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, 1998

                                      OR

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

                         Commission file number 1-640

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

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

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

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

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

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

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

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

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

As of March 22, 1999, 51,826,139 shares of common stock were outstanding.  The
aggregate  market  value  of the  11,475,208  shares  of  voting  stock  held by
nonaffiliates as of such date approximated $107 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-discontinued operations," "Patents and Trademarks,"
"Foreign Operations," and "Regulatory and Environmental  Matters," all contained
in Item 1.  Business,  (ii) under the captions  "Lead  pigment  litigation"  and
"Environmental  matters  and  litigation,"  both  contained  in  Item  3.  Legal
Proceedings, (iii) under the captions "Results of Operations" and "Liquidity and
Capital  Resources,"  both  contained  in Item 7.  Management's  Discussion  and
Analysis of Financial  Condition and Results of  Operations,  and (iv) under the
captions  "Currency  exchange rates,"  "Marketable  equity security prices," and
"Other," all  contained in Item 7A.  Quantitative  and  Qualitative  Disclosures
About Market Risk, are  forward-looking  statements that represent  management's
beliefs   and   assumptions   based   on   currently   available    information.
Forward-looking  statements  can be  identified  by the  use of  words  such  as
"believes,"  "intends,"  "may," "will," "should,"  "anticipates,"  "expects," or
comparable  terminology  or by  discussions  of  strategy.  Although the Company
believes that the expectations reflected in such forward-looking  statements are
reasonable,  it cannot give any assurances that these expectations will prove to
be correct. Such statements involve risks and uncertainties,  including, but not
limited to, the cyclicality of the titanium  dioxide  industry,  global economic
conditions,  global productive capacity, changes in product pricing, "Year 2000"
issues, and other risks and uncertainties included in the Company's filings with
the  Securities  and  Exchange  Commission.  Should  one or more of these  risks
materialize (or the  consequences of such a development  worsen),  or should the
underlying  assumptions prove incorrect,  actual results could differ materially
from those  forecasted  or expected.  The Company  assumes no duty to update any
forward-looking statements.




<PAGE>



                                    PART I

ITEM 1.     BUSINESS

General

      NL  Industries,  Inc.,  organized  as a New  Jersey  corporation  in 1891,
conducts  its   continuing   operations   through  its  principal   wholly-owned
subsidiary,  Kronos,  Inc.  Kronos is the  world's  fourth  largest  producer of
titanium dioxide pigments ("TiO2") with an estimated 11% share of worldwide TiO2
sales volume in 1998. Approximately one-half of Kronos' 1998 sales volume was in
Europe, where Kronos is the second largest producer of TiO2.

      The  Company's  objective  is to  maximize  total  shareholder  returns by
focusing on (i) acquiring additional TiO2 production capacity, (ii) investing in
certain cost  effective  debottlenecking  projects to increase  TiO2  production
capacity and efficiency,  (iii)  controlling  costs,  (iv) enhancing its capital
structure  and (v)  considering  mergers or  acquisitions  within  the  chemical
industry.

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

      Pricing  within the TiO2  industry  is  cyclical,  and changes in industry
economic  conditions  can  significantly   impact  the  Company's  earnings  and
operating cash flows. The Company's average TiO2 selling prices increased during
the first three quarters of 1998,  continuing the upturn in prices that began in
the second quarter of 1997. Industry-wide demand for TiO2 declined in 1998, with
second-half  1998 demand lower than first-half  1998 demand.  Kronos' 1998 sales
volume  decreased 4% from its record sales volume in 1997 reflecting lower sales
volume in Asia and Latin  America.  Kronos'  European sales volume in the second
half of 1998 was lower  than the first  half of 1998.  Kronos  expects  industry
demand in 1999 will be relatively unchanged from 1998, but this will depend upon
global economic conditions.  Prices in the fourth quarter of 1998 were even with
prices  in the  third  quarter  of 1998 and the  outlook  for  prices in 1999 is
uncertain.  The Company's  expectations  as to the future  prospects of the TiO2
industry  and prices are based  upon a number of  factors  beyond the  Company's
control,  including  continued  worldwide  growth  of  gross  domestic  product,
competition in the market place,  unexpected or  earlier-than-expected  capacity
additions and technological  advances.  If actual  developments  differ from the
Company's  expectations,  industry and Company  performance could be unfavorably
affected.


                                    -1-

<PAGE>



      Kronos has an  estimated  18% share of European  TiO2 sales  volume and an
estimated 12% share of North American TiO2 sales volume.  Per capita consumption
of TiO2 in the United States and Western  Europe far exceeds that in other areas
of the world and these  regions  are  expected  to  continue  to be the  largest
consumers  of TiO2.  Significant  regions for TiO2  consumption  could emerge in
Eastern  Europe,  the Far  East or  China if the  economies  in these  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 consumption of TiO2 in
Eastern  Europe.  Geographic  segment  information is contained in Note 3 to the
Consolidated Financial Statements.

  Products and operations

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

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

      Kronos is one of the world's  leading  producers  and  marketers  of TiO2.
Kronos and its distributors and agents sell and provide  technical  services for
its  products to over 4,000  customers  with the majority of sales in Europe and
North America.  Kronos'  international  operations are conducted  through Kronos
International,  Inc., a  Germany-based  holding company formed in 1989 to manage
and  coordinate  the  Company's  manufacturing  operations  in Germany,  Canada,
Belgium and Norway, and its sales and marketing activities in over 100 countries
worldwide.  Kronos and its predecessors have produced and marketed TiO2 in North
America and Europe for 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' 1998 TiO2 sales were to Europe, with
37% to North America and the balance to export markets.

      Kronos is also  engaged  in the  mining  and sale of  ilmenite  ore (a raw
material used in the sulfate pigment  production  process described below),  and
the manufacture and sale of iron-based water treatment  chemicals  (derived from
co-products of the pigment production processes).  Water treatment chemicals are
used as treatment and conditioning agents for industrial effluents and municipal
wastewater, and in the manufacture of iron pigments.


                                    -2-

<PAGE>



  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 1998 represented almost 60% of industry capacity.

      Kronos produced a record 434,000 metric tons of TiO2 in 1998,  compared to
the previous  record of 408,000  metric tons produced in 1997 and 373,000 metric
tons in 1996. Kronos  maintained near full capacity  production rates throughout
1997 and 1998 in response to strong  demand in 1997 and early 1998.  Kronos' $36
million debottlenecking  expansion of its Leverkusen,  Germany  chloride-process
plant increased annual production  capacity by approximately  20,000 metric tons
in 1997.  Kronos believes its current annual attainable  production  capacity is
approximately  440,000 metric tons, including its one-half interest in the joint
venture-owned Louisiana plant (see "TiO2 manufacturing joint venture").

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

      The primary raw materials used in the TiO2 sulfate  production process are
sulfuric acid and titanium-containing  feedstock derived primarily from rock and
beach sand  ilmenite.  Sulfuric  acid is available  from a number of  suppliers.
Titanium-containing  feedstock  suitable  for  use in  the  sulfate  process  is
available from a limited number of suppliers  around the world.  Currently,  the
principal  active sources are located in Norway,  Canada,  Australia,  India and
South   Africa.   As  one  of  the  few   vertically-integrated   producers   of
sulfate-process  pigments,  Kronos operates a rock ilmenite mine in Norway which
provided  all of Kronos'  feedstock  for its  European  sulfate-process  pigment
plants in 1998. For its Canadian plant, Kronos also purchases sulfate grade slag
from

                                    -3-

<PAGE>



Q.I.T.-Fer et Titane Inc. under a long-term supply contract which expires in
2002.

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

  TiO2 manufacturing joint venture

      Subsidiaries of Kronos and Tioxide Group, Ltd. ("Tioxide"), a wholly-owned
subsidiary of Imperial Chemicals Industries plc ("ICI"), each own a 50%-interest
in a manufacturing  joint venture,  Louisiana Pigment Company ("LPC").  LPC owns
and operates a chloride-process  TiO2 plant located in Lake Charles,  Louisiana.
Production  from the  plant  is  shared  equally  by  Kronos  and  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 LPC  including
production  and output  decisions.  Two  general  managers,  one  appointed  and
compensated  by each Partner,  manage the operations of the joint venture acting
under the direction of the supervisory committee.

      The manufacturing joint venture 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,
if any.  Kronos' share of the production  costs are reported as cost of sales as
the related TiO2 acquired  from the joint venture is sold,  and its share of the
joint venture's interest expense is reported as a component of interest expense.

  Competition

      The TiO2 industry is highly competitive. During the early 1990s, supply of
TiO2 exceeded  demand,  primarily due to new  chloride-process  capacity  coming
on-stream. Relative supply/demand relationships, which had a favorable impact on
industry-wide  prices  during the late 1980s,  had a negative  impact during the
early-1990s. Prices improved in the mid-1990s with a mini-peak in the first half
of 1995. Prices declined until the first quarter of 1997, when selling prices of
TiO2 began to increase as a result of increased  demand.  Sales volume in Europe
remained  strong in the first half of 1998,  but  moderated  in the second half.
Sales volume in 1998 in North America was even with 1997,  while sales volume to
export markets  declined,  especially in Asia.  Average selling prices increased
16% in 1998 versus 1997, but fourth-quarter 1998 prices were even with the third
quarter of 1998 as worldwide demand softened.  Kronos expects industry demand in
1999 will be relatively  unchanged  from 1998,  but this will depend upon global
economic  conditions.  As a result, the outlook for prices in 1999 is uncertain.
No  assurance  can be given  that  demand or price  trends  will  conform to the
Company's  expectations.  See  "Industry" for a description of certain risks and
uncertainties within the TiO2 industry.

                                    -4-

<PAGE>



      Capacity  additions  that are the  result of  construction  of  greenfield
plants in the worldwide TiO2 market require  significant capital and substantial
lead  time,  typically  three to five  years  in the  Company's  experience.  No
greenfield plants have been announced,  but industry capacity can be expected to
increase as Kronos and its competitors  debottleneck  existing plants.  Based on
the factors  described under the caption  "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 three to five 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
Kronos'  grades and  substantially  all of  Kronos'  production  are  considered
commodity  pigments with price generally being the most significant  competitive
factor.  During 1998 Kronos had an estimated  11% share of worldwide  TiO2 sales
volume, and Kronos believes that it is the leading seller of TiO2 in a number of
countries, including Germany and Canada.

      Kronos'  principal   competitors  are  E.I.  du  Pont  de  Nemours  &  Co.
("DuPont");  ICI (Tioxide);  Millennium  Chemicals,  Inc. (Millennium  Inorganic
Chemicals, Inc.) ("Millennium"); Kerr-McGee Corporation; Kemira Oy; and Ishihara
Sangyo Kaisha, Ltd. In 1998 Rhone-Poulenc sold its Thann et Mulhouse Ltd. French
TiO2 operations to Millennium.  Also in 1998 Bayer AG sold  approximately 80% of
its European TiO2  operations to Kerr-McGee and all of its Brazilian  operations
to Millennium.  Kronos' six largest competitors have estimated individual shares
of TiO2 production  capacity ranging from 23% to 5%, and an estimated  aggregate
74% share of worldwide  TiO2  production  volume.  DuPont has about  one-half of
total U.S. TiO2  production  capacity and is Kronos'  principal  North  American
competitor.

Rheox - discontinued operations

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

Research and Development

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


                                    -5-

<PAGE>



Patents and Trademarks

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

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

Foreign Operations

      The Company's chemical  businesses have operated in international  markets
since the  1920s.  Most of Kronos'  current  production  capacity  is located in
Europe  and  Canada.   Approximately   three-quarters   of  the  Company's  1998
consolidated  sales,  excluding  discontinued   operations,   were  to  non-U.S.
customers,  including  10% to  customers  in areas other than Europe and Canada.
Sales to customers in Asia  accounted for 2% of 1998's  consolidated  net sales.
Foreign  operations are subject to, among other things,  currency  exchange rate
fluctuations and the Company's  results of operations have in the past been both
favorably and unfavorably  affected by fluctuations in currency  exchange rates.
Effects of fluctuations in currency  exchange rates on the Company's  results of
operations  are discussed in Item 7.  "Management's  Discussion  and Analysis of
Financial  Condition and Results of Operations" and Item 7A.  "Quantitative  and
Qualitative Disclosures about Market Risk."

      Political and economic  uncertainties in certain of the countries in which
the Company operates may expose it to risk of loss. The Company does not believe
that there is currently any  likelihood  of material  loss through  political or
economic  instability,  seizure,  nationalization  or similar event. The Company
cannot predict,  however, whether events of this type in the future could have a
material  effect on its  operations.  The  Company's  manufacturing  and  mining
operations are also subject to extensive and diverse environmental regulation in
each of the  foreign  countries  in which  they  operate.  See  "Regulatory  and
Environmental Matters."

Customer Base and Seasonality

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


                                    -6-

<PAGE>



Employees

      As of December 31, 1998 the Company employed  approximately 2,500 persons,
excluding  the  joint  venture  employees  and  discontinued  operations,   with
approximately  100  employees in the United  States and  approximately  2,400 at
sites  outside the United  States.  Hourly  employees in  production  facilities
worldwide,  including the TiO2 manufacturing joint venture, are represented by a
variety of labor unions, with labor agreements having various expiration dates.
The Company believes its labor relations are good.

Regulatory and Environmental Matters

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

      The  Company's  U.S.  manufacturing  operations  are  governed  by federal
environmental and worker health and safety laws and regulations, principally the
Resource  Conservation and Recovery Act ("RCRA"),  the  Occupational  Safety and
Health Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act,
the Toxic Substances Control Act and the Comprehensive  Environmental  Response,
Compensation  and  Liability  Act, as amended by the  Superfund  Amendments  and
Reauthorization  Act  ("CERCLA"),  as well as the  state  counterparts  of these
statutes.  The Company  believes the  Louisiana  plant owned and operated by the
joint venture is in substantial compliance with applicable requirements of these
laws or compliance orders issued thereunder. Following the sale of its specialty
chemicals business,  the Company has no U.S. plants other than LPC. From time to
time,  the  Company's  facilities  may be  subject to  environmental  regulatory
enforcement under such statutes.  Resolution of such matters typically  involves
the establishment of compliance programs. Occasionally, resolution may result in
the payment of penalties,  but to date such penalties have not involved  amounts
having  a  material  adverse  effect  on the  Company's  consolidated  financial
position, results of operations or liquidity.

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


                                    -7-

<PAGE>



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

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

      In order to reduce sulfur dioxide emissions into the atmosphere consistent
with applicable environmental regulations,  Kronos completed the installation of
off-gas  desulfurization systems in 1997 at its Norwegian and German plants at a
cost of $30 million.  The manufacturing joint venture completed the installation
of a $16 million off-gas desulfurization system at the Louisiana plant in 1996.

      The Company's capital  expenditures  related to its ongoing  environmental
protection and improvement  programs are currently  expected to be approximately
$13 million in 1999 and $8 million in 2000.

      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."

Principal Shareholders

      At December 31, 1998 Valhi, Inc. and Tremont Corporation,  each affiliates
of Contran Corporation,  held approximately 58% and 20%,  respectively,  of NL's
outstanding  common  stock,  and  together  they may be deemed to control NL. At
December 31, 1998 Contran and its subsidiaries held approximately 92% of Valhi's
outstanding  common  stock,  and Valhi and other  entities  related to Harold C.
Simmons  held   approximately  53%  of  Tremont's   outstanding   common  stock.
Substantially all of Contran's outstanding voting stock is held either by trusts
established  for the  benefit  of  certain  children  and  grandchildren  of Mr.
Simmons,  of which Mr. Simmons is the sole trustee,  or by Mr. Simmons directly.
Mr.  Simmons,  the Chairman of the Board of NL and the Chairman of the Board and
Chief Executive  Officer of Contran and Valhi and a director of Tremont,  may be
deemed to control each of such companies.  NL and its consolidated  subsidiaries
are sometimes referred to herein collectively as the "Company."

                                    -8-

<PAGE>



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 a
long-term  debt  agreement.  The Company's  Nordenham TiO2 plant has liens on it
that  secure  claims  by the  City of  Leverkusen  and the  German  federal  tax
authorities and its Fredrikstad TiO2 plant has a lien on it that secures a claim
by Norwegian tax authorities,  pending resolution of certain tax litigation. See
Notes 10 and 13 to the Consolidated Financial Statements.

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

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

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
time,  been enacted or proposed that seek to (a) impose  various  obligations on
present  and former  manufacturers  of lead  pigment and  lead-based  paint with
respect to asserted health concerns associated with the use of such products and
(b) effectively  overturn court decisions in which the Company and other pigment
manufacturers  have  been  successful.  Examples  of such  proposed  legislation
include  bills which would  permit civil  liability  for damages on the basis of
market share,  rather than  requiring  plaintiffs to prove that the  defendant's
product caused the alleged damage. While no legislation or regulations have been
enacted to date which are  expected  to have a  material  adverse  effect on the
Company's consolidated  financial position,  results of operations or liquidity,
the imposition of market share liability could have such an effect. The Company

                                    -9-

<PAGE>



has not accrued any amounts for the pending  lead pigment and  lead-based  paint
litigation.  There is no  assurance  that the  Company  will  not  incur  future
liability  in  respect  of this  pending  litigation  in  view  of the  inherent
uncertainties  involved in court and jury rulings in pending and possible future
cases. However,  based on, among other things, the results of such litigation to
date, the Company  believes that the pending lead pigment and  lead-based  paint
litigation  is  without  merit.  Liability  that  may  result,  if  any,  cannot
reasonably be estimated.

      In 1989 and 1990 the  Housing  Authority  of New  Orleans  ("HANO")  filed
third-party  complaints for indemnity and/or  contribution  against the Company,
other alleged  manufacturers  of lead pigment  (together  with the Company,  the
"pigment  manufacturers") and the Lead Industries  Association (the "LIA") in 14
actions  commenced by residents of HANO units seeking  compensatory and punitive
damages for injuries allegedly caused by lead pigment.  The actions,  which were
pending  in the  Civil  District  Court  for the  Parish  of  Orleans,  State of
Louisiana,  were  dismissed by the district  court in 1990.  Subsequently,  HANO
agreed to  consolidate  all the cases and appealed.  In March 1992 the Louisiana
Court of Appeals,  Fourth  Circuit,  dismissed  HANO's  appeal as untimely  with
respect to three of these cases. With respect to the other cases included in the
appeal,  the court of appeals  reversed the lower court decision  dismissing the
cases. These cases were remanded to the District Court for further  proceedings.
In November  1994 the  District  Court  granted  defendants'  motion for summary
judgment  in one of the  remaining  cases  and in June 1995 the  District  Court
granted  defendants'  motion for summary  judgment  in several of the  remaining
cases.  After such grant,  only two cases remain  pending and have been inactive
since 1992,  Hall v. HANO,  et al. (No.  89-3552) and Allen V. HANO, et al. (No.
89-427) Civil District Court for the Parish of Orleans, State of Louisiana.

      In June 1989 a complaint  was filed in the  Supreme  Court of the State of
New York,  County of New York,  against the pigment  manufacturers  and the LIA.
Plaintiffs seek damages, contribution and/or indemnity in an amount in excess of
$50 million for monitoring and abating  alleged lead paint hazards in public and
private  residential  buildings,  diagnosing  and  treating  children  allegedly
exposed to lead paint in city  buildings,  the costs of educating city residents
to the hazards of lead paint,  and liability in personal  injury actions against
the City and the  Housing  Authority  based on alleged  lead  poisoning  of city
residents (The City of New York, the New York City Housing Authority and the New
York City Health and Hospitals  Corp. v. Lead Industries  Association,  Inc., et
al., No. 89-4617).  In December 1991 the court granted the defendants' motion to
dismiss claims alleging negligence and strict liability and denied the remainder
of the motion. In January 1992 defendants  appealed the denial.  The Company has
answered the remaining  portions of the  complaint  denying all  allegations  of
wrongdoing. In May 1993 the Appellate Division of the Supreme Court affirmed the
denial  of  the   motion  to  dismiss   plaintiffs'   fraud,   restitution   and
indemnification  claims.  In May 1994 the trial court  granted  the  defendants'
motion to dismiss the plaintiffs'  restitution and  indemnification  claims, and
plaintiffs  appealed.  In June 1996 the  Appellate  Division  reversed the trial
court's  dismissal  of  plaintiffs'   restitution  and  indemnification  claims,
reinstating those claims.  Defendants'  motion for summary judgment on the fraud
claim was denied in August 1995. In December 1995 defendants moved for summary

                                    -10-

<PAGE>



judgment on the basis that the fraud claim was time-barred. In February 1996 the
motion was denied.  In July 1997 the denial of defendants' two summary  judgment
motions on the fraud claim were affirmed by the Appellate Division.  In December
1998  plaintiffs  moved for partial  summary  judgment on their claims of market
share,  alternative liability,  enterprise liability,  and concert of action. In
February 1999 claims for  plaintiffs  New York City and New York City Health and
Hospital  Corporation  dismissed  with  prejudice  all their  claims and were no
longer  parties to the case.  Also in  February  1999 the New York City  Housing
Authority  dismissed  with  prejudice  all of its  claims  except for claims for
damages relating to two housing  projects.  Briefing on the December 1998 motion
and limited discovery are proceeding.

      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  and  briefing 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.  In June 1998 defendants
moved for partial  summary  judgment  dismissing  plaintiffs'  market  share and
alternative   liability   claims.  In  January  1999  the  trial  court  granted
defendants'  summary  judgment motion to dismiss the  alternative  liability and
enterprise liability claims, but denied defendants' motion to dismiss the market
share liability claim. Discovery is proceeding.

      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 alleged  class action  lawsuit had  originally  been
brought against the City of New York and other landlord defendants. The

                                    -11-

<PAGE>



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.  In May 1997 plaintiffs moved for class  certification and defendants
moved for summary  judgment.  In June 1997 the Court stayed all further activity
in the case pending  reconsideration  of its 1995 decision  permitting filing of
the  complaint  against  the  manufacturer  defendants  and  joinder  of the new
complaint  with the  pre-existing  complaint  against  New York  City and  other
landlords.  In November 1998 the court  dismissed  without  prejudice all claims
against the Company and the other pigment manufacturer defendants,  finding that
such claims were improperly joined.

      In April 1997 the  Company  was served  with a  complaint  in Parker v. NL
Industries,  et al.  (Circuit  Court,  Baltimore  City,  Maryland,  No. 97085060
CC915).  Plaintiff,  now an adult, and his wife, seek  compensatory and punitive
damages from the Company,  another former manufacturer of lead paint and a local
paint retailer,  based on claims of negligence,  strict liability and fraud, for
plaintiff's alleged ingestion of lead paint as a child. In June 1997 the Company
answered the complaint denying  liability.  In February 1998 the Court dismissed
the fraud claim. In July 1998 the Court granted the Company's motion for summary
judgment on all remaining claims. Plaintiffs have appealed.

      In December 1998 the Company was served with a complaint on behalf of four
children and their guardians in Sabater, et al. v. Lead Industries  Association,
et al.  (Supreme  Court of the  State of New York,  County  of Bronx,  Index No.
25533/98).  Plaintiffs  purport to  represent a class of all  persons  similarly
situated.  The complaint alleges against the Company, a trade  association,  and
other former  manufacturers  of lead pigment various causes of action  including
negligence,  strict products liability, fraud and misrepresentation,  concert of
action, civil conspiracy,  enterprise liability,  market share liability, breach
of warranties,  nuisance,  and violation of New York State's consumer protection
act. The complaint  seeks damages for  establishment  of property  abatement and
medical  monitoring  funds and  compensatory  damages  for  alleged  injuries to
plaintiffs.  Defendants  filed  motions to dismiss  the  nuisance  and  consumer
protection act claims in the complaint in March 1999.

      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

                                    -12-

<PAGE>



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  ruled  that  Commercial  Union is  entitled  to  receive  such
contribution  from the Company and the two  carriers,  but reserved  ruling with
respect  to the  relative  contributions  to be made  by  each  of the  parties,
including  contributions  by the Company  that may be required  with  respect to
periods in which it was  self-insured and  contributions  from one carrier which
were reinsured by a former  subsidiary of the Company,  the reinsurance costs of
which the Company may  ultimately  be required to bear. In June 1997 the Company
reached a settlement  in principle  with its insurers  regarding  allocation  of
defense costs in the lead pigment cases in which  reimbursement of defense costs
had been sought.

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


                                    -13-

<PAGE>



  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,  and/or
damages for injury to natural  resources.  Certain of these proceedings  involve
claims  for  substantial  amounts.  Although  the  Company  may be  jointly  and
severally  liable  for such  costs,  in most cases it is only one of a number of
PRPs who may also be jointly and severally liable.

      The extent of CERCLA liability  cannot  accurately be determined until the
Remedial  Investigation and Feasibility Study ("RIFS") is complete, the U.S. EPA
issues a record of decision and costs are  allocated  among PRPs.  The extent of
liability under analogous state cleanup  statutes and for common law equivalents
are  subject to similar  uncertainties.  The Company  believes  it has  provided
adequate  accruals for reasonably  estimable  costs for CERCLA matters and other
environmental  liabilities.  At December  31, 1998 the Company had accrued  $126
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, cleanup, removal and
remediation.  It is not  possible  to  estimate  the range of costs for  certain
sites.  The Company has estimated  that the upper end of the range of reasonably
possible  costs to the  Company  for sites for which it is  possible to estimate
costs is approximately  $160 million.  The Company's  estimate of such liability
has not been  discounted to present value and the Company has not recognized any
potential insurance recoveries. No assurance can be given that actual costs will
not exceed  either  accrued  amounts or the upper end of the range for sites for
which  estimates  have been made,  and no assurance can be given that costs will
not be incurred  with respect to sites as to which no estimate  presently can be
made.  The  imposition  of  more  stringent   standards  or  requirements  under
environmental  laws or regulations,  new developments or changes 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. Furthermore, there can
be no  assurance  that  additional  environmental  matters will not arise in the
future.  More detailed  descriptions  of certain legal  proceedings  relating to
environmental matters are set forth below.

      In July 1991 the United States filed an action in the U.S.  District Court
for the  Southern  District of Illinois  against the Company and others  (United
States of America v. NL  Industries,  Inc.,  et al.,  Civ. No. 91-CV 00578) with
respect  to the  Granite  City,  Illinois  lead  smelter  formerly  owned by the
Company.  The  complaint  seeks  injunctive  relief to compel the  defendants to
comply with an  administrative  order issued  pursuant to CERCLA,  and fines and
treble damages for the alleged failure to comply with the order. The Company and
the other parties

                                    -14-

<PAGE>



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. The Company  presently is
challenging  portions of the U.S.  EPA's  selection of the remedy.  In September
1997 the U.S. EPA informed  the Company that past and future  cleanup  costs are
estimated to total approximately $63.5 million. There is currently no allocation
among the PRPs for these costs.  The Company has been informed that the U.S. EPA
has reached an agreement in principle  with certain  other PRPs  settling  their
liabilities  with respect to the site for  approximately  50% of the site costs.
The Company is negotiating with the U.S. EPA to settle its liability.

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

      Having completed the RIFS at the Company's  former  Portland,  Oregon lead
smelter site, the Company  conducted  predesign studies to explore the viability
of the U.S.  EPA's  selected  remedy  pursuant  to a June  1989  consent  decree
captioned U.S. v. NL Industries,  Inc., Civ. No. 89-408,  United States District
Court for the District of Oregon.  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.  In May 1997 the
U.S.  EPA issued an Amended  Record of Decision  ("ARD") for the soils  operable
unit

                                    -15-

<PAGE>



changing portions of the cleanup remedy selected.  The ARD requires construction
of an onsite  containment  facility  estimated to cost between $10.5 million and
$12 million,  including  capital costs and operating and maintenance  costs. The
Company and certain other PRPs have entered into a consent decree to perform the
remedial  action in the ARD. In November 1991 Gould,  Inc., the current owner of
the site,  filed an action,  Gould,  Inc. v. NL Industries,  Inc., No.  91-1091,
United States District Court for the District of Oregon, against the Company for
damages for alleged  fraud in the sale of the smelter,  rescission  of the sale,
past CERCLA response costs and a declaratory judgment allocating future response
costs  and  punitive  damages.  In  February  1998  the  Company  and the  other
defendants  reached an agreement  settling the  litigation  by agreeing to pay a
portion of future  costs,  which are  estimated to be within  previously-accrued
amounts.

      The 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.  In August  1997 the U.S.  EPA issued the record of
decision for the Baxter Springs and Treece subsites.  The U.S. EPA has estimated
that the selected  remedy will cost an aggregate of  approximately  $7.1 million
for both subsites ($5.4 million for the Baxter Springs subsite).  The Company is
negotiating  with the U.S. EPA to resolve its  liability  at the Baxter  Springs
subsite. In addition,  the Company received a notice in March 1998 from the U.S.
EPA that it may be a PRP in three additional subsites in Cherokee County.

      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 August  1997 the trial  court
dismissed  the case.  In June 1998 the Illinois  appellate  court  affirmed.  In
October  1998 the Supreme  Court of Illinois  declined  the State's  petition to
review the  decisions in favor of the Company.  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.

      Residents  in the  vicinity  of the  Company's  former  Philadelphia  lead
chemicals  plant  commenced a class  action  allegedly  comprised  of over 7,500
individuals seeking medical monitoring and damages allegedly caused by emissions
from the plant.  Wagner, et al. v. Anzon, Inc. and NL Industries,  Inc., No. 87-
4420,  Court  of  Common  Pleas,   Philadelphia  County.  The  complaint  sought
compensatory  and punitive damages from the Company and the current owner of the
plant, and alleged causes of action for, among other things, negligence,  strict
liability,  and nuisance.  A class was certified to include persons who resided,
owned or rented property,  or who work or have worked within up to approximately
three-quarters  of a mile from the plant  from 1960  through  the  present.  The
Company  answered the complaint,  denying  liability.  In December 1994 the jury
returned  a  verdict  in  favor  of  the  Company.  Plaintiffs  appealed  to the
Pennsylvania  Superior  Court and in September  1996 the Superior Court affirmed
the

                                    -16-

<PAGE>



judgment in favor of the Company.  In December 1996 plaintiffs  filed a petition
for allowance of appeal to the Pennsylvania  Supreme Court,  which was declined.
Residents also filed  consolidated  actions in the United States  District Court
for the Eastern  District of Pennsylvania,  Shinozaki v. Anzon,  Inc. and Wagner
and Antczak v. Anzon and NL Industries,  Inc. Nos. 87-3441, 87-3502, 87-4137 and
87- 5150.  The  consolidated  action is a putative  class action  seeking CERCLA
response  costs,  including  cleanup and  medical  monitoring,  declaratory  and
injunctive  relief and civil  penalties for alleged  violations of the RCRA, and
also  asserting  pendent  common  law claims  for  strict  liability,  trespass,
nuisance and punitive damages. The court dismissed the common law claims without
prejudice,  dismissed  two of the three RCRA claims as against the Company  with
prejudice,  and  stayed  the  case  pending  the  outcome  of  the  state  court
litigation.

      At a municipal and industrial  waste  disposal site in Batavia,  New York,
the Company and  approximately  50 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. The Company and the other PRPs have
completed the work comprising  operable unit two (the extension of the municipal
water supply) with the exception of annual operation and  maintenance.  The U.S.
EPA also has claimed it has  incurred  approximately  $2.4 million in past costs
from the PRPs.  The Company and the other PRPs have  submitted  to a  nonbinding
allocation process, as a result of which the Company was assigned a 30% share of
future site liability.

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

  Other litigation

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

      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.

                                    -17-

<PAGE>



Plaintiffs allege personal injuries and seek compensatory damages totaling $18.5
million and punitive  damages  totaling  $55.5  million.  An agreement  has been
reached  settling  this matter,  with the Company being  indemnified  by another
party.

      In March 1997 the Company was served with a complaint in Ernest Hughes, et
al. v. Owens-Corning Fiberglass, Corporation, et al., No. 97-C-051, filed in the
Fifth Judicial District Court of Cass County,  Texas, on behalf of approximately
4,000  plaintiffs and their spouses  alleging injury due to exposure to asbestos
and seeking  compensatory and punitive damages.  The Company has filed an answer
denying the material  allegations.  The case has been stayed, and the plaintiffs
have refiled their cases in Ohio. The Company is a defendant in various asbestos
cases  pending  in  Ohio  on  behalf  of  approximately  8,800  personal  injury
claimants.  Plaintiffs  have agreed to voluntarily  dismiss the Company  without
prejudice from approximately 7,500 of such claims.

      In February 1999 the Company was served with a complaint in Cosey,  et al.
v. Bullard, et al., No. 95-0069, filed in the Circuit Court of Jefferson County,
Mississippi,  on behalf of approximately 1,600 plaintiffs alleging injury due to
exposure to asbestos and silica and seeking  compensatory and punitive  damages.
The Company  intends to file an answer  denying the material  allegations of the
complaint.

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

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

      No matters were submitted to a vote of security holders during the quarter
ended December 31, 1998.


                                    -18-

<PAGE>



                                    PART II

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

      NL's common stock is listed and traded on the New York Stock  Exchange and
the Pacific  Exchange  under the symbol "NL." As of March 22,  1999 there were
approximately  8,000 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 22, 1999 the closing price of
NL common stock according to the NYSE Composite Tape was $9-5/16.
<TABLE>
<CAPTION>


                                                                       Dividends
                                             High          Low         Declared
                                           ---------    ---------      ---------
<S>                                        <C>          <C>              <C>  
Year ended December 31, 1997:
  First quarter                            $  13-1/8    $   9-3/4        $   -
  Second quarter                            14-11/16        9-1/8            -
  Third quarter                              16-1/16       12-1/4            -
  Fourth quarter                             17-5/16       12-1/2            -

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


      The Company's  Senior Notes  generally limit the ability of the Company to
pay  dividends to 50% of  consolidated  net income,  as defined in the indenture
governing the Senior Notes, since October 1993. At December 31, 1998 $47 million
was  available  for payment of  dividends.  The Company did not pay dividends in
1997.  The  Company  reinstated  a regular  quarterly  dividend in June 1998 and
subsequently  paid three  quarterly  $.03 per share cash  dividends in 1998.  On
February 10,  1999,  the  Company's  Board of  Directors  increased  the regular
quarterly dividend to $.035 per share and declared a dividend to shareholders of
record as of March 17, 1999 to be paid on March 31, 1999.  The  declaration  and
payment of future dividends is  discretionary,  and the amount,  if any, will be
dependent  upon  the  Company's  results  of  operations,  financial  condition,
contractual  restrictions  and other  factors  deemed  relevant by the Company's
Board of Directors.


                                    -19-

<PAGE>



ITEM 6.     SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>

                                               Years ended December 31,
                               1994         1995         1996         1997          1998
                           ------------ ------------ ------------ ------------  ----------
                                         (In millions, except per share amounts)

<S>                        <C>          <C>          <C>          <C>           <C>       
INCOME STATEMENT DATA:
Net sales ..............   $      770.1 $     894.1  $     851.2  $     837.2   $    894.7
Operating income .......           80.5       161.2         71.6         82.5        171.2
Income (loss) from
 continuing operations .          (38.9)       66.5        (11.7)       (29.9)        89.9
Net income (loss) ......          (24.0)       85.6         10.8         (9.5)       366.7

Earnings per share:
  Basic:
    Income (loss) from
     continuing
     operations ........   $       (.76)$      1.30  $      (.23) $      (.58)  $     1.75
    Net income (loss) ..           (.47)       1.68          .21         (.19)        7.13
  Diluted:
    Income (loss) from
     continuing
     operations ........   $       (.76)$      1.29  $      (.23) $      (.58)  $     1.73
    Net income (loss) ..           (.47)       1.66          .21         (.19)        7.05

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

BALANCE SHEET DATA at 
 year end:
Cash, cash equivalents,
 current marketable
 securities and current
 restricted cash
 equivalents ...........   $      156.3 $     141.3  $     114.1  $     106.1   $    163.1
Current assets .........          486.4       551.1        500.2        454.5        546.1
Total assets ...........        1,162.4     1,271.7      1,221.4      1,098.2      1,155.0
Current liabilities ....          244.9       302.4        290.3        276.4        310.0
Long-term debt including
 current maturities ....          789.6       783.7        829.0        744.2        357.6
Shareholders' equity
 (deficit) .............         (293.1)     (209.4)      (203.5)      (222.3)       152.3

CASH FLOW DATA:
Operating activities ...   $      181.8 $      71.6  $      16.5  $      89.2   $     45.1
Investing activities ...          (30.4)      (56.7)       (68.4)       (11.1)       417.3
Financing activities ...         (132.1)       (3.3)        26.6        (82.6)      (396.2)

OTHER NON-GAAP FINANCIAL
 DATA:
EBITDA (1) .............   $       66.3 $     170.3  $      90.7  $      67.6   $    187.4

</TABLE>

                                    -20-

<PAGE>
<TABLE>
<CAPTION>

                                               Years ended December 31,
                                 --------------------------------------------------------
                                   1994        1995        1996        1997        1998
                                 --------    --------    --------    --------    --------
                                         (In millions, except per share amounts)
<S>                              <C>         <C>         <C>         <C>         <C>     
OTHER DATA:
Net debt at year end (2)...      $  633.4    $  681.6    $  740.7    $  652.0    $  230.9
Interest expense, net (3)..          71.5        69.5        64.6        63.0        43.1
Cash interest expense,
 net (4) ..................          54.5        50.9        44.2        39.9        24.8
Capital expenditures ......          34.6        60.7        64.2        28.2        22.4

TiO2 sales volumes
 (metric tons in
 thousands) ...............           376         366         388         427         408
Average TiO2 selling
 price index (1983=100) ...           131         152         138         132         153

</TABLE>

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

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

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

                                    -21-

<PAGE>



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

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

RESULTS OF OPERATIONS

  General

      The Company's  continuing  operations  are conducted by Kronos in the TiO2
business  segment.  As discussed below,  average TiO2 selling prices declined in
1997, but increased in 1998 compared to the prior year. Kronos' operating income
and margins improved in both 1997 and 1998.

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

  Net sales and operating income
<TABLE>
<CAPTION>

                                     Years ended December 31,           % Change
                                 --------------------------------   ----------------

                                   1996        1997        1998     1997-96  1998-97
                                 --------    --------    --------   -------  -------
                                          (In millions)

<S>                              <C>         <C>         <C>          <C>      <C>
Net sales - Kronos ........      $  851.2    $  837.2    $  894.7      -2%       +7%

Operating income - Kronos..      $   71.6    $   82.5    $  171.2     +15%     +107%

Percent change in TiO2:
  Sales volume ............                                           +10%       -4%
  Average selling prices 
   (in billing currencies).                                            -4%      +16%

</TABLE>

      Kronos'  operating income for 1998 more than doubled due to higher average
TiO2 selling prices, partially offset by lower sales volume and $12.9 million of
1997 income from refunds of German trade  capital  taxes,  discussed  below.  In
billing currency terms, Kronos' 1998 average TiO2 selling prices were 16% higher
than in 1997.  Average  selling  prices in the  fourth  quarter of 1998 were 11%
higher than the fourth  quarter of 1997 and even with the third quarter of 1998.
Selling  prices at the end of 1998 were 10% higher than  year-end  1997  levels.
Kronos'  operating income in 1997 was higher than 1996,  primarily due to record
production and sales volumes and the German trade capital tax income,  partially
offset by 4% lower average TiO2 selling prices.

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

                                    -22-

<PAGE>



      Kronos'  cost of sales  in 1998 was  lower  than  1997 due to lower  sales
volume.  Kronos' cost of sales in 1997 was lower than 1996 due to the  favorable
effects of foreign currency  translation and lower unit costs,  primarily due to
higher  production  levels,  partially  offset by higher sales volumes.  Cost of
sales,  as a percentage  of net sales,  decreased in 1998  primarily  due to the
impact on net sales of increased  average  selling  prices and decreased in 1997
primarily due to lower unit costs.

      Kronos' selling, general and administrative expenses declined in 1998 from
the  previous  year due to lower  distribution  expenses  related to lower sales
volume  and  favorable  effects  of  foreign  currency  translation,  while 1997
expenses  were  lower  than 1996 as a result of  favorable  effects  of  foreign
currency  translation and German trade capital tax refunds,  partially offset by
higher distribution expenses associated with higher 1997 sales volumes.

      Sales volume of 408,000  metric tons of TiO2 in 1998 was 4% lower than the
record  sales  volume in 1997  reflecting  lower sales  volume in Asia and Latin
America.  Approximately  one-half of Kronos'  1998 TiO2 sales,  by volume,  were
attributable to markets in Europe with  approximately  37% attributable to North
America, approximately 2% to Asia and the balance to other regions.

      Industry-wide demand was lower in the first half of 1996, Kronos believes,
due to customer destocking  inventories.  Kronos reduced its production rates to
manage  its  inventory  levels,   and  its  average  capacity   utilization  was
approximately  95% in 1996.  Demand improved in the second half of 1996, and was
strong  throughout  1997 and the first half of 1998,  before  moderating  in the
second half of 1998.  Kronos expects  industry demand in 1999 will be relatively
unchanged  from 1998,  but this will  depend upon  global  economic  conditions.
Kronos  produced  near  full  capacity  in  1997  and  1998,  but is  curtailing
production in 1999 to a level not to exceed Kronos'  expected 1999 sales volume.
Kronos'   outlook  for  average  TiO2  selling  prices  in  1999  is  uncertain.
Notwithstanding   the  uncertain   outlook  for  TiO2  prices  in  1999,  Kronos
anticipates  its 1999  operating  income  will be lower  than  1998 due to lower
production levels.

      The Company has  substantial  operations  and assets  located  outside the
United States (principally Germany, Norway, Belgium and Canada). The U.S. dollar
translated  value of the Company's  foreign sales and operating costs is subject
to currency  exchange rate  fluctuations  which may impact reported earnings and
may affect the  comparability  of  period-to-period  revenues  and  expenses.  A
significant  amount of the Company's sales are  denominated in currencies  other
than the U.S. dollar (64% in 1998),  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   sales  by  $58  million  and  $24  million  during  1997  and  1998,
respectively,  compared to the year-earlier period.  Fluctuation in the value of
the U.S. dollar relative to other  currencies  similarly  impacted the Company's
operating  expenses and the net impact of currency exchange rate fluctuations on
operating income comparisons was not significant in 1997 or 1998.


                                    -23-

<PAGE>



  General corporate

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

<TABLE>
<CAPTION>

                                     Years ended December 31,       Change
                                    -------------------------  ----------------
                                      1996      1997     1998  1997-96  1998-97
                                    -------  -------  -------  -------  -------
                                               (In millions)

<S>                                 <C>      <C>      <C>      <C>      <C>    
Securities earnings ..........      $   4.7  $   5.4  $  14.9  $    .7  $   9.5
Corporate expenses, net ......        (17.2)   (49.8)   (18.3)   (32.6)    31.5
Interest expense .............        (69.3)   (65.8)   (58.1)     3.5      7.7
                                    -------  -------  -------  -------  -------

                                    $ (81.8) $(110.2) $ (61.5) $ (28.4) $  48.7
                                    =======  =======  =======  =======  =======
</TABLE>

      Securities  earnings  fluctuate  in part  based  upon the  amount of funds
invested and yields thereon. Average funds invested in 1998 was higher than 1997
primarily due to the net proceeds  from the sale of Rheox in January  1998.  The
Company expects security  earnings in 1999 will be lower than 1998, due to lower
average levels of funds available for investment due to the repayment of certain
of the Company's debt in 1998.  Corporate expenses,  net in 1998 were lower than
1997,  primarily due to the $30 million  noncash charge taken in 1997 related to
the Company's adoption of SOP 96-1, "Environmental Remediation Liabilities." See
Note 2 to the  Consolidated  Financial  Statements.  This  charge is included in
selling,   general  and  administrative   expense  for  1997  in  the  Company's
Consolidated  Statements  of  Income.  Excluding  this  charge,  1998  corporate
expenses,  net were  slightly  lower  than 1997 due to the  recognition  of $3.7
million of income in 1998 related to the straight-line,  five-year  amortization
of $20  million of deferred  income  received  in  conjunction  with the sale of
Rheox,  partially  offset by $3.0  million of  expenses  in 1998  related to the
unsuccessful  acquisition  of certain  TiO2  businesses  and assets of  Tioxide.
Corporate  expenses,  net in 1997  exceeded  that of 1996,  primarily due to the
aforementioned $30 million noncash charge taken in 1997.

  Interest expense

      Interest  expense in 1998  declined  compared to 1997  principally  due to
prepayments of outstanding indebtedness, principally the Senior Secured Discount
Notes,   the  joint  venture  term  loan  and  a  portion  of  Kronos'  Deutsche
mark-denominated  debt. Interest expense declined in 1997 from 1996 due to lower
levels of  Kronos'  DM-denominated  debt,  partially  offset by higher  variable
interest rates on such debt. Assuming no significant increase in interest rates,
interest  expense in 1999 is expected to be lower  compared to 1998 due to lower
levels of outstanding  indebtedness,  including required payments on the DM term
loan.

  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

                                    -24-

<PAGE>



impact the Company's  effective income tax rate. In 1996 and 1997 the geographic
mix of income,  including losses in certain  jurisdictions  for which no current
refund was available and  recognition of a deferred tax asset was not considered
appropriate,  contributed  to the  Company's  effective  tax rate varying from a
normally-expected rate. In 1998 the Company's effective tax rate varied from the
normally-expected   rate  due   predominantly  to  the  recognition  of  certain
deductible    tax    attributes    which    previously    did   not   meet   the
"more-likely-than-not"  recognition criteria and the one-time effect of a refund
of German withholding taxes.

      The Company's deferred income tax status at December 31, 1998 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,  
                                                   ------------------------------
                                                    1996        1997       1998
                                                   -------    -------    --------
                                                             (In millions)
<S>                                                <C>        <C>        <C>     
Net cash provided (used) by:
  Operating activities .......................     $  16.5    $  89.2    $   45.1
  Investing activities .......................       (68.4)     (11.1)      417.3
  Financing activities .......................        26.6      (82.6)     (396.2)
                                                   -------    -------    --------
Net cash provided (used) by operating,
 investing and financing activities ..........     $ (25.3)   $  (4.5)   $   66.2
                                                   =======    =======    ========
</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. Cash flow from operations, before changes in assets and liabilities and
Rheox,  net,  in 1997 and 1998  improved  from the prior year  primarily  due to
higher operating income.

      Changes in the Company's inventories,  receivables and payables (excluding
the effect of currency translation) provided cash in 1996 and 1997 and used cash
in 1998  primarily due to  reductions  in inventory  levels in 1996 and 1997 and
increases in inventory  levels in 1998.  Income tax payments in 1998 as a result
of the gain on sale of Rheox and  certain  German  income tax  payments in 1996,
discussed below,  significantly  decreased cash flows from operating  activities
for each respective year.

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

      The Company  used a majority of the $380  million  after-tax  net proceeds
from the sale of Rheox to (i) prepay $118  million of the Rheox term loan,  (ii)
prepay

                                    -25-

<PAGE>



$42 million of Kronos'  tranche of the LPC joint  venture term loan,  (iii) make
$65  million of  open-market  purchases  of the  Company's  13%  Senior  Secured
Discount  Notes at prices  ranging  from  $101.25 to  $105.19  per $100 of their
principal amounts,  (iv) purchase $6 million of the Senior Secured Notes and $61
thousand of the Senior Secured  Discount Notes at a price of $100 and $96.03 per
$100 of their principal amounts, respectively,  pursuant to a June 1998 pro rata
tender offer to Note holders as required under the terms of the  indenture,  and
(v) redeem the  remaining  $121  million 13% Senior  Secured  Discount  Notes on
October 15, 1998 at the  redemption  price of 106% of the principal  amount,  in
accordance with the terms of the Senior Secured Discount Notes indenture.

      Borrowings  in 1998  included DM 35 million ($19  million  when  borrowed)
under the Company's short-term non-U.S. credit facilities and DM 20 million ($11
million  when  borrowed)  under the  Company's  DM  revolving  credit  facility.
Repayments  in 1998  included DM 40 million  ($23  million  when paid) of the DM
revolving  credit  facility  and DM 81 million ($44 million when paid) of its DM
term loan.  In 1997 the Company  prepaid DM 207 million ($127 million when paid)
of its DM term loan,  repaid DM 43  million  ($26  million  when paid) of its DM
revolving credit facility, repaid $15 million of its joint venture term loan and
repaid DM 15 million ($9  million  when paid) of its  short-term  DM-denominated
notes  payable.  In 1996 the Company  borrowed DM 144 million  ($96 million when
borrowed)  under its DM revolving  credit  facility.  It 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 $15 million on the joint venture term
loan and DM 16 million ($10  million when repaid) in payments on  DM-denominated
notes payable.

      The Company's capital  expenditures during the past three years include an
aggregate  of $38  million  ($6  million  in  1998)  for the  Company's  ongoing
environmental protection and compliance programs, including German and Norwegian
off-gas  desulfurization  systems. The Company's estimated 1999 and 2000 capital
expenditures  are $38 million  and $30  million,  respectively,  and include $13
million and $8 million,  respectively,  in the area of environmental  protection
and compliance.  

      In the last three years the Company spent $27 million ($2 million in 1998)
in  capital  expenditures   related  to  its  debottlenecking   project  at  its
Leverkusen,  Germany chloride-process TiO2 facility. The debottlenecking project
increased the Company's annual  attainable  production by  approximately  20,000
metric tons in 1997, and the Company  estimates its worldwide annual  attainable
capacity is 440,000 metric tons. Capital expenditures of the manufacturing joint
venture  and the  Company's  discontinued  operations  are not  included  in the
Company's capital expenditures.

      At December 31, 1998 the Company had cash and cash equivalents aggregating
$155 million (17% held by non-U.S.  subsidiaries)  and $12 million of restricted
cash  equivalents.  At December  31, 1998 the  Company's  subsidiaries  had $104
million available for borrowing under non-U.S.  credit  facilities.  At December
31, 1998 the Company had complied  with all  financial  covenants  governing its
debt agreements.

                                    -26-

<PAGE>



      Dividends paid during 1998 totaled $4.6 million. No dividends were paid in
1997. Dividends paid during 1996 totaled $15.3 million. At December 31, 1998 the
Company  had $47 million  available  for  payment of  dividends  pursuant to the
Senior Notes  indenture.  On February 10, 1999 the Company's  Board of Directors
increased the regular quarterly  dividend from $.03 per share to $.035 per share
and  declared a dividend  to  shareholders  of record as of March 17, 1999 to be
paid on March 31, 1999.

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

      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  tax  returns  in  various  U.S.  and  non-U.S.
jurisdictions  are being  examined  and tax  authorities  have  proposed  or may
propose tax deficiencies,  including  non-income tax related items and interest.
The Company  previously reached an agreement with the German tax authorities and
paid certain tax  deficiencies of  approximately DM 44 million ($28 million when
paid),  including  interest,  which resolved  significant tax  contingencies for
years through 1990. In the third quarter of 1998,  the Company  received a DM 14
million ($8.2 million when received) refund of 1990 German dividend  withholding
taxes.  The German tax authorities were required to refund such amounts based on
a 1998 German  Supreme Court decision in favor of another  taxpayer.  The refund
resulted in a reduction of the settlement  amount from DM 44 million referred to
above to DM 30  million  for years  through  1990.  No further  withholding  tax
refunds are expected.

      Certain  other  significant   German  tax  contingencies   aggregating  an
estimated DM 172 million ($103 million at December 31, 1998) through 1997 remain
outstanding  and are in  litigation.  Of these,  one  primary  issue  represents
disputed  amounts  aggregating DM 160 million ($96 million at December 31, 1998)
for  years  through  1997.  The  Company  has  received  tax  assessments  for a
substantial   portion  of  these  amounts.   No  payments  of  tax  or  interest
deficiencies  related to these  assessments are expected until the litigation is
resolved.  During  1997 a German  tax  court  proceeding  involving  a tax issue
substantially  the same as this issue was decided in favor of the taxpayer.  The
German tax authorities  appealed that decision to the German Supreme Court which
in February  1999  rendered its judgment in favor of the  taxpayer.  The Company
believes that the German Supreme Court's  judgment should  determine the outcome
of the Company's primary dispute with the German tax authorities.  Based on this
recent favorable judgment,  the Company will request that the tax assessments be
withdrawn.  The Company has granted a DM 94 million ($57 million at December 31,
1998)  lien on its  Nordenham,  Germany  TiO2  plant  in  favor  of the  City of
Leverkusen related to this tax contingency, and a DM 5 million ($3 million at

                                    -27-

<PAGE>



December 31, 1998) lien in favor of the German federal tax authorities for other
tax  contingencies.  If the German tax  authorities  withdraw their  assessments
based on the German Supreme Court's decision, the Company expects to request the
release of the DM 94 million lien in favor of the City of Leverkusen.

      In addition,  during 1997 the Company reached an agreement with the German
tax authorities  regarding  certain other issues not in litigation for the years
1991 through 1994, and agreed to pay additional tax deficiencies of DM 9 million
($5 million at December 31,  1998),  most of which was paid in the third quarter
of 1998.

      During 1997 the Company  received a tax assessment  from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at December
31, 1998)  relating to 1994.  The Company has appealed this  assessment  and has
begun  litigation  proceedings.  During  1998 the  Company  was  informed by the
Norwegian tax authorities that additional tax deficiencies of NOK 39 million ($5
million at December  31,  1998) will likely be proposed  for the year 1996.  The
Company  intends to vigorously  contest this issue and  litigate,  if necessary.
Although the Company believes that it will ultimately  prevail,  the Company has
granted a lien for the 1994 tax assessment on its Fredrikstad, Norway TiO2 plant
in favor of the Norwegian tax authorities and will be required to grant security
on the 1996 assessment when received.

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

      At December 31, 1998 the Company had net deferred tax  liabilities of $195
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 $134
million at December  31,  1998,  principally  related to the U.S.  and  Germany,
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  business  conducted  through  Kronos,  the
Company  also has  certain  interests  and  associated  liabilities  relating to
certain discontinued or divested  businesses,  and holdings of marketable equity
securities including securities issued by Valhi and other Contran subsidiaries.

      The Company has been named as a  defendant,  PRP, or both,  in a number of
legal  proceedings  associated  with  environmental  matters,   including  waste
disposal sites,  mining locations and facilities  currently or previously owned,
operated  or used  by the  Company,  certain  of  which  are on the  U.S.  EPA's
Superfund National Priorities List or similar state lists. On a quarterly basis,
the Company evaluates the potential range of its liability at sites where it has
been named as a PRP or defendant.  The Company believes it has adequate accruals
for

                                    -28-

<PAGE>



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 is in the process of  evaluating  and  upgrading  its computer
systems (both information technology ("IT") systems and non-IT systems involving
embedded chip technology) and software applications (collectively referred to as
"systems") to ensure that the systems  function  properly  beginning  January 1,
2000.  To achieve  its year 2000  compliance  plan,  the  Company  is  utilizing
internal and external resources to identify,  correct or reprogram, and test its
systems.

      The Company has conducted an inventory of its IT systems  worldwide and is
currently  testing the  systems and  applications  that have been  corrected  or
reprogrammed for year 2000  compliance.  The Company has completed a preliminary
inventory  of its  non-IT  systems  and  is in the  process  of  validating  the
inventory and correcting or replacing  date-deficient  systems.  The remediation
effort is well under way on all critical IT and non-IT systems,  and the Company
anticipates  that  remediation  of such critical  systems will be  substantially
complete  by March  1999,  and that  remediation  and  testing of all  remaining
systems will be complete by September 1999.  Once systems  undergo  remediation,
they are tested for year 2000  compliance.  For  critical  systems,  the testing
process usually involves  subjecting the remediated system to a simulated change
of date from the year  1999 to the year  2000  using,  in many  cases,  computer
resources.  The Company uses a number of packaged  software  products  that have
been upgraded to a year 2000 compliant version in the normal course of business.
Excluding the cost of these  software  upgrades,  the Company's cost of becoming
year 2000 compliant is

                                    -29-

<PAGE>



expected to be approximately $2 million,  of which about one-half has been spent
through December 31, 1998.

      The Company has identified  approximately  30 major  computer  systems and
assessed them for year 2000 compliance.  At December 31, 1998, approximately 80%
of the systems are year 2000 compliant.  Each operating unit has  responsibility
for its own conversion,  in line with overall guidance and oversight provided by
a corporate-level  coordinator,  and the status of each of the remaining systems
will be specifically tracked and monitored.

      As part of its year  2000  compliance  plan,  the  Company  has  requested
confirmations  from its major domestic and foreign  software  vendors,  hardware
vendors,  primary  suppliers and major  customers,  that they are developing and
implementing  plans  to  become,  or are,  year  2000  compliant.  Confirmations
received to date from the Company's software vendors,  hardware vendors, primary
suppliers and major  customers,  indicate that generally they are in the process
of implementing  remediation plans to ensure that their systems are compliant by
December 31, 1999. The major  software  vendors used by the Company have already
delivered  year 2000 compliant  software.  Notwithstanding  these  efforts,  the
ability of the  Company to affect the year 2000  preparedness  of such  vendors,
suppliers and customers is limited.

      The Company is developing a  contingency  plan to address  potential  year
2000  related  business  interruptions  that may occur on January  1,  2000,  or
thereafter. This plan is expected to be completed in the second quarter of 1999.

      Although the Company expects its systems to be year 2000 compliant  before
December  31,  1999,  it cannot  predict the outcome or success of the year 2000
compliance programs of its vendors,  suppliers,  and customers. The Company also
cannot predict whether its major software vendors, who continue to test for year
2000  compliance,  will find additional  problems that would result in unplanned
upgrades of their  applications  after  December 31, 1999.  As a result of these
uncertainties,  the Company cannot predict the impact on its financial condition
or results of  noncompliant  year 2000  systems  that the  Company  directly  or
indirectly  relies upon.  Should the Company's year 2000  compliance plan not be
successful  or be delayed  beyond  January  2000, or should one or more vendors,
suppliers or customers  fail to adequately  address their year 2000 issues,  the
consequences  to the Company could be  far-reaching  and material,  including an
inability to produce TiO2 at its manufacturing  facilities,  which could lead to
an indeterminate amount of lost revenue.  Other potential negative  consequences
could include plant malfunction,  impeded  communications or power supplies,  or
slower transaction processing and financial reporting. Although not anticipated,
the most reasonably likely worst-case  scenario of failure by the Company or its
key suppliers or customers to become year 2000  compliant  would be a short-term
slowdown  or  cessation  of  manufacturing  operations  at  one or  more  of the
Company's  facilities  and a short-term  inability on the part of the Company to
process  orders and  billings  in a timely  manner,  and to  deliver  product to
customers.

      Beginning  January 1, 1999,  eleven of the fifteen members of the European
Union ("EU"), including Germany,  Belgium, the Netherlands and France, adopted a
new European currency unit (the "euro") as their common legal currency.

                                    -30-

<PAGE>



Following the introduction of the euro, the  participating  countries'  national
currencies remain legal tender as denominations of the euro from January 1, 1999
through  January 1,  2002,  and the  exchange  rates  between  the euro and such
national currency units are fixed.

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

      The  Company  has  a  significant  amount  of  outstanding  DM-denominated
indebtedness which, at the Company's option, may be repaid in euros. In 1998 the
Company assessed and evaluated the impact of the euro conversion on its business
and made the  necessary  system  conversions.  The Company  spent and charged to
expense less than $1 million in evaluation and conversion costs.  Because of the
inherent uncertainty of the ultimate effect of the euro conversion,  the Company
cannot  accurately  predict the impact on its results of  operations,  financial
condition or liquidity.

      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 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  acquisition  or  joint  venture
transaction,  the Company may consider  using  available  cash,  issuing  equity
securities  or  increasing  its  indebtedness  to the  extent  permitted  by the
agreements   governing  the  Company's   existing  debt.  See  Note  10  to  the
Consolidated Financial Statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  General

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

                                    -31-

<PAGE>



interest rates or equity security prices at December 31, 1998. See Notes 2 and 8
to the Consolidated Financial Statements.

  Interest rates

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

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

<TABLE>
<CAPTION>


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

Variable rate debt (DM denominated):
  Principal amount .................   $  101.2  $  48.4  $   .2  $   .2  $    --    $   150.0  $   150.0
  Weighted-average interest
   rate ............................       5.4%     6.1%    9.3%    9.3%       --         5.6%

</TABLE>

  Currency exchange rates

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

      As described  above, at December 31, 1998, the Company had $150 million of
indebtedness  denominated in Deutsche marks. The potential  increase in the U.S.
dollar  equivalent  of  the  principal  amount  outstanding   resulting  from  a
hypothetical  10% adverse  change in exchange rates would be  approximately  $15
million.


                                    -32-

<PAGE>



  Marketable equity security prices

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

  Other

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

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

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

     Not applicable.

                                   PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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


                                    -33-

<PAGE>



ITEM 11.    EXECUTIVE COMPENSATION

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

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                    PART IV

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

 (a) and (d)   Financial Statements and Schedules

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

 (b)           Reports on Form 8-K

               Reports on Form 8-K for the quarter  ended  December 31, 1998 and
               thereafter through the date of this report.

               October 19, 1998  -  reported Items 5 and 7.
               October 21, 1998  -  reported Items 5 and 7.
               January 4, 1999   -  reported Items 5 and 7.
               January 22, 1999  -  reported Items 5 and 7.
               February 12, 1999 -  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.

                                    -34-

<PAGE>



Item No.                                Exhibit Index

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

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

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

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

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

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

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

 10.1       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  -  incorporated  by
            reference to Exhibit 10.2 to the Registrant's  Annual Report on Form
            10-K for the year ended December 31, 1996.


                                    -35-

<PAGE>



 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 - incorporated  by reference to Exhibit 10.4
            to the  Registrant's  Annual  Report on Form 10-K for the year ended
            December 31, 1996.

 10.5       Guaranty  dated as of January  31,  1997 made by the  Registrant  in
            favor of Hypobank  International  S.A., as Agent -  incorporated  by
            reference to Exhibit 10.5 to the Registrant's  Annual Report on Form
            10-K for the year ended December 31, 1996.

 10.6       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.

 10.7       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.

 10.8       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.

 10.9       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.

 10.10      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.

 10.11      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.

                                    -36-

<PAGE>



 10.12      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.

 10.13      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.

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

 10.15      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.

 10.16      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.

 10.17      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.

 10.18      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.

 10.19      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.

 10.20*     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

                                    -37-

<PAGE>



            Statement  on Schedule  14A for the annual  meeting of  shareholders
            held on April 24, 1985.

 10.21      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.

 10.22*     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.

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

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

 10.25*     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.

 10.26      Intercorporate Services Agreement by and between Valhi, Inc. and the
            Registrant  effective  as of  January  1,  1998  -  incorporated  by
            reference to Exhibit 10.10 to the  Registrant's  Quarterly Report on
            Form 10-Q for the quarter ended September 30, 1998.

 10.27      Intercorporate Services Agreement by and between Contran Corporation
            and the Registrant effective as of January 1, 1998 - incorporated by
            reference to Exhibit 10.9 to the  Registrant's  Quarterly  Report on
            Form 10-Q for the quarter ended September 30, 1998.

 10.28      Intercorporate Services Agreement by and between Tremont Corporation
            and the Registrant effective as of January 1, 1998 - incorporated by
            reference to Exhibit 10.11 to the  Registrant's  Quarterly Report on
            Form 10-Q for the quarter ended September 30, 1998.

 10.29      Intercorporate  Service  Agreement  by and between  Titanium  Metals
            Corporation   and  the   Registrant   effective   January   1,  1998
            incorporated  by  reference  to  Exhibit  10.12 to the  Registrant's
            Quarterly  Report on Form 10-Q for the quarter  ended  September 30,
            1998.


                                    -38-

<PAGE>



 10.30      Intercorporate Services Agreement by and between CompX International
            Inc. and the Registrant effective as of January 1, 1998 incorporated
            by reference to Exhibit 10.13 to the  Registrant's  Quarterly Report
            of Form 10-Q for the quarter ended September 30, 1998.

 10.31      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.

 10.32*     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.

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

 10.34*     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.

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

 10.36*     Agreement to Defer Bonus Payment dated February 20, 1998 between the
            Registrant  and  J.  Landis  Martin  and  related  trust   agreement
            incorporated  by  reference  to  Exhibit  10.49 to the  Registrant's
            Annual Report of Form 10-K for the year ended December 31, 1997.

 10.37      Asset Purchase  Agreement dated as of December 29, 1997 by and among
            NL  Industries,  Inc.,  Rheox,  Inc.,  Rheox  International,   Inc.,
            Harrisons and Crosfield plc, Harrisons and Crosfield  (America) Inc.
            and Elementis  Acquisition  98, Inc. - incorporated  by reference to
            Exhibit 10.50 to the Registrant's Annual Report of Form 10-K for the
            year ended December 31, 1997.

 21.1       Subsidiaries of the Registrant.

 23.1       Consent of Independent Accountants.

 27.1 Financial Data Schedule for the year ended December 31, 1998.


                                    -39-

<PAGE>



 99.1       Annual Report of NL Industries,  Inc.  Retirement Savings Plan (Form
            11-K) to be filed  under  Form  10-K/A  to the  Registrant's  Annual
            Report on Form 10-K within 180 days after December 31, 1998.

* Management contract, compensatory plan or arrangement.

                                    -40-

<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 22, 1999
                                      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 22, 1999       Harold C. Simmons, March 22, 1999
Director, President and                Chairman of the Board
Chief Executive Officer


/s/ Glenn R. Simmons                   /s/ Joseph S. Compofelice
Glenn R. Simmons, March 22, 1999       Joseph S. Compofelice, March 22, 1999
Director                               Director


/s/ Kenneth R. Peak                    /s/ Dr. Lawrence A. Wigdor
Kenneth R. Peak, March 22, 1999        Dr. Lawrence A. Wigdor, March 22, 1999
Director                               Director, President and Chief
                                       Executive Officer of Kronos

                                       

/s/ Elmo R. Zumwalt, Jr.               /s/ Susan E. Alderton
Elmo R. Zumwalt, Jr., March 22, 1999   Susan E. Alderton, March 22, 1999
Director                               Vice President and Chief Financial
                                       Officer

/s/ Robert D. Hardy                   
Robert D. Hardy, March 22, 1999
Vice President and Controller
(Principal Accounting Officer)


                                    -41-

<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, 1997 and 1998         F-3 / F-4

  Consolidated Statements of Income - Years ended
   December 31, 1996, 1997 and 1998                                F-5 / F-6

  Consolidated Statements of Comprehensive Income - Years
   ended December 31, 1996, 1997 and 1998                          F-7

  Consolidated Statements of Shareholders' Equity - Years
   ended December 31, 1996, 1997 and 1998                          F-8

  Consolidated Statements of Cash Flows - Years ended
   December 31, 1996, 1997 and 1998                                F-9 / F-11

  Notes to Consolidated Financial Statements                       F-12 / F-45


Financial Statement Schedules

  Report of Independent Accountants                                S-1

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

  Schedule II - Valuation and qualifying accounts                  S-8





                                    F-1

<PAGE>







                       REPORT OF INDEPENDENT ACCOUNTANTS



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

      In  our  opinion,  the  accompanying  consolidated  balance  sheets  of NL
Industries,   Inc.   and  the  related   consolidated   statements   of  income,
comprehensive income, shareholders' equity and cash flows present fairly, in all
material respects, the consolidated financial position of NL Industries, Inc. at
December 31, 1997 and 1998, and the consolidated results of their operations and
their cash flows for each of the three years in the period  ended  December  31,
1998  in  conformity  with  generally  accepted  accounting  principles.   These
financial  statements are the  responsibility of the Company's  management;  our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
generally  accepted auditing  standards,  which require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.

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





                                    PricewaterhouseCoopers LLP

Houston, Texas
February 10, 1999




                                    F-2

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                          December 31, 1997 and 1998

                     (In thousands, except per share data)


<TABLE>
<CAPTION>

              ASSETS
                                                          1997           1998
                                                       ----------     ----------

<S>                                                    <C>            <C>       
Current assets:
  Cash and cash equivalents ......................     $   96,394     $  154,953
  Restricted cash equivalents ....................          9,751          8,164
  Accounts and notes receivable, less
   allowance of $2,828 and $2,377 ................        148,676        133,769
  Refundable income taxes ........................          1,941         15,919
  Inventories ....................................        192,780        228,611
  Prepaid expenses ...............................          3,348          2,724
  Deferred income taxes ..........................          1,642          1,955
                                                       ----------     ----------

      Total current assets .......................        454,532        546,095
                                                       ----------     ----------



Other assets:
  Marketable securities ..........................         17,270         17,580
  Investment in joint ventures ...................        172,721        171,202
  Prepaid pension cost ...........................         23,848         23,990
  Deferred income taxes ..........................            110             --
  Other ..........................................         18,482         13,927
                                                       ----------     ----------

      Total other assets .........................        232,431        226,699
                                                       ----------     ----------



Property and equipment:
  Land ...........................................         19,479         19,626
  Buildings ......................................        150,090        144,228
  Machinery and equipment ........................        616,309        586,400
  Mining properties ..............................         88,617         84,015
  Construction in progress .......................          2,577          4,385
                                                       ----------     ----------
                                                          877,072        838,654

  Less accumulated depreciation and depletion ....        465,843        456,495
                                                       ----------     ----------

      Net property and equipment .................        411,229        382,159
                                                       ----------     ----------

                                                       $1,098,192     $1,154,953
                                                       ==========     ==========

</TABLE>



                                    F-3

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                    CONSOLIDATED BALANCE SHEETS (CONTINUED)

                          December 31, 1997 and 1998

                     (In thousands, except per share data)

<TABLE>
<CAPTION>


   LIABILITIES AND SHAREHOLDERS' EQUITY
                                                         1997           1998
                                                     -----------    -----------

<S>                                                  <C>            <C>        
Current liabilities:
  Notes payable ..................................   $    13,968    $    36,391
  Current maturities of long-term debt ...........        77,374         64,826
  Accounts payable and accrued liabilities .......       161,730        187,661
  Payable to affiliates ..........................        11,512         10,625
  Income taxes ...................................        10,910          9,224
  Deferred income taxes ..........................           891          1,236
                                                     -----------    -----------

      Total current liabilities ..................       276,385        309,963
                                                     -----------    -----------

Noncurrent liabilities:
  Long-term debt .................................       666,779        292,803
  Deferred income taxes ..........................       132,797        196,180
  Accrued pension cost ...........................        44,389         44,649
  Accrued postretirement benefits cost ...........        50,951         41,659
  Other ..........................................       148,903        116,732
                                                     -----------    -----------

      Total noncurrent liabilities ...............     1,043,819        692,023
                                                     -----------    -----------

Minority interest ................................           257            633
                                                     -----------    -----------

Shareholders' equity:
  Preferred stock - 5,000 shares authorized,
   no shares issued or outstanding ...............            --             --
  Common stock - $.125 par value; 150,000
   shares authorized; 66,839 shares issued .......         8,355          8,355
  Additional paid-in capital .....................       759,281        774,288
  Accumulated deficit ............................      (495,421)      (133,379)
  Accumulated other comprehensive income (loss):
    Currency translation .........................      (133,810)      (133,440)
    Marketable securities ........................         4,297          4,498
    Pension liabilities ..........................            --         (3,187)
  Treasury stock, at cost (15,572 and 15,028
   shares) .......................................      (364,971)      (364,801)
                                                     -----------    -----------

      Total shareholders' equity (deficit) .......      (222,269)       152,334
                                                     -----------    -----------

                                                     $ 1,098,192    $ 1,154,953
                                                     ===========    ===========
</TABLE>

Commitments and contingencies (Notes 13 and 17)

         See accompanying notes to consolidated financial statements.

                                    F-4

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

                 Years ended December 31, 1996, 1997 and 1998

                     (In thousands, except per share data)

<TABLE>
<CAPTION>

                                               1996        1997         1998
                                            ---------    ---------    ---------

<S>                                         <C>          <C>          <C>      
Revenues and other income:
  Net sales .............................   $ 851,179    $ 837,240    $ 894,724
  Other, net ............................      27,669       19,367       25,453
                                            ---------    ---------    ---------

                                              878,848      856,607      920,177
                                            ---------    ---------    ---------

Costs and expenses:
  Cost of sales .........................     668,605      649,945      618,447
  Selling, general and administrative ...     151,144      168,592      133,970
  Interest ..............................      69,333       65,759       58,070
                                            ---------    ---------    ---------

                                              889,082      884,296      810,487
                                            ---------    ---------    ---------
    Income (loss) from continuing
     operations before income
     taxes and minority interest ........     (10,234)     (27,689)     109,690

Income tax expense ......................       1,496        2,244       19,788
                                            ---------    ---------    ---------

    Income (loss) from continuing
     operations before minority
     interest ...........................     (11,730)     (29,933)      89,902

Minority interest .......................           5          (58)          40
                                            ---------    ---------    ---------

    Income (loss) from continuing
     operations .........................     (11,735)     (29,875)      89,862

Discontinued operations .................      22,552       20,402      287,396

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

    Net income (loss) ...................   $  10,817    $  (9,473)   $ 366,678
                                            =========    =========    =========

</TABLE>


                                    F-5

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)

                 Years ended December 31, 1996, 1997 and 1998

                    (In thousands, except per share data)


<TABLE>
<CAPTION>


                                         1996         1997          1998
                                     ----------    ----------    ----------

<S>                                  <C>           <C>           <C>       
Basic earnings per share:
  Continuing operations ..........   $     (.23)   $     (.58)   $     1.75
  Discontinued operations ........          .44           .39          5.59
  Extraordinary item .............           --            --          (.21)
                                     ----------    ----------    ----------

    Net income (loss) ............   $      .21    $     (.19)   $     7.13
                                     ==========    ==========    ==========


Diluted earnings per share:
  Continuing operations ..........   $     (.23)   $     (.58)   $     1.73
  Discontinued operations ........          .44           .39          5.52
  Extraordinary item .............           --            --          (.20)
                                     ----------    ----------    ----------

    Net income (loss) ............   $      .21    $     (.19)   $     7.05
                                     ==========    ==========    ==========

Shares used in the calculation of
 earnings per share:
  Basic ..........................       51,103        51,152        51,460
  Dilutive impact of stock options           --            --           540
                                     ----------    ----------    ----------

  Diluted ........................       51,103        51,152        52,000
                                     ==========    ==========    ==========

</TABLE>



         See accompanying notes to consolidated financial statements.

                                    F-6

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                 Years ended December 31, 1996, 1997 and 1998

                                (In thousands)


<TABLE>
<CAPTION>


                                                 1996       1997        1998
                                                -------   --------    ---------

<S>                                             <C>       <C>         <C>      
Net income (loss) ...........................   $10,817   $ (9,473)   $ 366,678
                                                -------   --------    ---------

Other comprehensive income (loss), net
 of tax:
  Marketable securities adjustment ..........     1,803      3,019          201
  Minimum pension liabilities
   adjustment ...............................        86      1,822       (3,187)
  Currency translation adjustment ...........     8,305    (15,181)         370
                                                -------   --------    ---------

    Other comprehensive income (loss) .......    10,194    (10,340)      (2,616)
                                                -------   --------    ---------

  Comprehensive income (loss) ...............   $21,011   $(19,813)   $ 364,062
                                                =======   ========    =========

</TABLE>



         See accompanying notes to consolidated financial statements.

                                    F-7

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                 Years ended December 31, 1996, 1997 and 1998

                                (In thousands)
<TABLE>
<CAPTION>


                                                                              Accumulated other                                    
                                                                        comprehensive income (loss)                      
                                             Additional              ----------------------------------   
                                    Common    paid-in   Accumulated   Currency    Pension    Marketable   Treasury
                                     stock    capital     deficit    translation liabilities securities     stock        Total
                                    -------  ---------- -----------  ----------- ----------- ----------  ---------    ---------


<S>                                  <C>      <C>        <C>          <C>          <C>        <C>        <C>          <C>       
Balance at December 31, 1995 .....   $8,355   $759,281   $(481,432)   $(126,934)   $(1,908)   $  (525)   $(366,258)   $(209,421)

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

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

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

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

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

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

         See accompanying notes to consolidated financial statements.

                                    F-8

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                 Years ended December 31, 1996, 1997 and 1998

                                (In thousands)

<TABLE>
<CAPTION>

                                               1996         1997        1998
                                             --------    ---------    ---------

<S>                                          <C>         <C>          <C>      
Cash flows from operating activities:
  Net income (loss) ......................   $ 10,817    $  (9,473)   $ 366,678
  Depreciation, depletion and
   amortization ..........................     36,285       34,887       34,545
  Noncash interest expense ...............     20,442       23,092       18,393
  Deferred income taxes ..................        297       (5,627)       4,988
  Minority interest ......................          5          (58)          40
  Net (gains) losses from:
    Securities transactions ..............         --       (2,657)          --
    Disposition of property and
     equipment ...........................      2,236       (1,735)         768
  Pension cost, net ......................     (8,018)      (5,112)      (5,566)
  Other postretirement benefits, net .....     (4,962)      (4,799)      (6,299)
  Change in accounting for environmental
   remediation costs .....................         --       30,000           --
  Discontinued operations:
    Net gain from sale of Rheox ..........         --           --     (286,071)
    Income from operations of Rheox ......    (22,552)     (20,402)      (1,325)
  Extraordinary item .....................         --           --       10,580
  Other, net .............................        (67)          --          317
                                             --------    ---------    ---------

                                               34,483       38,116      137,048

  Rheox, net .............................     20,705       31,506      (30,587)
  Change in assets and liabilities:
    Accounts and notes receivable ........      3,083      (14,925)      (2,012)
    Inventories ..........................      7,192       22,872      (49,839)
    Prepaid expenses .....................     (1,355)          96          436
    Accounts payable and accrued
     liabilities .........................     (1,949)       9,347       (2,741)
    Income taxes .........................    (36,414)      12,978      (12,976)
    Accounts with affiliates .............      3,408       (3,915)       2,286
    Other noncurrent assets ..............        236         (269)        (178)
    Other noncurrent liabilities .........    (12,851)      (6,640)       3,650
                                             --------    ---------    ---------

        Net cash provided by operating
         activities ......................     16,538       89,166       45,087
                                             --------    ---------    ---------


</TABLE>



                                    F-9

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                 Years ended December 31, 1996, 1997 and 1998

                                (In thousands)
<TABLE>
<CAPTION>
                                                1996         1997         1998
                                              --------    ---------    ---------
<S>                                          <C>         <C>          <C>      
Cash flows from investing activities:
  Proceeds from sale of Rheox ............   $     --    $      --    $ 435,080
  Capital expenditures ...................    (64,241)     (28,220)     (22,392)
  Proceeds from disposition of
   marketable securities .................         --        6,875        6,875
  Change in restricted cash
   equivalents, net ......................       (791)       1,144       (2,638)
  Investment in joint venture, net .......      3,934        8,364         (372)
  Proceeds from disposition of
   property and equipment ................         76        3,049          769
  Rheox, net .............................     (7,376)      (2,314)         (26)
                                             --------    ---------    ---------

      Net cash provided (used) by
       investing activities ..............    (68,398)     (11,102)     417,296
                                             --------    ---------    ---------

Cash flows from financing activities:
  Indebtedness:
    Borrowings ...........................     97,503           --       30,491
    Principal payments ...................    (32,362)    (182,215)    (315,892)
    Deferred financing costs .............         --       (2,343)          --
  Settlement of shareholder derivative
   lawsuit, net ..........................         --           --       11,211
  Dividends paid .........................    (15,333)          --       (4,636)
  Rheox, net .............................    (23,492)     100,940     (117,500)
  Other, net .............................        249        1,023          168
                                             --------    ---------    ---------

      Net cash provided (used) by
       financing activities ..............     26,565      (82,595)    (396,158)
                                             --------    ---------    ---------

      Net change during the year from
       operating, investing and
       financing activities ..............   $(25,295)   $  (4,531)   $  66,225
                                             ========    =========    =========


</TABLE>


                                    F-10

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                 Years ended December 31, 1996, 1997 and 1998

                                (In thousands)

<TABLE>
<CAPTION>

                                               1996         1997         1998
                                            ---------    ---------    ---------

<S>                                         <C>          <C>          <C>      
Cash and cash equivalents:
  Net change during the year from:
    Operating, investing and financing
     activities .........................   $ (25,295)   $  (4,531)   $  66,225
    Currency translation ................      (2,714)      (2,295)         (36)
    Sale of Rheox .......................          --           --       (7,630)
                                            ---------    ---------    ---------

                                              (28,009)      (6,826)      58,559
  Balance at beginning of year ..........     131,229      103,220       96,394
                                            ---------    ---------    ---------

  Balance at end of year ................   $ 103,220    $  96,394    $ 154,953
                                            =========    =========    =========

Supplemental disclosures:
  Cash paid for:
    Interest, net of amounts capitalized    $  51,678    $  55,908    $  37,965
    Income taxes ........................      50,400        6,875       54,230

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

</TABLE>


         See accompanying notes to consolidated financial statements.
                                    F-11

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 - Organization and basis of presentation:

      NL  Industries,  Inc.  conducts its  titanium  dioxide  pigments  ("TiO2")
operations through its wholly-owned subsidiary, Kronos, Inc. In January 1998 the
specialty  chemicals business of Rheox,  Inc., a wholly-owned  subsidiary of NL,
was sold. See Note 20.

      At December 31, 1998 Valhi, Inc. and Tremont Corporation,  each affiliates
of Contran Corporation,  held approximately 58% and 20%,  respectively,  of NL's
outstanding  common  stock,  and  together  they may be deemed to control NL. At
December 31, 1998 Contran and its subsidiaries held approximately 92% of Valhi's
outstanding  common  stock,  and Valhi and other  entities  related to Harold C.
Simmons  held   approximately  53%  of  Tremont's   outstanding   common  stock.
Substantially all of Contran's outstanding voting stock is held either by trusts
established  for the  benefit  of  certain  children  and  grandchildren  of Mr.
Simmons,  of which Mr. Simmons is the sole trustee,  or by Mr. Simmons directly.
Mr.  Simmons,  the Chairman of the Board of NL and the Chairman of the Board and
Chief Executive  Officer of Contran and Valhi and a director of Tremont,  may be
deemed to control each of such companies.

Note 2 - Summary of significant accounting policies:

Principles of consolidation and management's estimates

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

Translation of foreign currencies

      Assets and liabilities of subsidiaries whose functional currency is 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 are included in
other  comprehensive  income  (loss),  net of  related  deferred  income  taxes.
Currency transaction gains and losses are recognized in income currently.


                                    F-12

<PAGE>



Cash equivalents

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

Restricted cash equivalents

      At December 31, 1998  restricted  cash  equivalents  of  approximately  $5
million collateralize undrawn letters of credit, and restricted cash equivalents
of  approximately $7 million  collateralize  certain  environmental  remediation
obligations  of the  Company,  of which $4  million  has  been  classified  as a
noncurrent   asset.  At  December  31,  1997  restricted  cash   equivalents  of
approximately  $5  million  collateralized  undrawn  letters  of credit and cash
equivalents of  approximately  $5 million were restricted  under an indebtedness
agreement, which was repaid in 1998.

Marketable securities and securities transactions

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

Inventories

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

Investment in joint ventures

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

Property, equipment, depreciation and depletion

      Property  and  equipment  are stated at cost.  Interest  costs  related to
major, long-term capital projects are capitalized as a component of construction
costs. 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-13

<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 was nil in each of
the past three years.

Environmental remediation costs

      Environmental   remediation   costs  are  accrued  when  estimated  future
expenditures  are  probable  and  reasonably  estimable.  The  estimated  future
expenditures  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, 1997 and 1998 no receivables for recoveries
have been recognized.

      The Company  adopted a new method of accounting as required by the AICPA's
Statement of Position ("SOP") No. 96-1, "Environmental Remediation Liabilities,"
in 1997. The SOP,  among other things,  expands the types of costs which must be
considered in determining  environmental  remediation  accruals.  As a result of
adopting the SOP,  the Company  recognized  a noncash  cumulative  charge of $30
million in 1997. The charge did not impact the Company's 1997 income tax expense
because the Company  believes the resulting  deferred  income tax asset does not
currently   satisfy   the   more-likely-than-not   recognition   criteria   and,
accordingly,  the Company established an offsetting valuation allowance. The $30
million noncash charge is comprised  primarily of estimated future  expenditures
associated  with  managing and  monitoring  existing  environmental  remediation
sites,  and the  expenditures  have not been  discounted to present  value.  The
expenditures  consist  principally of legal and  professional  fees, but exclude
litigation  defense  costs for  matters  in which the  Company  asserts  that no
liability exists. Previously, all such expenditures were expensed as incurred.

Net sales

      Sales are recognized as products are shipped.


                                    F-14

<PAGE>



Income taxes

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

Interest rate swaps and contracts

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

Earnings per share

      Basic earnings per share is based on the weighted average number of common
shares  outstanding  during each period.  Diluted earnings per share is based on
the weighted  average  common  shares  outstanding  and the  dilutive  impact of
outstanding stock options.  The weighted average number of shares resulting from
outstanding  stock options which were excluded from the  calculation  of diluted
earnings per share because their impact would have been antidilutive  aggregated
2,483,000,  2,709,000 and 1,942,000 in 1996, 1997 and 1998, respectively.  There
were no  adjustments to income (loss) from  continuing  operations or net income
(loss) in the computation of earnings per share.

New accounting principles not yet adopted

      The  Company  will  adopt  Statement  of  Financial  Accounting  Standards
("SFAS") No. 133, Accounting for Derivative  Instruments and Hedging Activities,
no later than the first  quarter of 2000.  SFAS No. 133  establishes  accounting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts, and for hedging activities. Under SFAS No. 133, all
derivatives  will be recognized as either assets or liabilities  and measured at
fair value.  The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative.  The Company is currently studying this
newly-issued  accounting  rule, and the impact of adopting SFAS No. 133, if any,
will be

                                    F-15

<PAGE>



dependent  upon the extent to which the  Company  is then a party to  derivative
contracts or engaged in hedging activities.

Note 3 - Business and geographic segments:

      The Company's operations are conducted by Kronos in one operating business
segment  -  TiO2.  Titanium  dioxide  pigments  are  used to  impart  whiteness,
brightness  and  opacity  to a  wide  variety  of  products,  including  paints,
plastics,  paper, fibers and ceramics.  Discontinued  operations consists of the
Company's  specialty chemicals business owned by Rheox which was sold in January
1998.  See Note 20. At  December  31,  1997 and 1998 the net assets of  non-U.S.
subsidiaries  included in consolidated net assets  approximated $287 million and
$310 million, respectively.

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

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



                                    F-16

<PAGE>


<TABLE>
<CAPTION>
                                                  Years ended December 31,
                                            -----------------------------------
                                              1996         1997         1998
                                            ---------    ---------    ---------
                                                   (In thousands)
<S>                                         <C>          <C>          <C>      
Business segment - TiO2

  Net sales .............................   $ 851,179    $ 837,240    $ 894,724
  Other income, excluding corporate .....      18,388       12,339        6,110
                                            ---------    ---------    ---------
                                              869,567      849,579      900,834

  Cost of sales .........................     668,605      649,945      618,447
  Selling, general and
   administrative, excluding
   corporate ............................     129,356      117,133      111,206
                                            ---------    ---------    ---------

    Operating income ....................      71,606       82,501      171,181

  General corporate income (expense):
    Securities earnings, net ............       4,708        5,393       14,921
    Expenses, net .......................     (17,215)     (49,824)     (18,342)
    Interest expense ....................     (69,333)     (65,759)     (58,070)
                                            ---------    ---------    ---------

                                            $ (10,234)   $ (27,689)   $ 109,690
                                            =========    =========    =========

  Capital expenditures:
    Kronos ..............................   $  64,201    $  28,193    $  22,310
    General corporate ...................          40           27           82
                                            ---------    ---------    ---------

                                            $  64,241    $  28,220    $  22,392
                                            =========    =========    =========

  Depreciation, depletion and
   amortization:
    Kronos ..............................   $  36,091    $  34,684    $  34,341
    General corporate ...................         194          203          204
                                            ---------    ---------    ---------

                                            $  36,285    $  34,887    $  34,545
                                            =========    =========    =========
Geographic areas

  Net sales - point of origin:
    Germany .............................   $ 424,861    $ 439,926    $ 451,061
    United States .......................     245,424      250,798      289,701
    Canada ..............................     134,199      145,160      158,967
    Belgium .............................     133,708      122,784      159,558
    Norway ..............................     109,947       96,448       91,112
    Other ...............................      89,466       88,030       96,912
    Eliminations ........................    (286,426)    (305,906)    (352,587)
                                            ---------    ---------    ---------

                                            $ 851,179    $ 837,240    $ 894,724
                                            =========    =========    =========

  Net sales - point of destination:
    Europe ..............................   $ 471,948    $ 442,043    $ 493,942
    United States .......................     222,710      230,923      246,209
    Canada ..............................      51,292       58,231       66,843
    Latin America .......................      41,140       43,078       35,281
    Asia ................................      43,842       41,328       21,042
    Other ...............................      20,247       21,637       31,407
                                            ---------    ---------    ---------

                                            $ 851,179    $ 837,240    $ 894,724
                                            =========    =========    =========
</TABLE>

                                    F-17

<PAGE>

<TABLE>
<CAPTION>
                                                      December 31,
                                        ----------------------------------------
                                           1996           1997           1998
                                        ----------     ----------     ----------
                                                  (In thousands)

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

  Net property and equipment:
    Germany .......................     $  238,372     $  213,762     $  223,605
    Canada ........................         73,616         67,247         60,574
    Belgium .......................         62,615         50,783         51,683
    Norway ........................         55,367         44,841         42,336
    Other .........................          4,640          4,289          3,961
    Discontinued operations .......         31,436         30,307             --
                                        ----------     ----------     ----------

                                        $  466,046     $  411,229     $  382,159
                                        ==========     ==========     ==========

  Total assets:
    Kronos ........................     $1,064,285     $  961,635     $  997,893
    General corporate .............         66,978         47,922        157,060
    Discontinued operations .......         90,095         88,635             --
                                        ----------     ----------     ----------

                                        $1,221,358     $1,098,192     $1,154,953
                                        ==========     ==========     ==========
</TABLE>

Note 4 - Marketable securities and securities transactions:

<TABLE>
<CAPTION>

                                                              December 31,
                                                         ----------------------
                                                           1997          1998
                                                         --------      --------
                                                             (In thousands)

<S>                                                      <C>           <C>     
Available-for-sale securities - noncurrent
 marketable equity securities:
  Unrealized gains .................................     $  6,939      $  8,512
  Unrealized losses ................................         (328)       (1,591)
  Cost .............................................       10,659        10,659
                                                         --------      --------

      Aggregate market .............................     $ 17,270      $ 17,580
                                                         ========      ========
</TABLE>

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

Note 5 - Inventories:

<TABLE>
<CAPTION>

                                                             December 31,
                                                     ---------------------------
                                                       1997               1998
                                                     --------           --------
                                                           (In thousands)

<S>                                                  <C>                <C>     
Raw materials ............................           $ 45,844           $ 46,114
Work in process ..........................              8,018             11,530
Finished products ........................            107,427            136,225
Supplies .................................             31,491             34,742
                                                     --------           --------

                                                     $192,780           $228,611
                                                     ========           ========
</TABLE>


                                    F-18

<PAGE>



Note 6 - Investment in joint ventures:

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

<S>                                                     <C>             <C>     
TiO2 manufacturing joint venture ...............        $170,830        $171,202
Other ..........................................           1,891              --
                                                        --------        --------

                                                        $172,721        $171,202
                                                        ========        ========
</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.
("Tioxide"),  a  wholly-owned  subsidiary of Imperial  Chemicals  Industries plc
("ICI").  LPC owns and operates a  chloride-process  TiO2 plant in Lake Charles,
Louisiana.

      LPC had two tranches of long-term  debt,  one of which was  guaranteed  by
KLA.  LPC  prepaid the KLA  tranche in 1998 with cash  provided by the  Company.
KLA's tranche of LPC's debt was  reflected as  outstanding  indebtedness  of the
Company  because Kronos had guaranteed the purchase  obligation  relative to the
debt service of its tranche. See Note 10.

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

      Summary balance sheets of LPC are shown below.

<TABLE>
<CAPTION>
                                                               December 31,
                                                          ----------------------
                                                            1997          1998
                                                          --------      --------
                                                              (In thousands)
           ASSETS
<S>                                                       <C>           <C>     
Current assets .....................................      $ 41,602      $ 60,686
Other assets .......................................           764            --
Property and equipment, net ........................       309,989       294,906
                                                          --------      --------

                                                          $352,355      $355,592
                                                          ========      ========

   LIABILITIES AND PARTNERS' EQUITY

Long-term debt, including current portion:
  Kronos tranche ...................................      $ 42,429      $     --
  Tioxide tranche ..................................         7,200            --
  Note payable to Tioxide ..........................         9,000            --
Other liabilities, primarily current ...............         8,466        10,960
                                                          --------      --------
                                                            67,095        10,960

Partners' equity ...................................       285,260       344,632
                                                          --------      --------

                                                          $352,355      $355,592
                                                          ========      ========
</TABLE>
                                    F-19

<PAGE>


      Summary income statements of LPC are shown below.

<TABLE>
<CAPTION>
                                                  Years ended December 31,
                                            ------------------------------------
                                              1996          1997          1998
                                            --------      --------      --------
                                                       (In thousands)

<S>                                         <C>           <C>           <C>     
Revenues and other income:
  Kronos .............................      $ 74,916      $ 82,171      $ 90,392
  Tioxide ............................        73,774        80,512        89,879
  Interest income ....................           518           636           753
                                            --------      --------      --------

                                             149,208       163,319       181,024
                                            --------      --------      --------
Cost and expenses:
  Cost of sales ......................       140,361       156,811       178,803
  General and administrative .........           377           355           348
  Interest ...........................         8,470         6,153         1,873
                                            --------      --------      --------

                                             149,208       163,319       181,024
                                            --------      --------      --------

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

Note 7 - Other noncurrent assets:
<TABLE>
<CAPTION>

                                                                December 31,
                                                           ---------------------
                                                             1997         1998
                                                           -------       -------
                                                                (In thousands)

<S>                                                        <C>           <C>    
Deferred financing costs, net ......................       $ 9,973       $ 4,124
Restricted cash equivalents ........................            --         4,225
Intangible assets, net of accumulated
 amortization of $22,366 and $23,704 ...............         4,228         1,985
Other ..............................................         4,281         3,593
                                                           -------       -------

                                                           $18,482       $13,927
                                                           =======       =======
</TABLE>

Note 8 - Accounts payable and accrued liabilities:

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

<S>                                                  <C>                <C>     
Accounts payable .........................           $ 64,698           $ 55,270
                                                     --------           --------
Accrued liabilities:
  Employee benefits ......................             40,110             37,399
  Environmental costs ....................              9,000             44,122
  Interest ...............................              6,966              7,346
  Other ..................................             40,956             43,524
                                                     --------           --------
                                                       97,032            132,391
                                                     --------           --------

                                                     $161,730           $187,661
                                                     ========           ========
</TABLE>


                                    F-20

<PAGE>



Note 9 - Other noncurrent liabilities:

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

<S>                                                   <C>               <C>     
Environmental costs ........................          $125,502          $ 81,454
Insurance claims expense ...................            11,436            10,872
Employee benefits ..........................            10,835             9,778
Deferred income ............................                --            12,333
Other ......................................             1,130             2,295
                                                      --------          --------

                                                      $148,903          $116,732
                                                      ========          ========
</TABLE>

Note 10 - Notes payable and long-term debt:

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

<S>                                                       <C>           <C>     
Notes payable (DM 25,000 and DM 60,500,
 respectively) .....................................      $ 13,968      $ 36,391
                                                          ========      ========

Long-term debt:
  NL Industries:
    11.75% Senior Secured Notes ....................      $250,000      $244,000
    13% Senior Secured Discount Notes ..............       169,857            --
                                                          --------      --------

                                                           419,857       244,000
                                                          --------      --------
  Kronos:
    DM bank credit facility (DM 288,322 and
     DM 187,322, respectively) .....................       161,085       112,674
    LPC term loan ..................................        42,429            --
    Other ..........................................         3,282           955
                                                          --------      --------

                                                           206,796       113,629
                                                          --------      --------

  Rheox - bank term loan ...........................       117,500            --
                                                          --------      --------

                                                           744,153       357,629
  Less current maturities ..........................        77,374        64,826
                                                          --------      --------

                                                          $666,779      $292,803
                                                          ========      ========
</TABLE>

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

      In the event of foreclosure, the holders of the Notes would have access to
the  consolidated  assets,  earnings  and  equity of the  Company.  The  Company
believes the collateralization of the Notes, as described above, is the

                                    F-21

<PAGE>



functional  economic  equivalent of a full,  unconditional and joint and several
guarantee  of the Notes by Kronos  and the other  subsidiary,  whose net  assets
amount to $308 million at December 31, 1998.

      The Notes are  redeemable,  at the Company's  option,  starting in October
2000 at a redemption  price of 101.5% of the  principal  amount and declining to
100% after  October  2001. In the event of a Change of Control as defined in the
indenture,  the Company would be required to make an offer to purchase the Notes
at 101% of the principal  amount of the Notes.  The Notes are issued pursuant to
an indenture which contains a number of covenants and restrictions  which, among
other things,  restrict the ability of the Company and its subsidiaries to incur
debt,  incur liens,  pay  dividends  or merge or  consolidate  with,  or sell or
transfer  all or  substantially  all of their  assets  to,  another  entity.  At
December 31, 1998 $47 million was available for payment of dividends pursuant to
the terms of the indenture.  The quoted market price of the Senior Secured Notes
per $100 principal amount was $111.17 and $103.73 at December 31, 1997 and 1998,
respectively.

      At December 31, 1998 the DM credit facility  consisted of a DM 107 million
term loan and a DM 230 million revolving credit facility, of which DM 80 million
was  outstanding.  Borrowings  bear  interest at DM LIBOR plus 2.75%  (6.28% and
6.00% at December 31, 1997 and 1998,  respectively),  and are  collateralized by
the stock of certain KII  subsidiaries,  pledges of certain  Canadian and German
assets, and NL has guaranteed the facility. The term loan has scheduled payments
of DM 38 million  ($23 million at December 31, 1998) due in March 1999 and DM 69
million ($41 million at December 31, 1998) due in September  1999. In accordance
with the  provisions of the DM credit  agreement and as a result of the level of
operating  income in 1998 for KII, the Company  prepaid the term loan in full in
March 1999,  principally  by drawing on its DM revolving  credit  facility.  The
revolver's  balance is  scheduled to be reduced to DM 105 million in March 2000,
with the remaining balance to be repaid in September 2000.

      Unused  lines of  credit  available  for  borrowing  under  the  Company's
non-U.S. credit facilities, including the DM facility, approximated $104 million
at December 31, 1998.

      Notes  payable at December 31, 1997 and 1998 consists of DM 25 million and
DM 61 million,  respectively,  of short-term borrowings due within one year from
non-U.S.  banks with interest rates ranging from 3.75% to 3.875% at December 31,
1997 and from 3.75% to 4.60% at December 31, 1998.

      The Company used a portion of the net proceeds  from the January 1998 sale
of Rheox's  net assets to (i) prepay $118  million of the Rheox term loan,  (ii)
prepay $42 million of Kronos' tranche of the LPC joint venture term loan,  (iii)
make $65 million of  open-market  purchases of the Company's 13% Senior  Secured
Discount  Notes at prices  ranging  from  $101.25 to  $105.19  per $100 of their
principal amounts,  (iv) purchase $6 million of the Senior Secured Notes and $61
thousand of the Senior Secured  Discount Notes at a price of $100 and $96.03 per
$100 of their principal amounts, respectively,  pursuant to a June 1998 pro rata
tender offer to Note holders as required by the  indentures,  and (v) redeem the
remaining  13%  Senior  Secured  Discount  Notes  on  October  15,  1998  at the
redemption

                                    F-22

<PAGE>



price of 106% of the principal amount, in accordance with the terms of the
indenture.

      The aggregate  maturities of long-term debt at December 31, 1998 are shown
in the table below.

<TABLE>
<CAPTION>

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

      <S>                                                             <C>     
      1999                                                            $ 64,826
      2000                                                              48,406
      2001                                                                 199
      2002                                                                 198
      2003                                                             244,000
                                                                      --------

                                                                      $357,629
                                                                      ========
</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 contributes to each employee's account an amount equal
to  approximately  3% of the employee's  annual eligible  earnings and partially
matches  employee  contributions  to the Plan. The Company also has an unfunded,
nonqualified  defined   contribution  plan  covering  certain  executives,   and
contributions are based on a formula involving eligible earnings.  The Company's
expense related to these plans included in continuing operations was $.8 million
in 1996, $.7 million in 1997 and $.8 million in 1998.  Expense  related to these
plans  included in  discontinued  operations was $.5 million in each of 1996 and
1997 and nil in 1998.

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

<TABLE>
<CAPTION>
                                                Years ended December 31,
                                        ----------------------------------------
                                          1996           1997            1998
                                          ----           ----            ----
                                                     (Percentages)

<S>                                     <C>            <C>            <C>       
Discount rate .....................     6.5 to 8.5     6.0 to 8.5     5.5 to 8.5
Rate of increase in future
 compensation levels ..............     3.5 to 6.0     3.0 to 6.0     2.5 to 6.0
Long-term rate of return on
 plan assets ......................     7.0 to 9.0     6.0 to 9.0     6.0 to 9.0

</TABLE>

      During 1996 and 1998 the Company  curtailed  certain U.S. employee pension
benefits and recognized gains of $4.6 million and $1.5 million, respectively, of
which $2.7 million and $1.5 million, respectively, are included in discontinued

                                    F-23

<PAGE>



operations.  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.

      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.

      The components of the net periodic defined benefit pension cost, excluding
curtailment  gain and  discontinued  operations,  are set forth  below.  The net
periodic  defined benefit  pension cost included in discontinued  operations was
$.3 million in 1996 and nil in each of 1997 and 1998.

<TABLE>
<CAPTION>
                                                   Years ended December 31,
                                               --------------------------------
                                                 1996        1997        1998
                                               --------    --------    --------
                                                        (In thousands)

<S>                                            <C>         <C>         <C>     
Net periodic pension cost:
  Service cost benefits ....................   $  3,131    $  4,067    $  3,835
  Interest cost on projected benefit
   obligation ("PBO") ......................     15,439      15,335      15,669
  Expected return on plan assets ...........    (15,079)    (13,271)    (15,172)
  Amortization of prior service cost .......        415         344         332
  Amortization of net transition
   obligation ..............................        319         255         173
  Recognized actuarial losses (gains) ......       (719)     (2,653)        385
                                               --------    --------    --------

                                               $  3,506    $  4,077    $  5,222
                                               ========    ========    ========
</TABLE>

      The funded status of the Company's  defined  benefit  pension plans is set
forth below.

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

<S>                                                  <C>              <C>      
Change in PBO:
  Beginning of year ..........................       $ 263,244        $ 251,372
  Service cost ...............................           4,067            3,835
  Interest ...................................          15,335           15,669
  Participant contributions ..................           1,276            1,228
  Plan amendments ............................             161               --
  Actuarial losses ...........................           4,035           30,768
  Curtailment gain ...........................              --           (1,513)
  Discontinued operations:
    Service cost .............................             207               --
    Interest cost on PBO .....................           1,129               --
  Benefits paid ..............................         (11,811)         (15,748)
  Change in currency exchange rates ..........         (26,271)          10,402
                                                     ---------        ---------

    End of year ..............................         251,372          296,013
                                                     ---------        ---------
</TABLE>


                                    F-24

<PAGE>

<TABLE>
<CAPTION>
                                                             December 31,
                                                       ------------------------
                                                         1997            1998
                                                       ---------      --------- 
                                                           (In thousands)
                                                   
<S>                                                    <C>            <C>      
Change in fair value of plan assets:
  Beginning of year ..............................     $ 205,091      $ 199,371
  Actual return on plan assets ...................        18,327         20,951
  Employer contributions .........................         9,691         10,788
  Participant contributions ......................         1,276          1,228
  Benefits paid ..................................       (11,811)       (15,748)
  Change in currency exchange rates ..............       (23,203)         4,445
                                                       ---------      --------- 

    End of year ..................................       199,371        221,035
                                                       ---------      --------- 

Funded status at year end:
  Plan assets less than PBO ......................       (52,001)       (74,978)
  Unrecognized actuarial loss ....................        18,153         44,945
  Unrecognized prior service cost ................         4,198          3,341
  Unrecognized net transition obligation .........         1,003          1,215
                                                       ---------      --------- 

                                                       $ (28,647)     $ (25,477)
                                                       =========      ========= 

Amounts recognized in the balance sheet:
  Prepaid pension cost ...........................     $  23,848      $  23,990
  Accrued pension cost:
    Current ......................................        (8,106)        (8,005)
    Noncurrent ...................................       (44,389)       (44,649)
  Accumulated other comprehensive income .........            --          3,187
                                                       ---------      --------- 

                                                       $ (28,647)     $ (25,477)
                                                       =========      ========= 
</TABLE>

      Selected  information  related to the Company's  defined  benefit  pension
plans that have accumulated  benefit obligations in excess of fair value of plan
assets is presented  below.  At December 31, 1998, 83% of the projected  benefit
obligations of such plans relate to non-U.S. plans (1997 - 77%).

<TABLE>
<CAPTION>

                                                              December 31,
                                                       -------------------------
                                                         1997             1998
                                                       --------         --------
                                                            (In thousands)

<S>                                                    <C>              <C>     
Projected benefit obligation .................         $188,724         $231,860
Accumulated benefit obligation ...............          165,998          200,269
Fair value of plan assets ....................          125,925          148,682
</TABLE>

Incentive bonus programs

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


                                    F-25

<PAGE>



Postretirement benefits other than pensions

      In addition to providing pension benefits,  the Company currently provides
certain health care and life insurance  benefits for eligible retired employees.
Certain of the Company's  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 and
employees  retiring  after 1998 will not be entitled to any such  benefits.  The
majority of all  retirees  are  required to  contribute a portion of the cost of
their benefits and certain  current and future retirees are eligible for reduced
health care benefits at age 65. The Company's  policy is to fund medical  claims
as they are incurred, net of any contributions by the retirees.

      For measuring the OPEB  liability at December 31, 1998,  the expected rate
of  increase  in  health  care  costs  is 6% in 1999  and 5% in 2000  and  years
thereafter. Other weighted average assumptions used to measure the liability and
expense are presented below.

<TABLE>
<CAPTION>
                                                        Years ended December 31,
                                                        ------------------------
                                                         1996     1997     1998
                                                         ----     ----     ----
                                                               (Percentages)

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

      Variances  from  actuarially-assumed   rates  will  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 (decreased) by one percentage point for each year,  postretirement
benefit expense would have increased approximately $.1 million (decreased by $.1
million) in 1998,  and the  projected  benefit  obligation  at December 31, 1998
would have increased by  approximately  $.9 million  (decreased by $.8 million).
During 1996 the Company  curtailed  certain Canadian  employee OPEB benefits and
recognized a $1.3 million  gain.  During 1998, as a result of the sale of Rheox,
the Company  settled  certain U.S.  employee OPEB benefits and recognized a $3.2
million gain, all of which is included in discontinued operations.

      The components of the Company's net periodic  postretirement benefit cost,
excluding curtailment and settlement gains and discontinued operations,  are set
forth  below.  The  net  periodic   postretirement  benefit  costs  included  in
discontinued  operations  excluding the settlement gain was $.3 million in 1996,
$.2 million in 1997 and nil in 1998.


                                    F-26

<PAGE>
<TABLE>
<CAPTION>

                                                    Years ended December 31,
                                                -------------------------------
                                                  1996        1997        1998
                                                -------     -------     ------- 
                                                      (In thousands)

<S>                                             <C>         <C>         <C>    
Net periodic OPEB cost:
  Service cost benefits ....................    $    52     $    39     $    43
  Interest cost on PBO .....................      3,777       2,972       2,393
  Expected return on plan assets ...........       (596)       (584)       (583)
  Amortization of prior service cost .......     (2,075)     (2,075)     (2,075)
  Recognized actuarial losses (gains) ......        615        (305)       (811)
                                                -------     -------     ------- 

                                                $ 1,773     $    47     $(1,033)
                                                =======     =======     ======= 
</TABLE>

<TABLE>
<CAPTION>
                                                              December 31,
                                                        -----------------------
                                                          1997           1998
                                                        --------       -------- 
                                                             (In thousands)
<S>                                                     <C>            <C>     
Change in PBO:
  Beginning of year ..............................      $ 44,760       $ 36,994
  Service cost ...................................            39             43
  Interest cost ..................................         2,972          2,393
  Actuarial losses (gains) .......................        (5,696)         2,117
  Discontinued operations:
    Service cost .................................            66             --
    Interest cost on PBO .........................           194             --
    Settlement gain ..............................            --         (2,354)
  Benefits paid from:
    Company funds ................................        (4,183)        (4,179)
    Plan assets ..................................        (1,087)        (1,087)
  Change in currency exchange rates ..............           (71)          (115)
                                                        --------       -------- 

      End of year ................................        36,994         33,812
                                                        --------       -------- 
Change in fair value of plan assets:
  Beginning of year ..............................         6,689          6,527
  Actual return on plan assets ...................           450            450
  Employer contributions .........................           475            475
  Benefits paid ..................................        (1,087)        (1,087)
                                                        --------       -------- 
      End of year ................................         6,527          6,365
                                                        --------       -------- 
Funded status at year end:
  Plan assets less than PBO ......................       (30,467)       (27,447)
  Unrecognized actuarial loss ....................       (11,722)        (7,447)
  Unrecognized prior service cost ................       (14,171)       (12,008)
                                                        --------       -------- 

                                                        $(56,360)      $(46,902)
                                                        ========       ======== 
Amounts recognized in the balance sheet:
  Current ........................................      $ (5,409)      $ (5,243)
  Noncurrent .....................................       (50,951)       (41,659)
                                                        --------       -------- 

                                                        $(56,360)      $(46,902)
                                                        ========       ======== 
</TABLE>

                                    F-27

<PAGE>



Note 12 - Shareholders' equity:

Common stock
<TABLE>
<CAPTION>
                                                  Shares of common stock
                                            ------------------------------------
                                                          Treasury
                                            Issued         stock     Outstanding
                                            ------        --------   -----------
                                                      (In thousands)

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

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

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

Balance at December 31, 1998 .......        66,839         15,028         51,811
                                            ======         ======         ======
</TABLE>

      The  Company  reinstated  a regular  quarterly  dividend  in June 1998 and
subsequently  paid three  quarterly  $.03 per share cash  dividends in 1998.  On
February 10,  1999,  the  Company's  Board of  Directors  increased  the regular
quarterly dividend to $.035 per share and declared a dividend to shareholders of
record as of March 17, 1999 to be paid on March 31, 1999.

Common stock options

      The NL  Industries,  Inc. 1998  Long-Term  Incentive  Plan (the "NL Option
Plan") provides for the discretionary  grant of restricted  common stock,  stock
options,  stock appreciation rights ("SARs") and other incentive compensation to
officers and other key employees of the Company.  Although certain stock options
granted  pursuant  to a similar  plan which  preceded  the NL Option  Plan ("the
Predecessor Option Plan") remain outstanding at December 31, 1998, 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, 1998,  4,990,000  shares were  available for
future grants. The NL Option Plan provides for the grant of options that qualify
as  incentive  options and for options  which are not so  qualified.  Generally,
stock options and SARs (collectively, "options") are granted at a price equal to
or greater than 100% of the market price at the date of grant,  vest over a five
year  period  and expire  ten years  from the date of grant.  Restricted  stock,
forfeitable  unless  certain  periods of employment  are  completed,  is held in
escrow in the name of the grantee until the restriction period expires.  No SARs
have been granted under the NL Option Plan.

      In addition to the NL Option Plan, the Company had a stock option plan for
its nonemployee  directors that expired in 1998. At December 31, 1998 there were
options to acquire 8,000 shares of common stock outstanding under this plan, all
of which were fully  vested.  Future  grants to  directors  are  expected  to be
granted from the NL Option Plan.


                                    F-28

<PAGE>



      Changes in outstanding options granted pursuant to the NL Option Plan, the
Predecessor Option Plan and the nonemployee  director plan are summarized in the
table below.
<TABLE>
<CAPTION>
                                                    Exercise price      Amount
                                                       per share       payable
                                                 --------------------    upon
                                     Shares         Low       High     exercise
                                     ------      ---------  ---------  --------
                                       (In thousands, except per share amounts)

<S>                                   <C>        <C>        <C>        <C>     
Outstanding at December 31, 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
                                      -----      ---------  ---------  --------

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

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

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

Outstanding at December 31, 1998      2,119      $    5.00  $   24.19  $ 31,019
                                      =====      =========  =========  ========
</TABLE>

      At  December  31,  1996,  1997 and 1998  options  to  purchase  1,660,068,
1,801,955 and 957,861  shares,  respectively,  were  exercisable  and options to
purchase 358,220 shares become  exercisable in 1999. Of the exercisable  options
at December 31, 1998,  options to purchase  641,621  shares had exercise  prices
less than the  Company's  December  31, 1998 quoted  market  price of $14.19 per
share.  Outstanding options at December 31, 1998 expire at various dates through
2008, with a weighted-average remaining life of six years.

      The pro  forma  information  required  by SFAS No.  123,  "Accounting  for
Stock-Based  Compensation,"  is based  on an  estimation  of the  fair  value of
options issued subsequent to January 1, 1995. The  weighted-average  fair values
of options  granted during 1996,  1997 and 1998 were $8.38,  $6.35 and $9.78 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 1996, 1997 and 1998: stock price volatility of
42%, 37% and 51% in 1996, 1997 and 1998, respectively;  risk-free rate of return
of 5% in 1996 and 1997 and 4% in 1998; no dividend yield in 1996 and 1997, and a
dividend yield of .9% in 1998; and an expected term of 10 years in 1996, 9 years
in 1997  and 8 years  in  1998.  For  purposes  of pro  forma  disclosures,  the
estimated  fair value of the options is  amortized  to expense over the options'
vesting period.


                                    F-29

<PAGE>



      The  Company's pro forma net income (loss) and basic net income (loss) per
common share were as follows.  The pro forma impact on earnings per common share
for 1996,  1997 and 1998 is not  necessarily  indicative  of future  effects  on
earnings per share.

<TABLE>
<CAPTION>

                                                  Years Ended December 31,
                                          --------------------------------------
                                              1996         1997          1998
                                          -----------  -----------   -----------
                                         (In thousands except per share amounts)

<S>                                       <C>          <C>           <C>        
Net income (loss)- as reported ........   $    10,817  $    (9,473)  $   366,678
Net income (loss)- pro forma ..........   $    10,085  $   (11,057)  $   363,843

Net income (loss) per basic common
 share - as reported ..................   $       .21  $      (.19)  $      7.13
Net income (loss) per basic common
 share - pro forma ....................   $       .20  $      (.22)  $      7.07
</TABLE>


Preferred stock

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

Note 13 - Income taxes:

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

                                                  Years ended December 31,
                                             ----------------------------------
                                               1996         1997         1998
                                             --------    ---------    ---------
                                                    (In thousands)

<S>                                          <C>         <C>          <C>      
Pretax income (loss):
  U.S ....................................   $ 20,481    $  (9,308)   $  57,638
  Non-U.S ................................    (30,715)     (18,381)      52,052
                                             --------    ---------    ---------

                                             $(10,234)   $ (27,689)   $ 109,690
                                             ========    =========    =========

Expected tax expense (benefit) ...........   $ (3,581)   $  (9,692)   $  38,391
Non-U.S. tax rates .......................         (6)        (784)         339
German solidarity income taxes ...........         --        3,597        2,168
Valuation allowance ......................      3,013        5,107      (19,143)
Incremental tax on income of companies
 not included in the NL Tax Group ........      3,423        3,886        4,277
Refund of prior-year German dividend
 withholding taxes .......................         --           --       (8,219)
U.S. state income taxes ..................       (569)         231          307
Other, net ...............................       (784)        (101)       1,668
                                             --------    ---------    ---------

                                             $  1,496    $   2,244    $  19,788
                                             ========    =========    =========
</TABLE>


                                    F-30

<PAGE>
<TABLE>
<CAPTION>

                                                    Years ended December 31,
                                               --------------------------------
                                                 1996        1997        1998
                                               --------    --------    --------
                                                         (In thousands)

<S>                                            <C>         <C>         <C>     
Provision for income taxes:
  Current income tax expense (benefit):
    U.S. federal ...........................   $ (3,539)   $ (6,881)   $    850
    U.S. state .............................       (460)        681         307
    Non-U.S ................................      5,198      14,071      13,643
                                               --------    --------    --------

                                                  1,199       7,871      14,800
                                               --------    --------    --------
  Deferred income tax expense (benefit):
    U.S. federal ...........................     (6,493)      1,224       2,112
    U.S. state .............................       (668)       (450)         --
    Non-U.S ................................      7,458      (6,401)      2,876
                                               --------    --------    --------

                                                    297      (5,627)      4,988
                                               --------    --------    --------

                                               $  1,496    $  2,244    $ 19,788
                                               ========    ========    ========

Comprehensive provision (benefit) for
 income taxes allocable to:
  Pretax income (loss) .....................   $  1,496    $  2,244    $ 19,788
  Discontinued operations ..................     13,337      12,475      87,000
  Extraordinary item .......................         --          --      (5,698)
  Additional paid-in capital ...............         --          --      (3,796)
  Other comprehensive income:
    Marketable securities ..................        971       1,626         108
    Currency translation ...................       (642)        410          --
                                               --------    --------    --------

                                               $ 15,162    $ 16,755    $ 97,402
                                               ========    ========    ========

</TABLE>

                                    F-31

<PAGE>



      The components of the net deferred tax liability are summarized below:
<TABLE>
<CAPTION>
                                                       December 31,
                                --------------------------------------------------
                                          1997                       1998
                                          ----                       ----
                                      Deferred tax               Deferred tax
                                ------------------------    ----------------------
                                  Assets     Liabilities    Assets     Liabilities
                                ---------    -----------    -------    ----------- 
                                             (In thousands)

<S>                             <C>           <C>           <C>           <C>       
Tax effect of temporary
 differences relating to:
  Inventories ..............    $   4,223     $  (2,674)    $   3,359     $  (3,858)
  Property and equipment ...           --      (105,806)           --      (110,189)
  Accrued postretirement
   benefits cost ...........       19,682            --        16,434            --
  Accrued (prepaid)
   pension cost ............        5,296       (16,697)        5,341       (18,921)
  Accrued environmental
   costs ...................       45,242            --        42,666            --
  Noncompete agreement .....           --            --         5,717            --
  Other accrued
   liabilities and
   deductible
   differences .............       42,393            --        17,094            --
  Other taxable
   differences .............           --       (85,139)           --      (135,487)
Tax on unremitted
 earnings of
 non-U.S. subsidiaries .....           --       (17,551)           --       (21,351)
Tax loss and tax credit
 carryforwards .............      167,680            --       138,211            --
Valuation allowance ........     (188,585)           --      (134,477)           --
                                ---------     ---------     ---------     --------- 

  Gross deferred tax
   assets (liabilities) ....       95,931      (227,867)       94,345      (289,806)

Reclassification,
 principally netting by
 tax jurisdiction ..........      (94,179)       94,179       (92,390)       92,390
                                ---------     ---------     ---------     --------- 

  Net total deferred tax
   assets (liabilities) ....        1,752      (133,688)        1,955      (197,416)
  Net current deferred
   tax assets
   (liabilities) ...........        1,642          (891)        1,955        (1,236)
                                ---------     ---------     ---------     --------- 

  Net noncurrent deferred
   tax assets
   (liabilities) ...........    $     110     $(132,797)    $      --     $(196,180)
                                =========     =========     =========     ========= 
</TABLE>


                                    F-32

<PAGE>



      Changes in the Company's  deferred income tax valuation  allowance  during
the past three years are summarized below. The decrease in deductible  temporary
differences  in 1998  includes  items that have been  reported  as  discontinued
operations.

<TABLE>
<CAPTION>
                                                  Years ended December 31,
                                            -----------------------------------
                                               1996         1997         1998
                                            ---------    ---------    ---------
                                                    (In thousands)

<S>                                         <C>          <C>          <C>      
Balance at the beginning of year ........   $ 195,569    $ 207,117    $ 188,585

  Recognition of certain deductible tax
   attributes which previously did not
   meet the "more-likely-than-not"
   recognition criteria .................     (10,766)     (11,106)     (64,274)
  Increase in certain deductible
   temporary differences which the
   Company believes do not meet the
   "more-likely-than-not" recognition
   criteria .............................      13,779       16,213        6,964
  Offset to the change in gross deferred
   income tax assets due to dual
   residency status of a Company
   subsidiary and redetermination of
   certain U.S. tax attributes ..........      14,472      (11,300)      (3,734)
  Foreign currency translation ..........      (5,937)     (12,339)       6,936
                                            ---------    ---------    ---------

Balance at the end of year ..............   $ 207,117    $ 188,585    $ 134,477
                                            =========    =========    =========
</TABLE>

      Certain  of the  Company's  tax  returns  in  various  U.S.  and  non-U.S.
jurisdictions  are being  examined  and tax  authorities  have  proposed  or may
propose tax deficiencies,  including  non-income tax related items and interest.
The Company  previously reached an agreement with the German tax authorities and
paid certain tax  deficiencies of  approximately DM 44 million ($28 million when
paid),  including  interest,  which resolved  significant tax  contingencies for
years through 1990. In the third quarter of 1998,  the Company  received a DM 14
million ($8.2 million when received) refund of 1990 German dividend  withholding
taxes.  The German tax authorities were required to refund such amounts based on
a 1998 German  Supreme Court decision in favor of another  taxpayer.  The refund
resulted in a reduction of the settlement  amount from DM 44 million referred to
above to DM 30  million  for years  through  1990.  No further  withholding  tax
refunds are expected.

      Certain  other  significant   German  tax  contingencies   aggregating  an
estimated DM 172 million ($103 million at December 31, 1998) through 1997 remain
outstanding  and are in  litigation.  Of these,  one  primary  issue  represents
disputed  amounts  aggregating DM 160 million ($96 million at December 31, 1998)
for  years  through  1997.  The  Company  has  received  tax  assessments  for a
substantial   portion  of  these  amounts.   No  payments  of  tax  or  interest
deficiencies  related to these  assessments are expected until the litigation is
resolved.  During  1997 a German  tax  court  proceeding  involving  a tax issue
substantially  the same as this issue was decided in favor of the taxpayer.  The
German tax authorities  appealed that decision to the German Supreme Court which
in February 1999 rendered its judgment in favor of the taxpayer. The Company

                                    F-33

<PAGE>



believes that the German Supreme Court's  judgment should  determine the outcome
of the Company's primary dispute with the German tax authorities.  Based on this
recent favorable judgment,  the Company will request that the tax assessments be
withdrawn.  The Company has granted a DM 94 million ($57 million at December 31,
1998)  lien on its  Nordenham,  Germany  TiO2  plant  in  favor  of the  City of
Leverkusen  related to this tax  contingency,  and a DM 5 million ($3 million at
December 31, 1998) lien in favor of the German federal tax authorities for other
tax  contingencies.  If the German tax  authorities  withdraw their  assessments
based on the German Supreme Court's decision, the Company expects to request the
release of the DM 94 million lien in favor of the City of Leverkusen.

      In addition,  during 1997 the Company reached an agreement with the German
tax authorities  regarding  certain other issues not in litigation for the years
1991 through 1994, and agreed to pay additional tax deficiencies of DM 9 million
($5 million at December 31,  1998),  most of which was paid in the third quarter
of 1998.

      During 1997 the Company  received a tax assessment  from the Norwegian tax
authorities proposing tax deficiencies of NOK 51 million ($7 million at December
31, 1998)  relating to 1994.  The Company has appealed this  assessment  and has
begun  litigation  proceedings.  During  1998 the  Company  was  informed by the
Norwegian tax authorities that additional tax deficiencies of NOK 39 million ($5
million at December  31,  1998) will likely be proposed  for the year 1996.  The
Company  intends to vigorously  contest this issue and  litigate,  if necessary.
Although the Company believes that it will ultimately  prevail,  the Company has
granted a lien for the 1994 tax assessment on its Fredrikstad, Norway TiO2 plant
in favor of the Norwegian tax authorities and will be required to grant security
on the 1996 assessment when received.

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

      The Company  utilized  foreign tax credit  carryforwards  of $2 million in
1996 and $17 million in 1997, and utilized U.S. net operating loss carryforwards
of $20 million in 1997 to reduce U.S.  federal  income tax expense.  In 1998 the
Company  utilized $13 million of  alternative  minimum tax credit  carryforwards
(the benefit of which was recognized in discontinued  operations) to reduce U.S.
federal  income tax  expense  and $6 million  of foreign  tax credit  carryovers
expired  unutilized.  At December 31, 1998 for U.S. federal income tax purposes,
the  Company  has  approximately  $2 million of  unutilized  foreign  tax credit
carryforwards  which  expire in 1999.  The Company also has  approximately  $360
million of income tax loss carryforwards in Germany with no expiration date.


                                    F-34

<PAGE>



Note 14 - Other income, net:
<TABLE>
<CAPTION>
                                                    Years ended December 31,
                                               --------------------------------
                                                 1996         1997       1998
                                               --------     -------    --------
                                                      (In thousands)

<S>                                            <C>          <C>        <C>     
Securities earnings:
  Interest and dividends ..................    $  4,708     $ 2,736    $ 14,921
  Securities transactions .................          --       2,657          --
                                               --------     -------    --------
                                                  4,708       5,393      14,921
Currency transaction gains, net ...........       5,890       5,919       4,157
Noncompete agreement income ...............          --          --       3,667
Trade interest income .....................       1,613       2,983       2,115
Disposition of property and equipment .....      (2,236)      1,735        (768)
Technology fee income .....................       8,743          --          --
Pension and OPEB curtailment gains ........       3,240          --          --
Litigation settlement gains ...............       2,756          --          --
Other, net ................................       2,955       3,337       1,361
                                               --------     -------    --------

                                               $ 27,669     $19,367    $ 25,453
                                               ========     =======    ========
</TABLE>

      The  Company  received a $20  million  fee as part of the sale of Rheox in
January 1998 in payment for entering into a five-year covenant not to compete in
the rheological  products business.  The Company is amortizing the fee to income
using the  straight-line  method over the five-year  noncompete period beginning
January 30,  1998.  Technology  fee income was  amortized  by the  straight-line
method over a three-year period ending October 1996.

Note 15 - Other items:

      Advertising costs included in continuing operations, expensed as incurred,
were $1 million in each of 1996, 1997 and 1998.

      Research,  development and certain sales technical  support costs included
in continuing  operations is expensed as incurred and approximated $8 million in
1996 and $7 million in each of 1997 and 1998.

      Interest  capitalized related to continuing  operations in connection with
long-term  capital  projects  was $2  million  in each of 1996  and  1997 and $1
million in 1998.

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)

                                    F-35

<PAGE>



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
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 1996,  $.5  million in 1997 and $1.0  million in
1998.

      The Company is a party to an intercorporate  services agreement with Valhi
(the "Valhi ISA")  whereby  Valhi and the Company  provide  certain  management,
financial  and  administrative  services  to  each  other  on a fee  basis.  Net
management  services  fee  expense  (income)  related  to the  Valhi ISA was $.1
million in 1996, $(.1) million in 1997 and nil in 1998.

      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 $.1  million in 1996,  $.2
million in 1997 and $.1 million in 1998.

      The Company is party to an intercorporate  services  agreement (the "Timet
ISA") with  Titanium  Metals  Corporation  ("Timet"),  approximately  39% of the
outstanding common stock of which is currently held by Tremont.  Under the terms
of the contract,  the Company provides certain management and financial services
to Timet on a fee basis. Management services fee income related to the Timet ISA
was $.3 million in each of 1997 and 1998.

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

      Purchases of TiO2 from LPC were $69.8  million in 1996,  $78.1  million in
1997 and $89.0 million in 1998.

      An  employee of the Company  has been  granted  options to purchase  Valhi
common stock under the terms of Valhi's stock option plans. Prior to March 1998,

                                    F-36

<PAGE>



the Company paid 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 of
$1,000  in  1996,  $68,000  in  1997  and nil in 1998  in a  manner  similar  to
accounting  for SARs.  Subsequent to March 1998,  the Company no longer will pay
Valhi upon the exercise of such options.

      The Company and NL Insurance,  Ltd. of Vermont  ("NLIV"),  a  wholly-owned
subsidiary of Tremont,  are parties to an Insurance  Sharing  Agreement  ("ISA")
with respect to certain loss payments and reserves  established by NLIV that (i)
arise out of claims  against other entities for which the Company is responsible
and (ii) are  subject to payment by NLIV under  certain  reinsurance  contracts.
Also, NLIV will credit the Company with respect to certain  underwriting profits
or credit recoveries that NLIV receives from independent  reinsurers that relate
to retained liabilities. In the first quarter of 1999 the Company collateralized
letters of credit issued and  outstanding  on behalf of NLIV pursuant to the ISA
with $9.7 million of the Company's  cash, and expects to classify such amount as
current restricted cash equivalents in the first quarter of 1999.

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

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

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

<S>                                                <C>                 <C>     
Tremont Corporation ....................           $  3,354            $  3,053
LPC ....................................              8,513               8,264
Other, net .............................               (355)               (692)
                                                   --------            --------

                                                   $ 11,512            $ 10,625
                                                   ========            ========
</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,

                                    F-37

<PAGE>



respectively.  In most cases  management  expects  that, in the normal course of
business, leases will be renewed or replaced by other leases.

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

      Net rent expense included in continuing  operations  aggregated $8 million
in 1996, $7 million in 1997 and $6 million in 1998. At December 31, 1998 minimum
rental commitments under the terms of noncancellable operating leases, excluding
discontinued operations, were as follows:
<TABLE>
<CAPTION>

Years ending December 31,                             Real Estate      Equipment
-------------------------                             -----------      ---------
                                                             (In thousands)
 <S>                                                   <C>                <C>   
 1999                                                  $ 2,151            $1,130
 2000                                                    1,135               722
 2001                                                    1,093               300
 2002                                                    1,093               105
 2003                                                      916                32
 2004 and thereafter                                    19,996                 5
                                                       -------            ------

                                                       $26,384            $2,294
                                                       =======            ======
</TABLE>

Capital expenditures

      At December 31, 1998 the estimated  cost to complete  capital  projects in
process  approximated  $14 million,  including $7 million to complete a landfill
expansion for the Company's Belgian facility.

Purchase commitments

      The Company has long-term  supply contracts that provide for the Company's
chloride feedstock requirements through 2000. The agreements require the Company
to purchase certain minimum  quantities of feedstock with average minimum annual
purchase commitments aggregating approximately $98 million.

Legal proceedings

      Lead  pigment   litigation.   Since  1987,   the  Company,   other  former
manufacturers  of lead pigments for use in paint and lead-based  paint,  and the
Lead  Industries  Association  have been named as  defendants  in various  legal
proceedings  seeking damages for personal  injury and property damage  allegedly
caused by the use of lead-based paints. Certain of these actions have been filed
by  or on  behalf  of  large  United  States  cities  or  their  public  housing
authorities

                                    F-38

<PAGE>



and certain others have been asserted as class actions.  These legal proceedings
seek recovery under a variety of theories,  including  negligent product design,
failure to warn, strict  liability,  breach of warranty,  conspiracy/concert  of
action,  enterprise  liability,  market share liability,  intentional  tort, and
fraud and misrepresentation.

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

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

      Environmental  matters and litigation.  Some of the Company's  current and
former facilities, including several divested secondary lead smelters and former
mining  locations,   are  the  subject  of  civil   litigation,   administrative
proceedings  or  investigations  arising under  federal and state  environmental
laws. Additionally,  in connection with past disposal practices, the Company has
been named a potential  responsible  party ("PRP") pursuant to the Comprehensive
Environmental  Response,  Compensation  and  Liability  Act,  as  amended by the
Superfund  Amendments and  Reauthorization  Act ("CERCLA") in  approximately  75
governmental  and private  actions  associated  with  hazardous  waste sites and
former  mining  locations,  certain  of  which  are  on the  U.S.  Environmental
Protection  Agency's  Superfund  National  Priorities  List.  These actions seek
cleanup costs, damages for personal injury or property damage and/or damages for
injury to natural  resources.  While the Company  may be jointly  and  severally
liable for such costs,  in most cases it is only one of a number of PRPs who are
also jointly and  severally  liable.  In  addition,  the Company is a party to a
number of  lawsuits  filed in  various  jurisdictions  alleging  CERCLA or other
environmental  claims. At December 31, 1998 the Company had accrued $126 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

                                    F-39

<PAGE>



in excess of amounts currently  estimated by the Company to be required for such
matters.  No assurance  can be given that actual  costs will not exceed  accrued
amounts  or the upper end of the range for sites for which  estimates  have been
made and no assurance  can be given that costs will not be incurred with respect
to sites as to which no estimate presently can be made. Further, there can be no
assurance that additional environmental matters will not arise in the future.

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

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

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

Concentrations of credit risk

      Sales of TiO2  accounted  for more than 90% of net sales  from  continuing
operations  during each of the past three years. The remaining sales result from
the mining and sale of ilmenite ore (a raw material used in the sulfate  pigment
production process),  and the manufacture and sale of iron-based water treatment
chemicals (derived from co-products of the TiO2 production  processes).  TiO2 is
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  37% in 1996, 36% in 1997
and 37% in 1998 of sales were attributable to North America.

      Consolidated  cash,  cash  equivalents  and  restricted  cash  equivalents
includes  $53 million and $136  million  invested  in U.S.  Treasury  securities
purchased under  short-term  agreements to resell at December 31, 1997 and 1998,
respectively,  of which $45  million  and $126  million,  respectively,  of such
securities are held in trust for the Company by a single U.S. bank.

                                    F-40

<PAGE>



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,
                                                  1997               1998
                                           ------------------   ----------------
                                           Carrying    Fair     Carrying  Fair
                                            Amount     Value     Amount   Value
                                           --------    -----    --------  -----
                                                       (In millions)

<S>                                         <C>        <C>       <C>      <C>   
Cash, cash equivalents and current
 restricted cash equivalents                $ 106.1    $106.1    $163.1   $163.1
Marketable securities - classified as
 available-for-sale                            17.3      17.3      17.6     17.6

Notes payable and long-term debt:
 Fixed rate with market quotes:
    Senior Secured Notes                    $ 250.0    $277.9    $244.0   $253.1
    Senior Secured Discount Notes             169.9     186.7       -        -
  Variable rate debt                          338.3     338.3     150.0    150.0

Common shareholders' equity (deficit)       $(222.3)   $698.5    $152.3   $735.1
</TABLE>


      Fair value of the Company's marketable securities and Notes are based upon
quoted market prices and the fair value of the  Company's  common  shareholder's
equity (deficit) is based upon quoted market prices for NL's common stock at the
end of the year.

      In connection with its credit  facility,  Rheox entered into interest rate
collar  agreements in 1997 which  effectively set minimum and maximum U.S. LIBOR
interest rates of 5.25% and 8%, respectively, on $50 million principal amount of
its variable-rate bank term loan through May 2001. The margin on such borrowings
ranged from .75% to 1.75%, depending upon the level of a certain Rheox financial
ratio.  The  Company  was  exposed  to  interest  rate  risk  in  the  event  of
nonperformance by the other parties to the agreements.  At December 31, 1997 the
estimated  fair  value of such  agreements  was  estimated  to be a $.1  million
payable.  Such fair value  represented  the amount the  Company  would pay if it
terminated the collar agreements at that date, and is based upon quotes obtained
from the counter party  financial  institutions.  The Company  terminated  these
agreements in the first quarter of 1998  concurrently  with the  prepayment  and
termination of the underlying credit facility.  See Note 20. The Company held no
derivative financial instruments at December 31, 1998.


                                    F-41

<PAGE>



Note 19 - Quarterly financial data (unaudited):

<TABLE>
<CAPTION>
                                                    Quarter ended
                                    --------------------------------------------
                                    March 31    June 30      Sept. 30    Dec. 31
                                    --------    -------      --------    -------
                                      (In thousands, except per share amounts)

<S>                                <C>          <C>          <C>        <C>     
Year ended December 31, 1997:

  Net sales ....................   $ 204,389    $ 214,354    $210,343   $208,154
  Cost of sales ................     167,175      172,679     162,499    147,592
  Operating income .............       8,689       16,815      24,908     32,089
  Income (loss) from
   continuing operations .......     (40,180)      (3,428)      3,984      9,749
  Net income (loss) ............   $ (35,721)   $   2,255    $  9,761   $ 14,232
                                   =========    =========    ========   ========
  Basic and diluted
   earnings per share:
    Income (loss) from
     continuing operations .....   $    (.79)   $    (.07)   $    .08   $    .19
                                   =========    =========    ========   ========
    Net income (loss) ..........   $    (.70)   $     .04    $    .19   $    .28
                                   =========    =========    ========   ========
  Weighted average common
   shares and potential
   common shares
   outstanding:
    Basic ......................      51,140       51,144      51,146     51,175
    Diluted ....................      51,140       51,144      51,585     51,717

Year ended December 31, 1998:

  Net sales ....................   $ 222,629    $ 241,645    $221,520   $208,930
  Cost of sales ................     156,915      167,329     151,782    142,421
  Operating income .............      39,399       46,725      45,024     40,033
  Income from continuing
   operations ..................      16,300       23,414      31,359     18,789
  Net income ...................   $ 301,015    $  23,729    $ 28,959   $ 12,975
                                   =========    =========    ========   ========
  Earnings per share:
    Basic:
      Income from
       continuing
       operations ..............   $     .32    $     .46    $    .61   $    .36
                                   =========    =========    ========   ========
      Net income ...............   $    5.87    $     .46    $    .56   $    .25
                                   =========    =========    ========   ========
    Diluted:
      Income from
       continuing
       operations ..............   $     .31    $     .45    $    .60   $    .36
                                   =========    =========    ========   ========
      Net income ...............   $    5.80    $     .46    $    .55   $    .25
                                   =========    =========    ========   ========
  Weighted average common
   shares and potential
   common shares
   outstanding:
    Basic ......................      51,282       51,341      51,444     51,805
    Diluted ....................      51,852       52,030      52,194     52,014

</TABLE>

                                    F-42

<PAGE>



Note 20 - Discontinued operations:

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

      Condensed  income  statements  related to discontinued  operations for the
years ended  December 31, 1996 and 1997 and the month ended January 31, 1998 are
as follows. Interest expense has been allocated to discontinued operations based
on the amount of debt specifically attributed to Rheox's operations.

<TABLE>
<CAPTION>
                                           Years ended  December 31, Month ended
                                           ------------------------- January 31,
                                              1996         1997         1998
                                           ----------    ---------   -----------
                                                    (In thousands)

<S>                                         <C>          <C>          <C>      
Net sales ...............................   $ 134,895    $ 147,199    $  12,630
Other income (expense), net .............       2,811         (200)         (50)
                                            ---------    ---------    ---------

                                              137,706      146,999       12,580
                                            ---------    ---------    ---------

Cost of sales ...........................      69,843       73,583        6,969
Selling, general and administrative .....      26,310       29,231        2,737
Interest expense ........................       5,706       11,207          771
                                            ---------    ---------    ---------

                                              101,859      114,021       10,477
                                            ---------    ---------    ---------

    Income before income taxes and
     minority interest ..................      35,847       32,978        2,103

Income tax expense ......................      13,337       12,475          778
Minority interest .......................         (42)         101           --
                                            ---------    ---------    ---------

                                               22,552       20,402        1,325

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

                                            $  22,552    $  20,402    $ 287,396
                                            =========    =========    =========

</TABLE>


                                    F-43

<PAGE>



      A condensed balance sheet related to discontinued  operations  included in
the Company's consolidated balance sheet at December 31, 1997 is as follows.

<TABLE>
<CAPTION>

                                                                    December 31,
               ASSETS                                                   1997
                                                                  --------------
                                                                  (In thousands)

<S>                                                                   <C>      
Current assets:
  Cash and cash equivalents .................................         $   9,137
  Accounts and notes receivable .............................            15,415
  Inventories ...............................................            19,921
  Other current assets ......................................             6,443
                                                                      ---------

    Total current assets ....................................            50,916

Other assets:
  Property, plant and equipment, net ........................            30,308
  Other assets ..............................................             7,411
                                                                      ---------

                                                                      $  88,635
                                                                      =========

      LIABILITIES AND STOCKHOLDER'S DEFICIT

Current liabilities:
  Current maturities of long-term debt ......................         $  15,000
  Other current liabilities .................................            19,129
                                                                      ---------

    Total current liabilities ...............................            34,129
                                                                      ---------

Noncurrent liabilities:
  Long-term debt ............................................           102,500
  Deferred income taxes .....................................             2,485
  Other noncurrent liabilities ..............................             4,489
                                                                      ---------

    Total noncurrent liabilities ............................           109,474
                                                                      ---------

Stockholder's deficit .......................................           (54,968)
                                                                      ---------

                                                                      $  88,635
                                                                      =========
</TABLE>



                                    F-44

<PAGE>



      Condensed  cash  flow  data  for  Rheox  (excluding   dividends  paid  to,
contributions received from and intercompany loans with NL) is presented below.

<TABLE>
<CAPTION>
                                           Years ended December 31,  Month ended
                                           ------------------------  January 31,
                                               1996        1997         1998
                                            ---------    ---------    --------- 
                                                       (In thousands)

<S>                                         <C>          <C>          <C>       
Cash flows from operating activities ....   $  20,705    $  31,506    $ (30,587)
                                            ---------    ---------    --------- 
Cash flows from investing activities:
  Capital expenditures ..................      (2,665)      (2,330)         (26)
  Purchase of minority interests ........      (5,168)          --           --
  Other, net ............................         457           16           --
                                            ---------    ---------    --------- 

                                               (7,376)      (2,314)         (26)
                                            ---------    ---------    --------- 
Cash flows from financing activities:
  Indebtedness, net .....................     (23,041)     100,940     (117,500)
  Other, net ............................        (451)          --           --
                                            ---------    ---------    --------- 

                                              (23,492)     100,940     (117,500)
                                            ---------    ---------    --------- 
    Net change from operating,
     investing and financing
     activities .........................   $ (10,163)   $ 130,132    $(148,113)
                                            =========    =========    ========= 
</TABLE>


                                    F-45

<PAGE>



                       REPORT OF INDEPENDENT ACCOUNTANTS
                       ON FINANCIAL STATEMENT SCHEDULES


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

      Our audits of the  consolidated  financial  statements  referred to in our
report dated  February 10, 1999  appearing on page F-2 of the 1998 Annual Report
on Form 10-K of NL  Industries,  Inc.  also  included an audit of the  financial
statement  schedules  listed in Item  14(a) and (d) of this  Form  10-K.  In our
opinion,  these financial  statement  schedules  present fairly, in all material
respects,  the information  set forth therein when read in conjunction  with the
related consolidated financial statement.

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



                                    PricewaterhouseCoopers LLP

Houston, Texas
February 10, 1999


                                    S-1

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

           SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                           Condensed Balance Sheets

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

<S>                                                      <C>            <C>     
Current assets:
  Cash and cash equivalents ........................     $  11,607      $ 13,853
  Restricted cash equivalents ......................         4,934         5,500
  Accounts and notes receivable ....................         7,119            29
  Receivable from subsidiaries .....................        10,625         8,482
  Refundable income taxes ..........................            --         5,713
  Prepaid expenses .................................           256           162
  Deferred income taxes ............................            --           115
                                                         ---------      --------
      Total current assets .........................        34,541        33,854
                                                         ---------      --------
Other assets:
  Marketable securities ............................        17,270         4,087
  Notes receivable from subsidiary .................       573,218       419,164
  Investment in subsidiaries .......................      (216,264)      312,764
  Other ............................................         5,778         3,223
                                                         ---------      --------
      Total other assets ...........................       380,002       739,238
                                                         ---------      --------
Property and equipment, net ........................         3,221         3,011
                                                         ---------      --------
                                                         $ 417,764      $776,103
                                                         =========      ========

Current liabilities:
  Accounts payable and accrued liabilities .........     $  35,636      $ 28,873
  Payable to affiliates ............................         3,218         3,777
  Income taxes .....................................         5,051            --
  Deferred income taxes ............................         1,640            --
                                                         ---------      --------
      Total current liabilities ....................        45,545        32,650
                                                         ---------      --------
Noncurrent liabilities:
  Long-term debt ...................................       419,857       244,000
  Notes payable to affiliates ......................            --       265,838
  Deferred income taxes ............................        12,856         8,940
  Accrued pension cost .............................         7,019        12,351
  Accrued postretirement benefits cost .............        31,117        25,655
  Other ............................................       123,639        34,335
                                                         ---------      --------
      Total noncurrent liabilities .................       594,488       591,119
                                                         ---------      --------
Shareholders' equity (deficit) .....................      (222,269)      152,334
                                                         ---------      --------
                                                         $ 417,764      $776,103
                                                         =========      ========
</TABLE>
Contingencies (Note 4)

                                    S-2

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

     SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

                        Condensed Statements of Income

                 Years ended December 31, 1996, 1997 and 1998

                                (In thousands)

<TABLE>
<CAPTION>
                                               1996        1997         1998
                                             --------    ---------    ---------

<S>                                          <C>         <C>          <C>      
Revenues and other income:
  Equity in income (loss) from
   continuing operations of
   subsidiaries ..........................   $ (4,316)   $  (1,019)   $  73,839
  Interest and dividends .................      1,461        1,246        1,812
  Interest income from subsidiaries:
    Continuing ...........................     47,097       57,851       56,089
    Discontinued .........................      2,641        1,189           --
  Securities transactions ................         --        2,657        5,635
  Other income, net ......................      1,873          523        4,421
                                             --------    ---------    ---------

                                               48,756       62,447      141,796
                                             --------    ---------    ---------
Costs and expenses:
  General and administrative .............     18,094       49,502       10,756
  Interest ...............................     47,940       50,319       55,078
                                             --------    ---------    ---------

                                               66,034       99,821       65,834
                                             --------    ---------    ---------

      Income (loss) from continuing
       operations before income taxes ....    (17,278)     (37,374)      75,962

Income tax benefit .......................      5,543        7,499       13,900
                                             --------    ---------    ---------

      Income (loss) from continuing
       operations ........................    (11,735)     (29,875)      89,862

Discontinued operations ..................     22,552       20,402      287,396
Extraordinary item .......................         --           --      (10,580)
                                             --------    ---------    ---------

      Net income (loss) ..................   $ 10,817    $  (9,473)   $ 366,678
                                             ========    =========    =========
</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, 1996, 1997 and 1998

                                (In thousands)


<TABLE>
<CAPTION>

                                                1996        1997        1998
                                              --------    --------    ---------

<S>                                           <C>         <C>         <C>      
Cash flows from operating activities:
  Net income (loss) .......................   $ 10,817    $ (9,473)   $ 366,678
  Equity in (income) loss of subsidiaries:
    Continuing ............................      4,316       1,019      (73,839)
    Discontinued ..........................    (22,552)    (20,402)    (287,396)
  Distributions from subsidiaries:
    Continuing ............................     20,000      35,000       15,000
    Discontinued ..........................         --      30,000           --
  Noncash interest expense ................        842      (7,523)      (8,660)
  Deferred income taxes ...................     (1,443)      1,224       (3,862)
  Securities transactions .................         --      (2,657)      (3,711)
  Change in accounting for environmental
   remediation costs ......................         --      30,000           --
  Other, net ..............................     (3,291)     (2,544)      (3,382)
                                              --------    --------    ---------

                                                 8,689      54,644          828

  Change in assets and liabilities, net ...     (8,593)        789       92,018
                                              --------    --------    ---------

      Net cash provided by operating
       activities .........................         96      55,433       92,846
                                              --------    --------    ---------

Cash flows from investing activities:
  Investments in and loans to subsidiaries     (12,941)    (58,900)          --
  Proceeds from disposition of securities .         --       6,875        6,875
  Change in restricted cash equivalents,
   net ....................................       (484)       (101)        (566)
  Capital expenditures ....................        (40)        (15)         (82)
  Other, net ..............................         11         (12)          87
                                              --------    --------    ---------

      Net cash provided (used) by investing
       activities .........................    (13,454)    (52,153)       6,314
                                              --------    --------    ---------
</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, 1996, 1997 and 1998

                                (In thousands)

<TABLE>
<CAPTION>

                                                1996        1997         1998
                                              --------    --------    ---------

<S>                                           <C>         <C>         <C>       
Cash flows from financing activities:
  Indebtedness - principal payments .......   $     --    $     --    $(193,498)
  Borrowings from affiliates ..............         --          --       89,839
  Dividends ...............................    (15,333)         --       (4,636)
  Settlement of shareholder derivative
   lawsuit, net ...........................         --          --       11,211
  Treasury stock reissued .................        262       1,025          170
                                              --------    --------    ---------

      Net cash provided (used) by
       financing activities ...............    (15,071)      1,025      (96,914)
                                              --------    --------    ---------

  Increase (decrease) in cash and cash
   equivalents from:
    Operating activities ..................         96      55,433       92,846
    Investing activities ..................    (13,454)    (52,153)       6,314
    Financing activities ..................    (15,071)      1,025      (96,914)
                                              --------    --------    ---------

  Net change from operating, investing ....      
   and financing activities ...............    (28,429)      4,305        2,246
  Balance at beginning of year ............     35,731       7,302       11,607
                                              --------    --------    ---------

  Balance at end of year ..................   $  7,302    $ 11,607    $  13,853
                                              ========    ========    =========

</TABLE>


                                    S-5

<PAGE>



                     NL INDUSTRIES, INC. AND SUBSIDIARIES

    SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

                   Notes to Condensed Financial Information


Note 1 - Basis of presentation:

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

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

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

<S>                                                     <C>           <C>      
Current:
  Kronos and NLCC:
    Income taxes ...................................    $   3,381     $   1,099
    Other, net .....................................        7,024         5,873
  Other, net .......................................          356           786
  Tremont Corporation ..............................       (3,354)       (3,053)
                                                        ---------     ---------

                                                        $   7,407     $   4,705
                                                        =========     =========

Noncurrent:
  Notes receivable from Kronos .....................    $ 573,218     $ 419,164
  Notes payable to:
    NLCC ...........................................           --      (185,838)
    NL Environmental Management Services, Inc. .....           --       (80,000)
                                                        ---------     ---------

                                                        $ 573,218     $ 153,326
                                                        =========     =========
</TABLE>

Note 3 - Long-term debt:
<TABLE>
<CAPTION>
                                                              December 31,
                                                        ------------------------
                                                          1997            1998
                                                        --------        --------
                                                              (In thousands)

<S>                                                     <C>             <C>     
11.75% Senior Secured Notes ....................        $250,000        $244,000
13% Senior Secured Discount Notes ..............         169,857              --
                                                        --------        --------

                                                        $419,857        $244,000
                                                        ========        ========
</TABLE>

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


                                    S-6

<PAGE>



      The  Company's  $244 million of Senior  Secured Notes at December 31, 1998
are due October 2003.

      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>

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

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

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


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

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


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

</TABLE>

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

                                    S-8