are accounted for by the equity
method.

Intangible assets

      Intangible  assets,  included in other noncurrent assets, are amortized by
the  straight-line  method  over the  periods  expected  to be  benefitted,  not
exceeding ten years.

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. Maintenance,  repairs and minor renewals are expensed; 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.


                                    F-11

<PAGE>



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.

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 has not been
significant 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  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, 1995 and 1996, no receivables for recoveries
have been recognized.

      The Company will adopt the  recognition  and  disclosure  requirements  of
AICPA's Statement of Position No. 96-1, "Environmental Remediation Liabilities,"
in the first  quarter of 1997.  The new rule,  among other  things,  expands the
types of costs which must be considered in determining environmental remediation
accruals.  As a result of adopting the new  Statement  of Position,  the Company
expects to recognize a noncash cumulative charge of approximately $30 million in
the first quarter of 1997.  The charge is not expected to materially  change the
Company's  1997 tax expense due to existing  net  operating  losses for which no
benefit is expected to be  recognized.  Such charge is  comprised  primarily  of
estimated  future  undiscounted   expenditures   associated  with  managing  and
monitoring existing  environmental  remediation sites. The expenditures  consist
principally  of legal  and  professional  fees,  but do not  include  litigation
defense costs with respect to  situations  in which the Company  asserts that no
liability exists. Currently, such expenditures are expensed as incurred.

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

                                    F-12

<PAGE>



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"  realization
criteria.

Income (loss) per share of common stock

      Income  (loss) per share of common stock is based on the weighted  average
number of common shares and equivalents  outstanding.  Common stock equivalents,
consisting of nonqualified stock options, are excluded from the computation when
their effect is antidilutive.

Note 3 - Business and geographic segments:

      The Company's  operations  are  conducted in two business  segments - TiO2
conducted by Kronos and specialty chemicals conducted by Rheox. Titanium dioxide
pigments are used to impart whiteness,  brightness and opacity to a wide variety
of products,  including paints, plastics, paper, fibers and ceramics.  Specialty
chemicals  include  rheological  additives  which  control the flow and leveling
characteristics of a variety of products,  including paints,  inks,  lubricants,
sealants,  adhesives and cosmetics. General corporate assets consist principally
of cash, cash  equivalents and marketable  securities.  At December 31, 1995 and
1996,  the net assets of  non-U.S.  subsidiaries  included in  consolidated  net
assets approximated $121 million and $124 million, respectively.

<TABLE>
<CAPTION>

                                              Years ended December 31,
                                     -----------------------------------------
                                         1994          1995           1996
                                     -----------    -----------    -----------
                                                   (In thousands)

<S>                                   <C>            <C>            <C>        
Business segments

Net sales:
  Kronos ..........................   $   770,077    $   894,149    $   851,179
  Rheox ...........................       117,877        129,790        134,895
                                      -----------    -----------    -----------

                                      $   887,954    $ 1,023,939    $   986,074
                                      ===========    ===========    ===========

Operating income:
  Kronos ..........................   $    80,515    $   161,175    $    71,606
  Rheox ...........................        30,837         38,544         41,767
                                      -----------    -----------    -----------

                                          111,352        199,719        113,373

General corporate income (expense):
  Securities earnings .............         3,855          7,419          4,708
  Expenses, net ...................       (44,686)       (26,619)       (17,429)
  Interest expense ................       (83,926)       (81,617)       (75,039)
                                      -----------    -----------    -----------

                                      $   (13,405)   $    98,902    $    25,613
                                      ===========    ===========    ===========

Capital expenditures:
  Kronos ..........................   $    34,522    $    60,699    $    64,201
  Rheox ...........................         2,283          3,464          2,665
  General corporate ...............           126             33             40
                                      -----------    -----------    -----------

                                      $    36,931    $    64,196    $    66,906
                                      ===========    ===========    ===========
</TABLE>


                                    F-13

<PAGE>

<TABLE>
<CAPTION>


                                              Years ended December 31,
                                         1994          1995            1996
                                     -----------    -----------    -----------
                                                   (In thousands)

<S>                                   <C>            <C>            <C>        
  Depreciation, depletion and
   amortization:
    Kronos ........................   $    31,156    $    35,706    $    36,295
    Rheox .........................         3,153          3,089          3,175
    General corporate .............           283            194            194
                                      -----------    -----------    -----------

                                      $    34,592    $    38,989    $    39,664
                                      ===========    ===========    ===========

Geographic areas

  Net sales - point of origin:
    United States .................   $   303,475    $   339,568    $   348,071
    Europe ........................       587,291        703,206        653,828
    Canada ........................       122,957        139,341        139,346
    Eliminations ..................      (125,769)      (158,176)      (155,171)
                                      -----------    -----------    -----------

                                      $   887,954    $ 1,023,939    $   986,074
                                      ===========    ===========    ===========

  Net sales - point of destination:
    United States .................   $   238,568    $   258,850    $   273,110
    Europe ........................       468,915        580,794        523,667
    Canada ........................        64,374         60,472         56,436
    Other .........................       116,097        123,823        132,861
                                      -----------    -----------    -----------

                                      $   887,954    $ 1,023,939    $   986,074
                                      ===========    ===========    ===========

  Operating income:
    United States .................   $    49,358    $    75,650    $    71,914
    Europe ........................        50,273        103,096         27,971
    Canada ........................        11,721         20,973         13,488
                                      -----------    -----------    -----------

                                      $   111,352    $   199,719    $   113,373
                                      ===========    ===========    ===========

</TABLE>

<TABLE>
<CAPTION>

                                                    December 31,
                                      ------------------------------------------
                                         1994           1995             1996
                                      ----------      ----------      ----------
                                                   (In thousands)

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

Business segments:
  Kronos .......................      $  950,200      $1,063,369      $1,064,285
  Rheox ........................          83,176          83,620          90,095
  General corporate ............         129,034         124,664          66,978
                                      ----------      ----------      ----------

                                      $1,162,410      $1,271,653      $1,221,358
                                      ==========      ==========      ==========

Geographic segments:
  United States ................      $  308,017      $  311,374      $  303,547
  Europe .......................         594,921         690,353         718,626
  Canada .......................         130,438         145,262         132,207
  General corporate ............         129,034         124,664          66,978
                                      ----------      ----------      ----------

                                      $1,162,410      $1,271,653      $1,221,358
                                      ==========      ==========      ==========
</TABLE>
                                    F-14

<PAGE>

Note 4 - Marketable securities and securities transactions:

<TABLE>
<CAPTION>

                                                               December 31,
                                                         ----------------------
                                                           1995          1996
                                                         --------      --------
                                                              (In thousands)

<S>                                                      <C>           <C>     
Available-for-sale securities - noncurrent
 marketable equity securities:
  Unrealized gains .................................     $  1,962      $  3,516
  Unrealized losses ................................       (2,770)       (1,550)
  Cost .............................................       21,752        21,752
                                                         --------      --------

      Aggregate market .............................     $ 20,944      $ 23,718
                                                         ========      ========

</TABLE>

<TABLE>
<CAPTION>

                                                      Years ended December 31,
                                                    ----------------------------
                                                     1994         1995      1996
                                                    -------      -------    ----
                                                            (In thousands)

<S>                                                 <C>          <C>         <C>
Securities transactions gains (losses)
 on trading securities:
  Unrealized ..................................     $(1,177)     $ 1,125     $--
  Realized ....................................         (43)          50      --
                                                    -------      -------     ---

                                                    $(1,220)     $ 1,175     $--
                                                    =======      =======     ===
</TABLE>

Note 5 - Inventories:

<TABLE>
<CAPTION>

                                                             December 31,
                                                     ---------------------------
                                                       1995               1996
                                                     --------           --------
                                                             (In thousands)

<S>                                                  <C>                <C>     
Raw materials ............................           $ 35,075           $ 43,284
Work in process ..........................              9,132             10,356
Finished products ........................            172,330            142,091
Supplies .................................             35,093             36,779
                                                     --------           --------

                                                     $251,630           $232,510
                                                     ========           ========
</TABLE>

Note 6 - Investment in joint ventures:

<TABLE>
<CAPTION>

                                                              December 31,
                                                        ------------------------
                                                          1995            1996
                                                        --------        --------
                                                              (In thousands)

<S>                                                     <C>             <C>     
TiO2 manufacturing joint venture ...............        $183,129        $179,195
Other ..........................................           2,764           2,284
                                                        --------        --------

                                                        $185,893        $181,479
                                                        ========        ========
</TABLE>

      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  Group,  Ltd., a
wholly-owned  subsidiary of Imperial Chemicals  Industries PLC ("Tioxide").  LPC
owns and operates a chloride-process TiO2 plant in Lake Charles, Louisiana.


                                    F-15

<PAGE>



      LPC has long-term debt that is collateralized by the partnership interests
of the partners and  substantially  all of the assets of LPC. The long-term debt
consists of two tranches,  one attributable to each partner, and each tranche is
serviced through (i) the purchase of the plant's TiO2 output in equal quantities
by the partners and (ii) cash capital contributions. KLA is required to purchase
one-half of the TiO2  produced by LPC.  KLA's tranche of LPC's debt is reflected
as  outstanding  indebtedness  of the Company  because Kronos has guaranteed the
purchase obligation relative to the debt service of its tranche. See Note 10.

      LPC is intended to be operated  on a  break-even  basis and,  accordingly,
Kronos'  transfer price 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 are  reported as cost of sales as the related  TiO2  acquired  from LPC is
sold,  and its share of the  interest  expense is  reported  as a  component  of
interest expense.

      Summary balance sheets of LPC are shown below.

<TABLE>
<CAPTION>

                                                               December 31,
                                                          ----------------------
                                                            1995          1996
                                                          --------      --------
           ASSETS                                         (In thousands)

<S>                                                       <C>           <C>     
Current assets .....................................      $ 49,398      $ 47,861
Other assets .......................................         1,553         1,224
Property and equipment, net ........................       335,254       325,617
                                                          --------      --------

                                                          $386,205      $374,702
                                                          ========      ========

   LIABILITIES AND PARTNERS' EQUITY

Long-term debt, including current portion:
  Kronos tranche ...................................      $ 73,286      $ 57,858
  Tioxide tranche ..................................        59,400        16,800
  Note payable to Tioxide ..........................            --        21,000
Other liabilities, primarily current ...............        17,719        14,084
                                                          --------      --------
                                                           150,405       109,742

Partners' equity ...................................       235,800       264,960
                                                          --------      --------

                                                          $386,205      $374,702
                                                          ========      ========
</TABLE>


                                    F-16

<PAGE>



      Summary income statements of LPC are shown below.


<TABLE>
<CAPTION>


                                                  Years ended December 31,
                                           ------------------------------------
                                             1994          1995          1996
                                           --------      --------      --------
                                                      (In thousands)

<S>                                         <C>           <C>           <C>     
Revenues and other income:
  Kronos .............................      $ 70,492      $ 76,365      $ 74,916
  Tioxide ............................        67,218        75,241        73,774
  Interest income ....................           462           653           518
                                            --------      --------      --------

                                             138,172       152,259       149,208
                                            --------      --------      --------
Cost and expenses:
  Cost of sales ......................       126,972       140,103       140,361
  General and administrative .........           572           385           377
  Interest ...........................        10,628        11,771         8,470
                                            --------      --------      --------

                                             138,172       152,259       149,208
                                            --------      --------      --------

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

Note 7 - Other noncurrent assets:

<TABLE>
<CAPTION>

                                                               December 31,
                                                           ---------------------
                                                             1995         1996
                                                           -------       -------
                                                               (In thousands)

<S>                                                        <C>           <C>    
Intangible assets, net of accumulated
 amortization of $20,562 and $22,207 ...............       $11,803       $ 7,939
Deferred financing costs, net ......................        13,199         9,791
Other ..............................................         6,163         7,095
                                                           -------       -------

                                                           $31,165       $24,825
                                                           =======       =======
</TABLE>

Note 8 - Accounts payable and accrued liabilities:
<TABLE>
<CAPTION>

                                                              December 31,
                                                     ---------------------------
                                                       1995               1996
                                                     --------           --------
                                                            (In thousands)

<S>                                                  <C>                <C>     
Accounts payable .........................           $ 68,734           $ 60,648
                                                     --------           --------
Accrued liabilities:
  Employee benefits ......................             49,884             34,618
  Environmental costs ....................              6,000              6,000
  Interest ...............................              6,633              9,429
  Miscellaneous taxes ....................              2,557              4,073
  Other ..................................             32,177             39,136
                                                     --------           --------

                                                       97,251             93,256
                                                     --------           --------

                                                     $165,985           $153,904
                                                     ========           ========
</TABLE>


                                    F-17

<PAGE>



Note 9 - Other noncurrent liabilities:

<TABLE>
<CAPTION>

                                                               December 31,
                                                          ----------------------
                                                            1995          1996
                                                          --------      --------
                                                               (In thousands)

<S>                                                       <C>           <C>     
Environmental costs ................................      $112,827      $106,849
Employee benefits ..................................        13,148        11,960
Insurance claims expense ...........................        12,088        11,673
Deferred technology fee income .....................         8,456            --
Other ..............................................         1,992         1,566
                                                          --------      --------

                                                          $148,511      $132,048
                                                          ========      ========
</TABLE>

Note 10 - Notes payable and long-term debt:
<TABLE>
<CAPTION>

                                                                December 31,
                                                          ----------------------
                                                            1995         1996
                                                          --------      --------
                                                               (In thousands)

<S>                                                       <C>           <C>     
Notes payable (DM 56,000 and DM 40,000,
 respectively) .....................................      $ 39,247      $ 25,732
                                                          ========      ========


Long-term debt:
  NL Industries:
    11.75% Senior Secured Notes ....................      $250,000      $250,000
    13% Senior Secured Discount Notes ..............       132,034       149,756
                                                          --------      --------

                                                           382,034       399,756
  Kronos:
    DM bank credit facility (DM 397,610 and
     DM 539,971, respectively) .....................       276,895       347,362
    LPC term loan ..................................        73,286        57,858
    Other ..........................................        13,672         9,125
                                                          --------      --------

                                                           363,853       414,345
  Rheox:
    Bank term loan .................................        37,263        14,659
    Other ..........................................           553           286
                                                          --------      --------

                                                            37,816        14,945

                                                           783,703       829,046
  Less current maturities ..........................        43,369        91,946
                                                          --------      --------

                                                          $740,334      $737,100
</TABLE>

      The Company's $250 million principal amount of 11.75% Senior Secured Notes
due 2003 and $188 million principal amount at maturity ($100 million proceeds at
issuance)  of 13% Senior  Secured  Discount  Notes due 2005  (collectively,  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 Senior  Secured Notes are also  collateralized  by a
first  priority  lien on the stock of Kronos and a second  priority  lien on the
stock of Rheox. In the event of foreclosure, the Note holders would have access

                                    F-18

<PAGE>



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 to a full,  unconditional and joint and several
guarantee of the Notes by Kronos and Rheox.

      The  Senior  Secured  Notes  and the  Senior  Secured  Discount  Notes are
redeemable,  at the  Company's  option,  after  October  2000 and October  1998,
respectively.  The redemption  prices range from 101.5% (starting  October 2000)
declining to 100% (after  October 2001) of the  principal  amount for the Senior
Secured  Notes and range from 106%  (starting  October  1998)  declining to 100%
(after October 2001) of the accreted value of the Senior Secured Discount Notes.
In the event of a Change of Control,  as defined,  the Company would be required
to make an offer to purchase  the Notes at 101% of the  principal  amount of the
Senior  Secured  Notes  and 101% of the  accreted  value of the  Senior  Secured
Discount  Notes.  The Notes are issued  pursuant to  indentures  which contain 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 or merge or consolidate with, or sell or transfer all or substantially
all of their assets to,  another  entity.  At December 31, 1996, no amounts were
available for payment of dividends pursuant to the terms of the indentures.  The
Senior  Secured  Discount  Notes do not require cash interest  payments  through
October 1998. The net carrying  value of the Senior  Secured  Discount Notes per
$100 principal amount at maturity was $70.42 and $79.87 at December 31, 1995 and
1996, respectively.  At December 31, 1996, the quoted market price of the Senior
Secured Notes was $106.08 per $100 principal  amount and the quoted market price
of the Senior Secured  Discount Notes was $86.34 per $100 principal amount (1995
- $107.06 and $80.95, respectively).

      At December 31, 1996, the DM credit facility  consists of a DM 396 million
term  loan  and a DM 250  million  revolving  credit  facility,  of which DM 144
million is  outstanding.  Borrowings bear interest at DM LIBOR plus 1.625% (5.5%
and 4.76% at December 31, 1995 and 1996,  respectively),  and are collateralized
by the stock of certain KII subsidiaries. In January 1997, the Company completed
an amendment to the DM credit facility in which the Company prepaid a net DM 207
million  ($127  million) of the term loan and DM 43 million ($26 million) of the
revolver,  leaving DM 188 million and DM 100 million outstanding,  respectively.
In addition, the aggregate amount available for borrowing under the revolver was
reduced to DM 230 million. The majority of the cash generated from a refinancing
of the  Rheox  term  loan,  discussed  below,  was  used for a  portion  of such
prepayments.  As amended, the term loan is due in 1998 and 1999 and the revolver
is due in 2000,  borrowings  bear  interest at DM LIBOR plus  2.75%,  additional
collateral  in the form of  pledges of certain  Canadian  and German  assets was
granted and NL has guaranteed the facility.

      At December 31, 1996,  Rheox's term loan is due in quarterly  installments
through December 1997, and is  collateralized  principally by the stock of Rheox
and its U.S.  subsidiaries.  The term loan bears interest, at Rheox's option, at
the prime  rate  plus 1.5% or LIBOR  plus  2.5%  (1995 - 8.3%  with  LIBOR  rate
borrowings;  1996 - 9.8% with  prime rate  borrowings).  In  January  1997,  the
Company  completed a refinancing of this facility which  increased the term loan
to $125 million and provided for a $25 million revolving facility,  generating a
net $135 million in cash proceeds and credit availability. As amended, the term

                                    F-19

<PAGE>



loan is due in  quarterly  installments  commencing  in  September  1997 through
January 2004 and the revolver is due no later than January  2004.  The margin on
LIBOR-based  borrowings will range from .75% to 1.75%,  depending upon the level
of a certain Rheox financial ratio.

      After  giving  effect for the Rheox term loan and the  amendment to the DM
credit facility,  unused lines of credit available for borrowing under the Rheox
U.S. facility and under the Company's non-U.S. credit facilities,  including the
DM facility, approximated $9 million and $102 million, respectively, at December
31, 1996.

      Borrowings  under KLA's  tranche of LPC's term loan bear  interest at U.S.
LIBOR  plus  1.625%   (7.315%  and  7.245%  at  December   31,  1995  and  1996,
respectively)  and are  repayable in quarterly  installments  through  September
2000. See Note 6.

      Notes  payable at December 31, 1995 and 1996 consists of DM 56 million and
DM 40 million,  respectively,  of short-term borrowings due within one year from
non-U.S. banks with interest rates ranging from 4.25% to 4.856% in 1995 and from
3.25% to 3.70% in 1996.

      The  aggregate  maturities  of  long-term  debt at December  31, 1996 on a
historical and a pro forma basis, giving effect for the January 1997 refinancing
described above, are shown in the table below.

<TABLE>
<CAPTION>

Years ending December 31,                               Historical    Pro forma
                                                        ----------    ---------
                                                             (In thousands)

      <S>                                                 <C>         <C>     
      1997                                                $ 91,946    $ 28,152
      1998                                                 103,938      65,040
      1999                                                 133,295     120,609
      2000                                                  11,855      26,855
      2001                                                     215      22,715
      2002 and thereafter                                  525,541     567,937
                                                          --------    --------
                                                           866,790     831,308
      Less unamortized original issue discount
       on the Senior Secured Discount Notes                 37,744      37,744
                                                          --------    --------

                                                          $829,046    $793,564
                                                          ========    ========
</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.  Personnel  employed by
non-U.S.  subsidiaries  are  covered  by  separate  plans  in  their  respective
countries  and U.S.  employees  are  covered  by  various  plans  including  the
Retirement Programs of NL Industries, Inc. (the "NL Pension Plan").

      A majority of U.S. employees are eligible to participate in a contributory
savings plan. The Company partially matches employee  contributions to the Plan,
and, beginning April 1996, the Company contributes to each employee's account an
amount equal to approximately 3% of the employee's annual eligible earnings. The
Company also has an unfunded defined contribution plan covering certain

                                    F-20

<PAGE>



executives,  and  contributions  are  based  on  a  formula  involving  eligible
earnings.  The Company's expense related to these plans was $.8 million in 1994,
and $1.2 million in 1995 and $1.3 million in 1996.

      Defined  pension  benefits are  generally  based upon years of service and
compensation under fixed-dollar,  final pay or career average formulas,  and the
related expenses are based upon independent  actuarial  valuations.  The funding
policy for U.S.  defined  benefit plans is to  contribute  amounts which satisfy
funding  requirements of the Employee Retirement Income Security Act of 1974, as
amended,  and the Retirement  Protection Act of 1994.  Non-U.S.  defined benefit
pension plans are funded in accordance with applicable statutory requirements.

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

<TABLE>
<CAPTION>

                                                 Years ended December 31,
                                           1994           1995            1996
                                        ----------     ----------     ----------
                                                   (Percentages)

<S>                                     <C>            <C>            <C>
Discount rate .....................            8.5     7.0 to 8.5     6.5 to 8.5
Rate of increase in future
 compensation levels ..............     5.0 to 6.0     3.5 to 6.0     3.5 to 6.0
Long-term rate of return on
 plan assets ......................     8.5 to 9.0     8.0 to 9.0     7.0 to 9.0
</TABLE>

      During 1996, the Company  curtailed certain U.S. employee pension benefits
and  recognized  a $4.6 million  gain.  Plan assets are  comprised  primarily of
investments  in  U.S.  and  non-U.S.   corporate  equity  and  debt  securities,
short-term investments, mutual funds and group annuity contracts.

      Statement of Financial  Accounting  Standards ("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,
including  the rate of return on pension plan assets,  will result in additional
increases or  decreases  in accrued  pension  liabilities,  pension  expense and
funding  requirements  in future  periods.  At  December  31,  1996,  79% of the
projected benefit obligations in excess of plan assets relate to non-U.S. plans.
The funded status of the Company's  defined  benefit  pension plans is set forth
below.

                                    F-21

<PAGE>


<TABLE>
<CAPTION>

 
                                           Assets exceed         Accumulated benefits
                                       accumulated benefits         exceed assets
                                      ----------------------    ----------------------
                                           December 31,              December 31,
                                      ----------------------    ----------------------
                                         1995       1996           1995         1996
                                      ---------    ---------    ---------    ---------
                                                       (In thousands)

<S>                                   <C>          <C>          <C>          <C>      
Actuarial present value of benefit
 obligations:
  Vested benefits .................   $  47,181    $  48,953    $ 156,275    $ 167,411
  Nonvested benefits ..............       3,744        4,075        2,562        9,466
                                      ---------    ---------    ---------    ---------

  Accumulated benefit obligations .      50,925       53,028      158,837      176,877
  Effect of projected salary
   increases ......................       7,885        7,598       22,373       25,741
                                      ---------    ---------    ---------    ---------

  Projected benefit obligations
   ("PBO") ........................      58,810       60,626      181,210      202,618
Plan assets at fair value .........      71,345       78,511      124,632      126,580
                                      ---------    ---------    ---------    ---------

Plan assets over (under) PBO ......      12,535       17,885      (56,578)     (76,038)
Unrecognized net loss (gain) from
 experience different from
 actuarial assumptions ............       7,155        3,567      (20,643)      11,414
Unrecognized prior service cost
 (credit) .........................       3,147        3,838       (2,711)         262
Unrecognized transition obligations
 (assets) being amortized over 15
 to 18 years ......................        (261)        (469)       2,517        2,043
Adjustment required to recognize
 minimum liability ................          --           --       (1,908)      (1,822)
                                      ---------    ---------    ---------    ---------

      Total prepaid (accrued)
       pension cost ...............      22,576       24,821      (79,323)     (64,141)
Less current portion ..............          --           --      (10,012)      (6,200)
                                      ---------    ---------    ---------    ---------

      Noncurrent prepaid (accrued)
       pension cost ...............   $  22,576    $  24,821    $(69,311)    $(57,941)
                                      =========    =========    =========    =========
</TABLE>

      The components of the net periodic defined benefit pension cost, excluding
curtailment gain, are set forth below.

<TABLE>
<CAPTION>

                                                 Years ended December 31,
                                           ------------------------------------
                                             1994          1995         1996
                                           --------      --------      --------
                                                     (In thousands)

<S>                                        <C>           <C>           <C>     
Service cost benefits ................     $  4,905      $  4,325      $  3,482
Interest cost on PBO .................       15,371        17,853        16,577
Return on plan assets ................       (8,039)      (16,574)      (16,245)
Net amortization and deferrals .......       (5,940)       (2,399)          (39)
                                           --------      --------      --------

                                           $  6,297      $  3,205      $  3,775
                                           ========      ========      ========
</TABLE>


                                    F-22

<PAGE>



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 and Rheox in  relation to the
annual  operating  plan of the  employee's  business unit and, for most of these
employees, individual performance.

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  U.S. and 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.
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, 1996,  the expected rate
of  increase in health care costs is 8% in 1997,  gradually  declining  to 5% in
2000. Other  assumptions used to measure the liability and expense are presented
below.

<TABLE>
<CAPTION>

                                                        Years ended December 31,
                                                        ------------------------
                                                          1994     1995     1996
                                                        -------   ------   -----
                                                              (Percentages)

<S>                                                        <C>      <C>      <C>
Discount rate .......................................      8.5      7.5      7.5
Long-term rate for compensation increases ...........      6.0      4.5      6.0
Long-term rate of return on plan assets .............      9.0      9.0      9.0
</TABLE>

      Variances  from  actuarially-assumed   rates  will  result  in  additional
increases or decreases in accrued OPEB  liabilities,  net periodic  OPEB expense
and funding  requirements in future periods.  If the health care cost trend rate
was  increased by one  percentage  point for each year,  postretirement  benefit
expense  would  have  increased  approximately  $.2  million  in  1996,  and the
actuarial present value of accumulated  benefit obligations at December 31, 1996
would have  increased by  approximately  $2.2 million.  During 1996, the Company
curtailed  certain Canadian employee OPEB benefits and recognized a $1.3 million
gain.

                                    F-23

<PAGE>


<TABLE>
<CAPTION>


                                                                 December 31,
                                                             -------------------
                                                               1995        1996
                                                             -------     -------
                                                                (In thousands)

<S>                                                          <C>         <C>    
Actuarial present value of accumulated benefit
 obligations:
  Retiree benefits .....................................     $53,211     $41,768
  Other fully eligible active plan participants ........       1,228         840
  Other active plan participants .......................       2,322       2,152
                                                             -------     -------
                                                              56,761      44,760

Plan assets at fair value ..............................       7,103       6,689
                                                             -------     -------
Accumulated postretirement benefit obligations
 in excess of plan assets ..............................      49,658      38,071
Unrecognized net gain from experience different
 from actuarial assumptions ............................       4,676       7,083
Unrecognized prior service credit ......................      12,199      16,259
                                                             -------     -------

    Total accrued postretirement benefits cost .........      66,533      61,413
Less current portion ...................................       6,298       5,478
                                                             -------     -------

    Noncurrent accrued postretirement benefits
     cost ..............................................     $60,235     $55,935
                                                             =======     =======
</TABLE>

      The components of the Company's net periodic  postretirement benefit cost,
excluding curtailment gain, are set forth below.

<TABLE>
<CAPTION>

                                                      Years ended December 31,
                                                  -----------------------------
                                                   1994       1995        1996
                                                  -------    -------    -------
                                                          (In thousands)

<S>                                               <C>        <C>        <C>    
Interest cost on accumulated benefit
 obligations ..................................   $ 4,338    $ 4,415    $ 3,995
Service cost benefits earned during the year ..        99        101        112
Return on plan assets .........................      (688)      (637)      (596)
Net amortization and deferrals ................    (1,495)    (1,870)    (1,473)
                                                  -------    -------    -------

                                                  $ 2,254    $ 2,009    $ 2,038
                                                  =======    =======    =======
</TABLE>

Note 12 - Shareholders' deficit:

Common stock

<TABLE>
<CAPTION>

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

<S>                                            <C>          <C>           <C>   
Balance at December 31, 1993 ...........       66,839       15,949        50,890
  Treasury shares reissued .............           --         (162)          162
                                              -------      -------       -------

Balance at December 31, 1994 ...........       66,839       15,787        51,052
  Treasury shares reissued .............           --          (39)           39
                                              -------      -------       -------

Balance at December 31, 1995 ...........       66,839       15,748        51,091
  Treasury shares reissued .............           --          (27)           27
                                              -------      -------       -------

Balance at December 31, 1996 ...........       66,839       15,721        51,118
                                              =======      =======       =======
</TABLE>

                                    F-24

<PAGE>

Common stock options

      The 1989 Long Term Performance Incentive Plan of NL Industries,  Inc. (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,
1996, 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, 1996, an aggregate of 2.5 million 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 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  maintains a stock option
plan for its nonemployee directors.  At December 31, 1996, there were options to
acquire  10,000  shares of common  stock  outstanding  of which 8,000 were fully
vested.

      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.

                                    F-25

<PAGE>


<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, 1993 .....      1,718    $ 4.81   $24.19   $ 20,624

  Granted ............................        675      8.69    10.69      6,315
  Exercised ..........................        (13)     9.31    10.50       (120)
  Forfeited ..........................         (6)     5.00     9.31        (46)
                                         --------    ------   ------   --------

Outstanding at December 31, 1994 .....      2,374      4.81    24.19     26,773

  Granted ............................         94     11.81    14.81      1,150
  Exercised ..........................        (39)     5.00    10.78       (282)
  Forfeited ..........................        (36)     5.00    11.81       (320)
                                         --------    ------   ------   --------

Outstanding at December 31, 1995 .....      2,393      4.81    24.19     27,321

  Granted ............................        218     14.25    17.25      3,316
  Exercised ..........................        (27)     5.00    10.78       (262)
  Forfeited ..........................        (10)     5.00    14.25        (91)
  Expired ............................         (1)    10.78    10.78         (6)
                                         --------    ------   ------   --------

Outstanding at December 31, 1996 .....      2,573    $ 4.81   $24.19   $ 30,278
                                         ========    ======   ======   ========
</TABLE>


      At  December  31,  1994,  1995 and  1996,  options  to  purchase  850,582,
1,189,907 and 1,660,068  shares,  respectively,  were exercisable and options to
purchase 298,698 shares become  exercisable in 1997. Of the exercisable  options
at December 31, 1996,  options to purchase  1,161,398 shares had exercise prices
less than the  Company's  December  31, 1996 quoted  market price of $10.875 per
share.  Outstanding options at December 31, 1996 expire at various dates through
2006, 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 during 1995 and 1996. The weighted average fair values of options
granted during 1995 and 1996 were $6.02 and $8.38 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 1995 and 1996: stock price volatility of 31% and 42% in 1995 and 1996,
respectively; risk-free rate of return of 5%; no dividend yield; and an expected
term of 9 years.  If the fair  value-based  method of accounting in SFAS No. 123
had been  applied,  the  Company's  earnings per share would not have changed in
1995 and would have been reduced by $.01 per share in 1996. The pro forma impact
on earnings per share for 1996 is not  necessarily  indicative of future effects
on earnings per share.

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.

                                    F-26

<PAGE>



Note 13 - Income taxes:

      The  components  of (i) income  (loss)  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,
                                               --------------------------------
                                                 1994        1995        1996
                                               --------    --------    --------
                                                     (In thousands)

<S>                                            <C>         <C>         <C>     
Pretax income (loss):
  U.S ......................................   $ (6,241)   $ 43,125    $ 50,430
  Non-U.S ..................................     (7,164)     55,777     (24,817)
                                               --------    --------    --------

                                               $(13,405)   $ 98,902    $ 25,613
                                               ========    ========    ========

Expected tax expense (benefit) .............   $ (4,692)   $ 34,616    $  8,965
Non-U.S. tax rates .........................     (7,108)     (7,016)       (206)
Rate change adjustment of deferred taxes ...         --      (6,593)         --
Valuation allowance ........................     24,309      (9,588)      3,013
Settlement of U.S. tax audits ..............     (5,437)         --          --
Incremental tax on income of companies not
 included in the NL Tax Group ..............        790         499       3,132
U.S. state income taxes ....................        534         721         468
Other, net .................................      1,338          32        (539)
                                               --------    --------    --------

                                               $  9,734    $ 12,671    $ 14,833
                                               ========    ========    ========

Provision for income taxes:
  Current income tax expense (benefit):
    U.S. federal ...........................   $ (5,222)   $    249    $  4,934
    U.S. state .............................        475       2,135       1,136
    Non-U.S ................................      2,574      39,535       5,961
                                               --------    --------    --------

                                                 (2,173)     41,919      12,031
                                               --------    --------    --------
  Deferred income tax expense (benefit):
    U.S. federal ...........................      4,058      (9,005)     (4,764)
    U.S. state .............................        347      (1,026)       (668)
    Non-U.S ................................      7,502     (19,217)      8,234
                                               --------    --------    --------

                                                 11,907     (29,248)      2,802
                                               --------    --------    --------

                                               $  9,734    $ 12,671    $ 14,833
                                               ========    ========    ========

Comprehensive tax provision allocable to:
  Pretax income (loss) .....................   $  9,734    $ 12,671    $ 14,833
  Shareholders' deficit, principally
   deferred income taxes allocable to
   currency translation and marketable
   securities adjustments ..................          7          10         971
                                               --------    --------    --------

                                               $  9,741    $ 12,681    $ 15,804
                                               ========    ========    ========
</TABLE>


                                    F-27

<PAGE>



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

<TABLE>
<CAPTION>

                                                   December 31,
                               -------------------------------------------------
                                          1995                       1996
                                          ----                       ----
                                     Deferred tax              Deferred tax
                               -----------------------    ----------------------
                                 Assets    Liabilities      Assets   Liabilities
                               ---------   -----------    ---------  -----------
                                              (In thousands)
<S>                            <C>          <C>          <C>          <C>       
Tax effect of temporary
 differences relating to:
  Inventories ..............   $   5,277    $  (5,644)   $   4,130    $  (4,967)
  Property and equipment ...         574     (109,418)         512     (109,963)
  Accrued postretirement
   benefits cost ...........      23,200           --       21,396           --
  Accrued (prepaid) pension
   cost ....................       8,978      (14,942)       6,308      (17,579)
  Accrued environmental
   costs ...................      38,214           --       36,670           --
  Other accrued liabilities
   and deductible
   differences .............      26,496           --       33,464           --
  Other taxable differences           --     (101,621)          --     (102,578)
Tax on unremitted earnings
 of non-U.S. subsidiaries ..         281      (22,526)          --      (18,048)
Tax loss and tax credit
 carryforwards .............     189,263           --      205,476           --
Valuation allowance ........    (195,569)          --     (207,117)          --
                               ---------    ---------    ---------    ---------

  Gross deferred tax assets
   (liabilities) ...........      96,714     (254,151)     100,839     (253,135)

Reclassification,
 principally netting by tax
 tax jurisdiction ..........     (93,404)      93,404      (99,019)      99,019
                               ---------    ---------    ---------    ---------

  Net total deferred tax
   assets (liabilities) ....       3,310     (160,747)       1,820     (154,116)
  Net current deferred tax
   assets (liabilities) ....       2,522       (3,555)       1,597       (2,895)
                               ---------    ---------    ---------    ---------

  Net noncurrent deferred
   tax assets (liabilities)    $     788    $(157,192)   $     223    $(151,221)
                               =========    =========    =========    =========
</TABLE>

      The  Company's  valuation  allowance  increased  in the  aggregate  by $31
million in each of 1994 and 1995 and $12 million in 1996.  During 1995, both the
Company's gross deferred tax assets and the offsetting  valuation allowance were
increased  by $34  million as a result of  recharacterizations  of  certain  tax
attributes  primarily  due to  changes  in  certain  tax  return  elections.  In
addition,  the valuation  allowance  increased  during 1995 by $6 million due to
foreign currency translation and was reduced by approximately $10 million due to
a change in estimate of the future tax benefit of certain tax credits  which the
Company believes satisfies the  "more-likely-than-not"  recognition criteria. In
1996, both the Company's gross deferred tax assets and the offsetting  valuation
allowance  were increased by $14 million due to certain  non-U.S.  tax losses of
its dual resident  subsidiary.  In addition,  the valuation  allowance decreased
during

                                    F-28

<PAGE>



1996 by $6 million due to foreign  currency  translation and was increased by $3
million  as  a  result  of  increases  in  certain  other  deductible  temporary
differences  during the year which the Company believes do not currently satisfy
the "more-likely-than-not" recognition criteria.

      Certain of the  Company's  income tax returns in various U.S. and non-U.S.
jurisdictions  are being  examined  and tax  authorities  have  proposed  or may
propose tax  deficiencies.  During  1994,  the German tax  authorities  withdrew
certain  proposed  tax  deficiencies  of DM 100 million and remitted tax refunds
aggregating DM 225 million ($136 million),  including  interest,  on a tentative
basis while  examination of the Company's  German income tax returns  continued.
The Company  subsequently  reached an agreement with the German tax  authorities
regarding such examinations which resolved certain significant tax contingencies
for years through 1990. The Company received final  assessments and paid certain
tax  deficiencies  of  approximately  DM 50 million  ($32  million  when  paid),
including interest, in settlement of these issues in 1996. The Company considers
the agreement to be a favorable  resolution of the contingencies and the payment
was within previously-accrued amounts for such matters.

      Certain  other  German  tax  contingencies  remain  outstanding  and  will
continue to be litigated.  Although the Company believes that it will ultimately
prevail in the litigation, the Company has granted a DM 100 million ($64 million
at December 31, 1996) lien on its Nordenham,  Germany TiO2 plant in favor of the
German tax  authorities  until the litigation is resolved.  No assurances can be
given that this  litigation  will be resolved in the Company's  favor in view of
the inherent  uncertainties involved in court rulings. The Company believes that
it has  adequately  provided  accruals for  additional  income 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.

      During 1995, the Company  recorded tax benefits of $6.6 million due to the
reduction in dividend  withholding  tax rates  pursuant to  ratification  of the
U.S./Canada income tax treaty.

      During  1995,  the  Company  utilized  $14  million of foreign  tax credit
carryforwards  and U.S. net  operating  loss  carryforwards  from prior years to
reduce its 1995 U.S. federal income tax expense.  At December 31, 1996, for U.S.
federal  income tax  purposes,  the  Company  had  approximately  $27 million of
foreign  tax  credit  carryforwards   expiring  during  1997  through  2001  and
approximately $10 million of alternative  minimum tax credit  carryforwards with
no expiration  date. The Company also had  approximately  $400 million of income
tax loss carryforwards in Germany with no expiration date.


                                    F-29

<PAGE>



Note 14 - Other income, net:

<TABLE>
<CAPTION>

                                                    Years ended December 31,
                                               --------------------------------
                                                 1994        1995         1996
                                               --------    --------    --------
                                                      (In thousands)

<S>                                            <C>         <C>         <C>     
Securities earnings:
  Interest and dividends ...................   $  5,075    $  6,244    $  4,708
  Securities transactions ..................     (1,220)      1,175          --
                                               --------    --------    --------
                                                  3,855       7,419       4,708
Litigation settlement gains ................     22,978          --       2,756
Technology fee income ......................     10,344      10,660       8,743
Currency transaction gains, net ............      1,735         561       5,637
Pension and OPEB curtailment gains .........         --          --       5,900
Royalty income .............................      1,508          --          --
Disposition of property and equipment ......     (1,981)     (2,713)     (2,312)
Other, net .................................      6,389       6,314       5,048
                                               --------    --------    --------

                                               $ 44,828    $ 22,241    $ 30,480
                                               ========    ========    ========
</TABLE>

      Litigation  settlement gains includes $20 million related to the Company's
1994  settlement of its lawsuit  against  Lockheed  Corporation.  Technology fee
income was amortized by the straight-line method over a three-year period ending
October 1996.

Note 15 - Other items:

      Advertising costs, expensed as incurred,  were $2 million in each of 1994,
1995 and 1996.

      Research,  development and certain sales technical support costs, expensed
as incurred,  approximated  $10 million in 1994, and $11 million in each of 1995
and 1996.

      Interest  capitalized in connection with long-term capital projects was $1
million in each of 1994 and 1995, and $2 million in 1996.

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 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

                                    F-30

<PAGE>



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 $.4 million in each of 1994, 1995 and 1996.

      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  related to the Valhi ISA was $.2  million in
1994, and $.1 million in each of 1995 and 1996.

      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 nil in 1994, and $.1 million
in each of 1995 and 1996.

      Baroid Corporation,  a former  wholly-owned  subsidiary of the Company and
currently a subsidiary of Dresser Industries, Inc., and the Company were parties
to an intercorporate services agreement (the "Baroid ISA") pursuant to which, as
amended,  Baroid agreed to make certain  services  available to the Company on a
fee basis. The agreement was terminated in 1994. Management services fee expense
pursuant to the Baroid ISA approximated $.2 million in 1994.

      Sales to Baroid in the  ordinary  course of business  were $1.8 million in
1994, $1.6 million in 1995 and $1.1 million in 1996.

      Purchases in the ordinary  course of business  from  unconsolidated  joint
ventures,  including LPC, were approximately $74 million in 1994, $79 million in
1995 and $81 million in 1996.

      Certain  employees of the Company  have been  granted  options to purchase
Valhi common stock under the terms of Valhi's  stock option  plans.  The Company
and Valhi have agreed that the Company will pay Valhi the  aggregate  difference
between the option  price and the market  value of Valhi's  common  stock on the
exercise date of such options.  For financial  reporting  purposes,  the Company
accounts for the related expense  (income)  ($64,000 in 1994,  $(25,000) in 1995
and $1,000 in 1996) in a manner  similar to accounting for SARs. At December 31,
1996,  employees of the Company held options to purchase 365,000 shares of Valhi
common  stock at  exercise  prices  ranging  from $4.76 to $14.66 per share.  At
December 31, 1996,  30,000 of the vested options were exercisable at prices less
than Valhi's quoted market price per share of $6.375.

                                    F-31

<PAGE>



      The Company and NLI Insurance, Ltd., a wholly-owned subsidiary of Tremont,
are parties to an  Insurance  Sharing  Agreement  with  respect to certain  loss
payments and reserves  established by NLI Insurance,  Ltd. that (i) arise out of
claims against other entities for which the Company is responsible  and (ii) are
subject to payment by NLI Insurance,  Ltd. under certain reinsurance  contracts.
Also,  NLI  Insurance,  Ltd.  will  credit the Company  with  respect to certain
underwriting profits or credit recoveries that NLI Insurance, Ltd. receives from
independent reinsurers that relate to retained liabilities.

      Net amounts payable to affiliates are summarized in the following table.

<TABLE>
<CAPTION>

                                                           December 31,
                                                   ----------------------------
                                                     1995                1996
                                                   --------            --------
                                                          (In thousands)

<S>                                                <C>                 <C>     
Tremont Corporation ....................           $  3,525            $  3,529
LPC ....................................              6,677               6,677
Other ..................................                (21)                 (2)
                                                   --------            --------

                                                   $ 10,181            $ 10,204
</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.

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.


                                    F-32

<PAGE>



      Net rent expense aggregated $8 million in 1994, $9 million in 1995 and $12
million in 1996.  At December 31, 1996,  minimum  rental  commitments  under the
terms of noncancellable operating leases were as follows:

<TABLE>
<CAPTION>

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

  <S>                                                       <C>        <C>    
  1997                                                      $ 2,219    $ 2,721
  1998                                                        2,086      2,179
  1999                                                        2,102      1,197
  2000                                                        1,777        119
  2001                                                        1,415         17
  2002 and thereafter                                        24,752       -
                                                            -------    ----

                                                            $34,351    $ 6,233
                                                            =======    =======
</TABLE>

Capital expenditures

      At December 31, 1996, the estimated cost to complete  capital  projects in
process  approximated  $16  million,  including  a  $8  million  debottlenecking
expansion project at the Company's  Leverkusen,  Germany  chloride-process  TiO2
facility  and $2 million  related to  environmental  protection  and  compliance
programs.

Purchase commitments

      The Company has long-term  supply contracts that provide for the Company's
chloride feedstock requirements through 2000. The agreements require the Company
purchase  certain  minimum  quantities of feedstock with average  minimum annual
purchase commitments aggregating approximately $115 million.

Legal proceedings

      Lead pigment litigation. Since 1987, the Company, other past 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
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, 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; several 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

                                    F-33

<PAGE>



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 and/or damages for personal injury or property  damage.  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,
1996, the Company had accrued $113 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  $160
million. The Company's estimates of such 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. As discussed in Note 2, the
Company  will adopt the  AICPA's  Statement  of  Position  96-1,  "Environmental
Remediation  Liabilities,"  during  the first  quarter of 1997,  increasing  its
environmental liability by approximately $30 million.

      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 operations and products
of the Company have the potential to cause  environmental  or other damage.  The
Company  continues  to implement  various  policies and programs in an effort to
minimize these risks. The Company's policy is to comply with  environmental laws
and  regulations at all of its  facilities and to continually  strive to improve
environmental  performance in association with applicable industry  initiatives.
It is possible that future developments, such as stricter requirements of

                                    F-34

<PAGE>



environmental  laws  and  enforcement  policies  thereunder,  could  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 almost 90% of net sales during the past three
years. TiO2 is 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. In each of the past three years, approximately
one-half of the Company's TiO2 sales by volume were to Europe and  approximately
36% in both 1994 and 1995 and 37% in 1996 of sales  were  attributable  to North
America.

      Consolidated  cash,  cash  equivalents  and restricted  cash includes $103
million and $53 million  invested in U.S.  Treasury  securities  purchased under
short-term agreements to resell at December 31, 1995 and 1996, respectively,  of
which $88 million and $41 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,
                                                  1995                1996
                                            -----------------   ----------------
                                            Carrying    Fair    Carrying   Fair
                                             Amount     Value    Amount    Value
                                            --------   ------   --------  ------
                                                        (In millions)

<S>                                          <C>       <C>      <C>       <C>   
Cash and cash equivalents, including
 restricted cash .........................   $141.3    $141.3   $114.1    $114.1
Marketable securities - classified as
 available-for-sale ......................     20.9      20.9     23.7      23.7

Notes payable and long-term debt:
  Fixed rate with market quotes:
    Senior Secured Notes .................   $250.0    $267.7   $250.0    $265.2
    Senior Secured Discount Notes ........    132.0     151.8    149.8     161.9
  Variable rate debt .....................    440.9     440.9    455.0     455.0

Common shareholders' equity (deficit) ....   $(209.4)  $619.5   $(203.5)  $555.9
</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  (deficit) is based upon quoted market prices for NL's common stock.  The
Company held no derivative financial instruments at December 31, 1995 and 1996.

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, 1995:

  Net sales .................   $ 250,875   $ 283,474   $ 255,339    $ 234,251
  Cost of sales .............     169,768     187,896     169,058      149,462
  Operating income ..........      41,968      57,549      50,590       49,612

      Net income ............   $  13,062   $  21,002   $  17,426    $  34,119(a)
                                =========   =========    =========   =========

  Net income per share of
   common stock .............   $     .26   $     .41   $       .34  $     .66(a)
                                =========   =========    =========   =========

  Weighted average shares
   and common stock
   equivalents outstanding ..      51,176      51,552      51,628       51,486
                                =========   =========    =========   =========

Year ended December 31, 1996:

  Net sales .................   $ 240,440   $ 263,162   $ 248,462    $ 234,010
  Cost of sales .............     169,816     194,794     193,271      180,557
  Operating income ..........      41,938      36,098      19,471       15,866

      Net income (loss) .....   $  13,444   $  11,919   $  (4,249)   $ (10,297)
                                =========   =========   =========    =========

  Net income (loss) per
   share of common stock ....   $     .26   $     .23   $    (.08)   $    (.20)
                                =========   =========   =========    =========

  Weighted average shares
   and common stock
   equivalents outstanding ..      51,510      51,493      51,118       51,118
                                =========   =========    =========   =========
</TABLE>

(a)   Income tax benefits in the fourth quarter of 1995 include the  recognition
      of $10 million of deferred  tax assets  related to a change in estimate of
      the future tax benefit of certain tax credits  which the Company  believes
      satisfies the "more-likely-than-not" recognition criteria and $6.6 million
      related to the reduction in U.S./Canada dividend withholding tax rates.
      See Note 13.

                                    F-35

<PAGE>



                       REPORT OF INDEPENDENT ACCOUNTANTS
                       ON FINANCIAL STATEMENT SCHEDULES


     Our report on the consolidated financial statements of NL Industries,  Inc.
is included on page F-2 of this Annual Report on Form 10-K.  In connection  with
our  audits of such  financial  statements,  we have also  audited  the  related
financial statement schedules listed in the index on page F-1.

     In our opinion,  the financial  statement schedules referred to above, when
considered  in  relation  to the basic  financial  statements  taken as a whole,
present  fairly,  in all  material  respects,  the  information  required  to be
included therein.





                                    COOPERS & LYBRAND L.L.P.

Houston, Texas
February 7, 1997


                                    S-1

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

           SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                           Condensed Balance Sheets

                          December 31, 1995 and 1996

                                (In thousands)

<TABLE>
<CAPTION>


                                                          1995           1996
                                                       ---------      ---------

<S>                                                    <C>            <C>      
Current assets:
  Cash and cash equivalents, including
   restricted cash of $4,349 and $4,833 ..........     $  40,080      $  12,135
  Accounts and notes receivable ..................           203            356
  Receivable from subsidiaries ...................         4,273          9,542
  Refundable income taxes ........................         1,662             --
  Prepaid expenses ...............................           729            445
                                                       ---------      ---------

      Total current assets .......................        46,947         22,478
                                                       ---------      ---------

Other assets:
  Marketable securities ..........................        20,944         23,718
  Notes receivable from subsidiary ...............       382,034        505,557
  Investment in subsidiaries .....................       (89,395)      (175,063)
  Other ..........................................         7,582          6,680
                                                       ---------      ---------

      Total other assets .........................       321,165        360,892
                                                       ---------      ---------

Property and equipment, net ......................         3,562          3,396
                                                       ---------      ---------

                                                       $ 371,674      $ 386,766
                                                       =========      =========

Current liabilities:
  Accounts payable and accrued liabilities .......     $  28,116      $  24,929
  Payable to affiliates ..........................         3,498          2,813
  Income taxes ...................................            --          3,024
  Deferred income taxes ..........................         1,905          1,908
                                                       ---------      ---------

      Total current liabilities ..................        33,519         32,674
                                                       ---------      ---------

Noncurrent liabilities:
  Long-term debt .................................       382,034        399,756
  Deferred income taxes ..........................        10,211          9,736
  Accrued pension cost ...........................        10,835         10,974
  Accrued postretirement benefits cost ...........        37,430         34,396
  Other ..........................................       107,066        102,711
                                                       ---------      ---------

      Total noncurrent liabilities ...............       547,576        557,573
                                                       ---------      ---------

Shareholders' deficit ............................      (209,421)      (203,481)
                                                       ---------      ---------

                                                       $ 371,674      $ 386,766
                                                       =========      =========
</TABLE>

Contingencies (Note 4)

                                    S-2

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

     SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

                      Condensed Statements of Operations

                 Years ended December 31, 1994, 1995 and 1996

                                (In thousands)

<TABLE>
<CAPTION>


                                               1994         1995         1996
                                            ---------     ---------    ---------

<S>                                         <C>           <C>          <C>      
Revenues and other income:
  Equity in income of subsidiaries .....    $   7,925     $  99,734    $  18,236
  Interest and dividends ...............        2,538         2,739        1,461
  Interest income from subsidiary ......       43,157        45,551       49,738
  Securities transactions ..............       (1,220)        1,175           --
  Other income, net ....................        3,135           460        1,873
                                            ---------     ---------    ---------

                                               55,535       149,659       71,308
                                            ---------     ---------    ---------
Costs and expenses:
  General and administrative ...........       69,875        27,079       18,094
  Interest .............................       44,003        45,842       47,940
                                            ---------     ---------    ---------

                                              113,878        72,921       66,034
                                            ---------     ---------    ---------

      Income (loss) before income
       taxes ...........................      (58,343)       76,738        5,274

Income tax benefit .....................       34,361         8,871        5,543
                                            ---------     ---------    ---------

      Net income (loss) ................    $ (23,982)    $  85,609    $  10,817
                                            =========     =========    =========

</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, 1994, 1995 and 1996

                                (In thousands)
<TABLE>
<CAPTION>



                                                 1994        1995        1996
                                               --------    --------    --------

<S>                                            <C>         <C>         <C>     
Cash flows from operating activities:
  Net income (loss) ........................   $(23,982)   $ 85,609    $ 10,817
  Equity in income of subsidiaries .........     (7,925)    (99,734)    (18,236)
  Distributions from subsidiaries ..........     30,000      15,000      20,000
  Noncash interest expense .................        845         842         842
  Deferred income taxes ....................    (20,577)      1,411      (1,443)
  Securities transactions ..................      1,220      (1,175)         --
  Other, net ...............................     (3,836)     (5,819)     (3,291)
                                               --------    --------    --------

                                                (24,255)     (3,866)      8,689

  Change in assets and liabilities, net ....     23,263       8,042      (8,593)
  Marketable trading securities:
    Purchases ..............................       (870)       (762)         --
    Dispositions ...........................     15,530      27,102          --
                                               --------    --------    --------

      Net cash provided by operating
       activities ..........................     13,668      30,516          96
                                               --------    --------    --------

Cash flows from investing activities:
  Investments in and loans to subsidiaries .     (6,630)     (9,062)    (12,941)
  Capital expenditures .....................       (126)        (33)        (40)
  Other, net ...............................        402          10          11
                                               --------    --------    --------

      Net cash used by investing
       activities ..........................     (6,354)     (9,085)    (12,970)
                                               --------    --------    --------

</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, 1994, 1995 and 1996

                                (In thousands)

<TABLE>
<CAPTION>


                                                 1994        1995        1996
                                               --------    --------    --------

<S>                                            <C>         <C>         <C>      
Cash flows from financing activities:
  Dividends ................................   $     --    $     --    $(15,333)
  Principal payments of borrowings .........       (170)         --          --
  Other, net ...............................        120         278         262
                                               --------    --------    --------

      Net cash provided (used) by
       financing activities ................        (50)        278     (15,071)
                                               --------    --------    --------

Cash and cash equivalents:
  Increase (decrease) from:
    Operating activities ...................     13,668      30,516          96
    Investing activities ...................     (6,354)     (9,085)    (12,970)
    Financing activities ...................        (50)        278     (15,071)
                                               --------    --------    --------

  Net change from operating, investing
   and financing activities ................      7,264      21,709     (27,945)
  Balance at beginning of year .............     11,107      18,371      40,080
                                               --------    --------    --------

  Balance at end of year ...................   $ 18,371    $ 40,080    $ 12,135
                                               ========    ========    ========

</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.

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

<TABLE>
<CAPTION>

                                                             December 31,
                                                     --------------------------
                                                         1995            1996
                                                     ---------        ---------
                                                             (In thousands)

<S>                                                  <C>              <C>       
Current:
  Tremont Corporation ........................       $  (3,525)       $  (3,529)
  Other ......................................              27               (2)
  Kronos and Rheox:
    Income taxes .............................             567             (836)
    Other, net ...............................           3,706           11,096
                                                     ---------        ---------

                                                     $     775        $   6,729
                                                     =========        =========

Noncurrent - notes receivable from:
  Kronos .....................................       $ 382,034        $ 399,756
  Rheox ......................................              --          105,801
                                                     ---------        ---------

                                                     $ 382,034        $ 505,557
</TABLE>

Note 3 - Long-term debt:

<TABLE>
<CAPTION>

                                                               December 31,
                                                        ------------------------
                                                          1995            1996
                                                        --------        --------
                                                              (In thousands)

<S>                                                     <C>             <C>     
11.75% Senior Secured Notes ....................        $250,000        $250,000
13% Senior Secured Discount Notes ..............         132,034         149,756
                                                        --------        --------

                                                        $382,034        $399,756

</TABLE>

      See Note 10 of the Consolidated  Financial Statements for a description of
the Notes.


                                    S-6

<PAGE>



      The aggregate  maturities of the Company's  long-term debt at December 31,
1996 are shown in the table below.

<TABLE>
<CAPTION>

                                                                        Amount
                                                                  --------------
                                                                  (In thousands)

<S>                                                                     <C>     
Senior Secured Notes due 2003 ..................................        $250,000
Senior Secured Discount Notes due 2005 .........................         187,500
                                                                        --------
                                                                         437,500
Less unamortized original issue discount on the
 Senior Secured Discount Notes .................................          37,744

                                                                        $399,756
                                                                        ========
</TABLE>

      The  Company and Kronos  have  agreed,  under  certain  circumstances,  to
provide  Kronos'  principal  international  subsidiary with up to DM 125 million
through January 1, 2001. The Company has guaranteed the DM credit facility.

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>


                                     Balance at   Charged to                   Currency
                                     beginning    costs and                   translation               Balance at
           Description                of year      expenses      Deductions   adjustments     Other     end of year
           -----------               ----------   ----------     ----------   -----------    -------    -----------

<S>                                    <C>          <C>           <C>          <C>           <C>          <C>     
Year ended December 31, 1996:
  Allowance for doubtful accounts
   and notes receivable ..........     $  4,039     $  1,274      $ (1,331)(a) $   (169)     $     --     $  3,813
                                       ========     ========      ========     ========      ========     ========

  Amortization of intangibles ....     $ 20,562     $  3,152      $     --     $ (1,507)     $     --     $ 22,207
                                       ========     ========      ========     ========      ========     ========

  Valuation allowance for deferred
   income taxes ..................     $195,569     $  3,013      $     --     $ (5,937)     $14,472(c)   $207,117
                                       ========     ========      ========     ========      ========     ========

Year ended December 31, 1995:
  Allowance for doubtful accounts
   and notes receivable ..........     $  3,749     $    289      $   (166)(a) $    167      $     --     $  4,039
                                       ========     ========      ========     ========      ========     ========

  Amortization of intangibles ....     $ 16,149     $  3,241      $     --     $  1,172      $     --     $ 20,562
                                       ========     ========      ========     ========      ========     ========

  Valuation allowance for deferred
   income taxes ..................     $164,500     $ (9,588)     $     --     $  6,451      $ 34,206(b)  $195,569
                                       ========     ========      ========     ========      ========     ========

Year ended December 31, 1994:
  Allowance for doubtful accounts
   and notes receivable ..........     $  3,008     $  1,141      $   (616)(a) $    216      $     --     $  3,749
                                       ========     ========      ========     ========      ========     ========

  Amortization of intangibles ....     $ 11,941     $  2,901      $     --     $  1,307      $     --     $ 16,149
                                       ========     ========      ========     ========      ========     ========

  Valuation allowance for deferred
   income taxes ..................     $133,377     $ 24,309      $     --     $  6,814      $     --     $164,500
                                       ========     ========      ========     ========      ========     ========
</TABLE>

(a)   Amounts written off, less recoveries.
(b)   Direct  offset  to the  increase  in  gross  deferred  income  tax  assets
      resulting from  recharacterization of certain tax attributes due primarily
      to changes in certain income tax return elections.
(c)   Direct offset to the increase in non-U.S. gross deferred income tax assets
      due to dual residency status of a Company subsidiary.

                                    S-8